Synapse, a Banking as a Service (BaaS) provider labeled in 2023 as one of the World’s Best Fintech Companies by CNBC, is in the throes of bankruptcy. In just a few short months, things have changed dramatically at Synapse it seems. It has been reported that over 10 million accounts have been impacted by Synapse’s failure.
The firm’s collapse is impacting other Fintechs and some securities crowdfunding platforms that depend on its platform to provide services. The Fintech is reportedly shifting from Chapter 11 bankruptcy into Chapter 7 liquidation as things go from bad to worse.
Synapse is a firm that powers digital banking services such as savings and credit as well as other embedded financial services. It also operates a FINRA-regulated broker-dealer.
Earlier this month, it was reported that TabaPay had agreed to acquire Synapse, but the deal fell apart as rumblings of lost funds emerged. Before the wheels fell off, TabaPay co-founder and CEO Rodney Robinson said the assets were a natural fit for their existing services before he had a change of heart.
Evolve Bank & Trust, a partner of Synapse, has issued a statement supporting the bankruptcy motion to safeguard users’ funds. Evolve explained that Synapse had disabled access to its system without notice, impacting its operations.
On Friday, Evolve stated that as they move forward, “Evolve Bank & Trust reaffirms our commitment to collaborating with financial industry partners with the shared goal of providing customers access to their funds. We are dedicated to addressing any challenges that arise with agility and efficacy, ensuring the integrity and security of all customer funds remain paramount.” Evolve pointed to the US Trustee’s filing regarding Synapse, which blamed Synapse’s “gross mismanagement.”
Evolve also noted that it is a “robustly well-capitalized FDIC institution,” adding that it is dedicated to providing customers with access to their funds.
Fintech Business Weekly has reported that Synapse co-founder and CEO Sankaet Pathak had accused former client Mercury of moving nearly $50 million erroneously. In an X from today, a shared email from an apparent employee claimed end users would be left “high and dry” if some solution was not found quickly. Yesterday, Pathak claimed that they would have updates on cashing out for all users except for Evolve.
It’s a Mess.
In an email viewed by CI, investment crowdfunding platform MicroVentures assured its investors that all was well and that it had no exposure to the Synapse mess. While Synapse had at one point provided services to MicroVentures, the bullet was dodged when the crowdfunding platform decided to transition away from Synapse as quickly and quietly as possible in late 2023.
The missive explained the change:
“Our main objective was to protect investor funds. We purposely limited the information we shared due to the nature of events reportedly occurring with both Synapse and Evolve. Although not publicly verified at the time, issues with communication and transparency became a concern. This was a situation with which we were not comfortable, and which ultimately prompted our banking transition.”
MicroVentures decided to use Synapse’s services in 2018 to remove friction in the investment process. Initially, Synapse helped MicroVentures in the investment process while enabling them to offer other products to their investors, such as custody and savings accounts. MicroVentures utilized the service to help process almost $850 million in investor funds.
MicroVentures said that certain issues with Synapse came to light in 2023, and funds were eventually shifted to Silicon Valley Bank (SVB), now a division of First Citizens Bank & Trust Company, to hold funds. MicroVentures shared they reviewed other BaaS providers but felt none of them could provide the long-term stability they desired. In the end, MicroVentures built some of the services themselves. The company also said it may be able to assist other impacted platforms.
CI contacted MicroVentures for additional information on the separation between the two firms. Tyler Gray, President of MicroVentures, explained that they had used Synapse for payments, distributions, custody accounts, and savings accounts while customer accounts were held at Evolve.
He said they were already investigating other options beyond Synapse following a report last October that Evolve had a $13 million deficit in Synapse FBO Accounts. Around the same time, Synapse reportedly was laying off staff. Not a good sign.
Following these events, MicroVentures started to move quickly to exit the relationship. Meanwhile, Synapse was said to be pushing them to utilize the Synapse broker-dealer, which MicroVentures “could not get comfortable with.”
Gray did state that “MicroVentures has taken decisive steps to protect our investors’ funds by proactively transitioning away from Synapse and Evolve Bank & Trust. Our main objective has always been to safeguard our investors’ assets.”
“Given the recent bankruptcy filing by Synapse and the freezing of associated accounts by Evolve Bank & Trust, we are confident that our decision to terminate our relationship with these entities was the right move. None of the 10-20 million accounts at risk are MicroVentures accounts, underscoring our commitment to maintaining the highest level of financial security for our investors,” said Gray.
Another crowdfunding provider was not so fortunate. Mainvest has publicly discussed their problems and their relationship with Synapse. While Mainvest is winding down operations due to other issues, the Synapse fiasco is not making things easy. A Mainsvest spokesperson shared with CI:
“The dispute between Evolve and Synapse is affecting site users. Evolve Bank froze payment processing for Synapse users last week, and we- along with hundreds of other clients representing ~10MM end users- are still affected. There’s been a good amount written on this, though from our view, not quite enough given the scale of the problem and the lack of action from federal regulators.”
We are aware of chatter that there are other investment platforms that have been left in the lurch. According to the small print on their site, Yieldstreet may be one of those platforms:
“Certain services are offered through Synapse Financial Technologies, Inc. and its affiliates (collectively, “Synapse”) as well as certain third-party financial services partners. Synapse is not a bank and is not affiliated with Yieldstreet. Bank accounts are established by Evolve Bank & Trust.”
CI has reached out to Yieldstreet for more information.
While regulators are certainly aware of the Synapse bankruptcy, no announcements of an investigation have been made—at least not yet. But it would come as no surprise if some sort of action is in the works, as the debacle is apparently impacting millions of users of their services.
Prior to falling into bankruptcy, Synapse had raised over $50 million in venture capital funding.
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