A group of senators has banded together to urge Synapse's owners, as well as its bank and fintech partners, to “immediately restore access to customer funds.” As part of their demands, the senators suggested that both the company's partners and investors were to blame for the loss of customer funds.
In a letter released on Monday, Sen. Sherrod Brown (D-Ohio), chairman of the Senate Committee on Banking, Housing and Urban Affairs, along with Sens. Ron Wyden (D-Ore.), Tammy Baldwin (D-Wis.) and John Fetterman (D-Pennsylvania), noted that customers of companies that partnered with banking-as-a-service startup Synapse have not been able to access their funds since mid-May.
The letter was addressed to W. Scott Stafford, president and CEO of Evolve Bank & Trust, but was also sent to Synapse's key investors and the company's major bank and fintech partners. Recipients include former Synapse CEO Sankaet Pathak, venture firms Andreessen Horowitz, Core Innovation Capital, Trinity Ventures, American Bank, AMG National Trust, Trust & Lineage Bank, and fintech companies Copper, Juno, Mercury, YieldStreet and Yotta.
San Francisco-based Synapse operated a service that allowed other companies, primarily fintechs, to incorporate banking services into their own offerings. For example, a software provider that specialized in payroll for companies with a lot of 1099 subscribers used Synapse to offer instant payments capabilities, while other providers used it to offer dedicated credit and debit cards. Until last year, Synapse offered these services as an intermediary for its banking partners, Evolve Bank & Trust and business banking startup Mercury, but Evolve and Mercury decided to partner directly and eliminate Synapse as an intermediary.
Synapse has raised just over $50 million in venture capital in total, including a $33 million Series B led by Andreessen Horowitz's Angela Strange in 2019. The startup was rocked by layoffs in 2023 and filed for Chapter 11 bankruptcy in April this year, hoping to sell its assets to another fintech company, TabaPay, in a fire sale for $9.7 million. But TabaPay backed out. It's not entirely clear why. Synapse has placed a lot of the blame on Evolve and Mercury, but the companies have held up their hands and told TechCrunch they're not to blame. Synapse CEO and co-founder Sankaet Pathak did not respond to a request for comment.
As a result, Synapse was forced to file for Chapter 7 bankruptcy protection in May and completely liquidate its business, and has been shut out of customers ever since.
Government authorities were not so quick to let this go, citing the role of fintech partners.
In their letter, the senators said it is the responsibility of all parties involved, including backing venture capital firms, to “ensure the safety and accessibility of end-user funds.”
They called on everyone to work together to immediately make available all customer deposits that are currently frozen due to Synapse's bankruptcy.
Specifically, they wrote: “You are responsible for customers who were locked out of their accounts. Consumer fintech companies marketed their products to the public as a safe, trusted alternative to banks. Thanks to these promises, consumers adopted their products and made deposits through their apps and websites. Venture capital firms funded Synapse without insisting on adequate controls to protect consumers. The venture capital firms stood to profit while Synapse promoted itself as a trusted financial infrastructure provider, but they could not see Synapse delivering on its promises. Banks partnered with Synapse to find new revenue streams. These partnerships ultimately enabled Synapse to sell the services that banks offered.”
The senators also expressed concern and alarm over “a potential shortfall of between $65 million and $96 million between the amount consumers are due and the funds Synapse's partner banks are holding on their behalf,” calling it “deeply disturbing and completely unacceptable.”
They added: “In time it will become clear who is ultimately responsible for this mess, but for now the priority must be ensuring consumers can access their money again.”
In their letter, the senators criticized the entire banking-as-a-service model, saying Synapse's bankruptcy “exposed inherent weaknesses in this tripartite business model, causing hardworking Americans and small businesses to lose access to their funds.”
The past week has been full of drama in the world of banking-as-a-service. On June 26, Evolve Bank announced that it had fallen victim to a cyberattack and data breach that may have also affected its partner companies. According to the company, the incident involved “data and personal information of Evolve's retail banking customers and customers of financial technology partners, including Affirm, Mercury, Bilt, Alloy, and Stripe.” On June 29, fintech company Wise announced that some of its customers' personal data may have been stolen in a data breach. Also last week, Thread Bank, a popular partner to BaaS startups such as Unit, was hit with an FDIC enforcement action. Notably, as publication Paymnts noted, the order issued to Thread is “unique in that it specifically points to the bank's Banking-as-a-Service (BaaS) and Loan-as-a-Service (LaaS) programs.”
TechCrunch reached out to both Evolve Bank and Synapse's former CEO, Sankaet Pathak, for comment, but Evolve declined to comment.
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