The unraveling of fintech upstart Synapse is causing chaos in the banking world, leaving thousands of customers without access to their money and sparking a mystery about millions of dollars that have gone missing. Four small US banks are holding some of the money, but the rest remains unaccounted for.
Synapse, a 10-year-old fintech firm, was a key player in the digital banking space, offering “banking as a service” to fintech companies like Mercury, Dave, and Juno. By partnering with FDIC-backed banks, Synapse provided these digital banking outfits with access to checking accounts and debit cards, while the traditional lenders received deposits and fee revenue in return.
However, the partnership between Synapse and its partner banks quickly soured, leading to a bankruptcy filing in April. The fallout from the bankruptcy has left customers stranded without access to their funds, with a shortfall of $85 million reported. While some money has been returned to customers, the whereabouts of the remaining funds are still unknown.
Regulators are now closely scrutinizing these partnerships, warning banks to tighten their controls when working with fintech firms. The Federal Reserve recently issued an enforcement action against one of Synapse’s partner banks, highlighting risk management weaknesses surrounding such relationships.
The saga surrounding Synapse’s bankruptcy serves as a cautionary tale about the potential pitfalls of partnerships between venture-backed upstarts and traditional banks. As regulators crack down on these relationships, the banking industry is facing increased scrutiny and pressure to improve oversight and monitoring practices.
The fallout from Synapse’s collapse is a stark reminder of the risks involved in the rapidly evolving fintech space, and serves as a warning to both banks and fintech firms to tread carefully in their partnerships.