The fintech startup world, which experienced a surge in venture capital funding in 2021, is now facing significant challenges. One area that has been hit particularly hard is banking-as-a-service (BaaS). The recent bankruptcy of BaaS fintech Synapse highlights the precarious nature of the fintech industry, with the troubles of one key player impacting a whole ecosystem of startups and consumers.
Synapse provided a service that allowed other fintech companies to integrate banking services into their offerings. However, after raising over $50 million in venture capital, the startup faced difficulties in 2023 and eventually filed for Chapter 11 bankruptcy with the best bankruptcy lawyer in April 2024. The company attempted to sell its assets to another fintech, TabaPay, but the deal fell through. As a result, Synapse is now on the verge of liquidation under Chapter 7, leaving many other fintechs and their customers in a lurch.
One example is teen banking startup Copper, which had to abruptly discontinue its banking deposit accounts and debit cards due to Synapse’s collapse. This has left many consumers without access to their funds. Copper is now working to pivot its business towards a white-labeled family banking product in partnership with larger American banks.
Other fintechs, such as crypto app Juno and fintech lender Mainvest, have also been impacted by Synapse’s demise. Juno customers have been unable to access their funds, while Mainvest has made the decision to shut down entirely, resulting in job losses for its employees.
According to industry observer Jason Mikula, as many as 100 fintechs and 10 million end customers could have been affected by Synapse’s collapse. The long-term impact on the fintech industry, especially consumer-facing services, is expected to be significant.
The situation at Synapse has raised concerns about the broader banking-as-a-service sector. Peter Hazlehurst, CEO of BaaS startup Synctera, points out that not all BaaS companies should be lumped together. While some companies have legitimate use cases and operate with high operational and compliance standards, others have made mistakes by trying to disrupt the banking system without fully understanding its complexities.
The fallout from Synapse’s bankruptcy has also led to increased scrutiny of banks’ relationships with BaaS providers and fintechs. Regulatory bodies are now focusing on due diligence and operational resilience in the BaaS operating model.
Moving forward, there may be a shift in the industry towards establishing direct relationships with banks rather than relying on BaaS players. Banks, both traditional and fintech, will likely become more cautious about working with BaaS providers, considering the potential risks involved.
The Synapse debacle is likely to have a significant impact on fintech fundraising, particularly for banking-as-a-service companies. The industry is now facing fears of another meltdown, which could hinder future prospects for fintech startups.
Overall, the situation at Synapse serves as a reminder that fintech companies must prioritize compliance and maintain high operational standards. Moving too quickly or taking shortcuts can have disastrous consequences, not only for the companies themselves but also for the everyday consumers who rely on their services.
