Collapse? 100 fintech ventures weakened

Last year, the financial technology (fintech) startup world, which was very popular in 2021, started to have problems as it became harder for them to get money from investors. As we move into the middle of 2024, large parts of the fintech industry are in trouble, especially the banking-as-a-service (BaaS) area, which experts last year said was doing well.

The biggest problem right now is that a BaaS fintech company called Synapse has gone bankrupt. This shows how dangerous it can be for fintech companies when one important company has problems, because many of them depend on each other.

Synapse’s problems have hurt and caused problems for many other startups and customers all over the country.

To summarize: Synapse, based in San Francisco, helped other companies (mostly fintechs) add banking services to what they offer. For example, a software company that helps businesses pay their contractors used Synapse to let them pay instantly. Others used it to offer special credit or debit cards. Synapse worked between a bank partner called Evolve Bank & Trust and a business banking startup called Mercury, among other customers.

Synapse raised just over $50 million from investors in its lifetime, including $33 million in 2019 led by Angela Strange from Andreessen Horowitz. The startup had problems in 2023, laying off employees, and filed for bankruptcy in April of this year, hoping to sell its assets for $9.7 million to another fintech called TabaPay. But TabaPay changed its mind. It’s not clear why. Synapse blamed Evolve and Mercury, but both of them said they were not responsible. Sankaet Pathak, the CEO and co-founder of Synapse, is no longer responding to requests for comment.

The result is that Synapse is close to having to shut down completely, and many other fintechs and their customers are suffering because of Synapse’s failure.

For instance, a teen banking startup called Copper, which was a Synapse customer, had to suddenly stop its banking accounts and debit cards on May 13 because of Synapse’s problems. This leaves many customers, mostly families, unable to access the money they had put into Copper’s accounts.

Copper says it’s still operating and has another product, a financial education app called Earn, that is doing well. Now it’s trying to change its business to offer family banking products with other, larger American banks that it hopes to partner with later this year.

Money in a crypto app called Juno was also affected by Synapse’s collapse, as reported by CNBC. A Maryland teacher named Chris Buckler said in a May 21 filing that he was unable to access his money held by Juno due to the problems related to the Synapse bankruptcy.

“I am increasingly desperate and don’t know where to turn,” Bucker wrote. “I have nearly $38,000 tied up as a result of the halting of transaction processing. This money took years to save up.”

Meanwhile, Mainvest, a fintech lender to restaurant businesses, is shutting down because of the problems at Synapse. An unknown number of employees there are losing their jobs. On its website, the company said: “Unfortunately, after exploring all available alternatives, a mix of internal and external factors have led us to the difficult decision to cease Mainvest’s operations and dissolve the company.”

Based on Synapse’s filings, as many as 100 fintechs and 10 million customers could have been affected by the company’s collapse, according to Jason Mikula, an industry observer and author of Fintech Business Weekly.

“But that may understate the total damage,” he added, “as some of those customers do things like running payroll for small business.”

The long-term negative and serious impact of what happened at Synapse will be significant “on all of fintech, especially consumer-facing services,” Mikula said.

“While regulators don’t have direct jurisdiction over middleware providers, which includes firms like Unit, Synctera, and Treasury Prime, they can exert their power over their bank partners,” Mikula added. “I’d expect heightened attention to ongoing due diligence around the financial condition of these kinds of middleware vendors, none of which are profitable, and increased focus on business continuity and operational resilience for banks engaged in BaaS operating models.”

Perhaps not all BaaS companies should be grouped together. That’s what Peter Hazlehurst, founder and CEO of another BaaS startup Synctera, is quick to point out.

“There are mature companies with legitimate use cases being served by companies like ours and Unit, but the damage done by some of the fallouts you’re reporting on are just now rearing their ugly heads,” he said. “Unfortunately, the problems many folks are experiencing today were baked into the platforms several years ago and compounded over time while not being visible until the last minute when everything collapses at the same time.”

Hazlehurst says some classic Silicon Valley mistakes were made by early players: people with computer engineering knowledge wanted to ‘disrupt’ the old and stodgy banking system without fully understanding that system.

“When I left Uber and founded Synctera, it became very clear to me that the earliest players in the ‘BaaS’ space built their platforms as quick solves to tap into a ‘trend’ of neo/challenger banking without an actual understanding of how to run programs and the risks involved,” Peter Hazlehurst said.

“Banking and finance of any sort is serious business. It requires both skill and wisdom to build and run. There are regulatory bodies protecting consumers from bad outcomes like this for a reason,” he adds.

And he says that in those early days, the banking partners – those that should have known better – didn’t act as the safety net when choosing fintech partners. “Working with these players seemed like a really exciting opportunity to ‘evolve’ their business, and they trusted blindly.”

To be fair, the BaaS players and neobanks that rely on them aren’t the only ones in trouble. We are continuously seeing news reports about how banks are being closely watched for their relationships with BaaS providers and fintechs. For example, the FDIC was “concerned” that Choice Bank, “had opened…accounts in legally risky countries” on behalf of digital banking startup Mercury, according to a report by The Information. Officials also reportedly scolded Choice for letting overseas Mercury customers “open thousands of accounts using questionable methods to prove they had a presence in the U.S.”

Kruze Consulting’s Healy Jones believes that the Synapse situation will be “a non-issue” for the startup community moving forward. But he thinks that clear rules for consumer protection are needed.

The FDIC needs to “come out with some clear language about what is and is not covered with FDIC insurance in a neobank that uses a third party bank on the backend,” he said. “That will help keep the neo-banking sector calm,” he said.

As Gartner analyst Agustin Rubini said, “The case of Synapse underscores the need for fintech companies to maintain high operational and compliance standards. As middleware providers, they must ensure accurate financial record-keeping and transparent operations.”

From my point of view, as someone who has covered fintech’s ups and down for years, I don’t think all BaaS players are doomed. But I do think this situation, combined with all the increased scrutiny, could make banks (traditional and fintech alike) more hesitant to work with a BaaS player, choosing instead to establish direct relationships with banks as Copper hopes to do.

Banking is highly regulated and highly complicated and when Silicon Valley players get it wrong, the ones who get hurt are everyday human beings.

The rush to invest money in 2020 and 2021 led to a lot of fintechs moving quickly, partly to satisfy hungry investors seeking growth at all costs. Unfortunately, fintech is an area where companies can’t move so quickly that they take shortcuts, especially ones that ignore compliance. The end result, as we can see in the case of Synapse, can be disastrous.

With funding already down in the fintech sector, it’s very likely that the Synapse debacle will impact future prospects for fintech fundraising, especially for banking-as-a-service companies. Fears that another meltdown will happen are real, and let’s face it, valid.