The Synapse Mess Just Got Messier. It Highlights the Risks of BaaS Partnerships.
Plus, Clair's CEO says EWA products are loans. Regulations still need to be updated.
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The Synapse Mess Just Got Messier. It Highlights the Risks of BaaS Partnerships.
The Synapse mess—years in the making—just got a whole lot messier. The once-fast-growing Banking-as-a-Service (BaaS) provider filed for bankruptcy in April. Now, it has cut off services to some of its bank and fintech partners, including Evolve Bank & Trust and Mainvest, and stranded tens of thousands of consumers and businesses without access to their funds.
Mainvest, an investment crowdfunding platform that connects local small businesses with investors, announced on May 14 that it would cease operations. While the company attributed its decision to several factors, including the pandemic and a steep decline in fintech funding (down 42% year over year to $35 billion in 2023), it was blunt in its assessment that its reliance on Synapse was the death knell for the investment platform. “To be clear, the uncertainty surrounding Synapse’s bankruptcy, which is playing out in real time [and] affecting our users and millions of others, was the catalyst for this decision,” a Mainvest spokesperson said.
In a statement on its website, Evolve said of its inability to access its Synapse dashboard: “Synapse’s abrupt shutdown of essential systems without notice and failure to provide necessary records needlessly jeopardized end users by hindering our ability to verify transactions, confirm end user balances, and comply with applicable law. …Any insinuation suggesting that Evolve has intentionally mishandled or withheld funds is entirely false and defamatory.”
What’s transpiring between Synapse, some of its 20 bank and 100 fintech partners and their customers is a dramatic case-study-in-progress of the potentially significant third-party risks posed by BaaS providers, whose models facilitate the delivery of banking services—checking accounts, payments, cards, lending, etc.—via cloud-based platforms or application programming interfaces (APIs) linked to the systems of licensed banks. Beyond Evolve, regulated banks known for their BaaS partnerships include Cross River Bank, Piermont Bank, Celtic Bank, Stride Bank, The Bancorp Bank, and Blue Ridge Bank, among others.
There were red flags for years before Synapse suddenly shut down this month, and it’s a cautionary tale for those active in or considering the BaaS market. The San Francisco startup raised more than $50 million from venture firms including Andreessen Horowitz, Trinity Ventures and Core Innovation Capital. In 2019, Angela Strange, the partner with Andreessen Horowitz who led the investment, referred to Synapse as “the AWS of banking.” (In retrospect, a serious misrepresentation, to which Amazon Web Services likely takes umbrage.)