Synapse’s Collapse Freezes Nearly $160M in Fintech User Funds — Here’s the Inside Story

The bankruptcy of BaaS fintech Synapse has sent shockwaves through the fintech industry, highlighting the interdependence of these tech-driven financial services. This San Francisco-based startup, which allowed other companies to integrate banking services into their platforms, has left many fintechs and their customers in turmoil.

Background and Key Events

Synapse, which enabled services like instant payments and specialized credit/debit cards, raised over $50 million in venture capital, including a $33 million Series B round led by Andreessen Horowitz. However, the company began to falter in 2023, eventually filing for Chapter 11 bankruptcy in April 2024 with hopes of selling its assets to TabaPay for $9.7 million. When that deal fell through, Synapse was forced into Chapter 7 liquidation, leaving nearly $160 million in customer deposits frozen.

Timeline of Events

July 7: Fintech Business Weekly reports that a recent status conference offered little hope for users with frozen funds, totaling about $158.6 million. Efforts to reconcile and release these funds have slowed, with an estimated $65 million to $95 million still unaccounted for.

July 1: A group of senators urges Synapse's partners and investors to restore customer access to their funds. The senators hold both Synapse's partners and venture investors responsible for the missing money.

June 12: Synapse’s CEO, Sankaet Pathak, reportedly raises $10 million for a new robotics startup, even as questions linger about $85 million in Synapse’s customer funds.

May 25: Filings reveal that up to 100 fintechs and 10 million end customers could be affected by Synapse’s collapse. This includes funds at crypto app Juno and banking platform Yotta. Fintech lender Mainvest announces its shutdown due to the fallout.

May 16: A U.S. trustee files a motion to convert Synapse’s Chapter 11 bankruptcy to Chapter 7 liquidation, citing gross mismanagement and ongoing losses with little chance of reorganization.

May 13: Teen banking startup Copper discontinues its banking operations due to Synapse’s troubles, leaving families without access to their funds.

May 9: TabaPay abandons its plans to purchase Synapse’s assets, leading to finger-pointing between Synapse’s CEO, banking partner Evolve Bank & Trust, and Mercury.

April 22: Synapse files for Chapter 11 bankruptcy, initially planning to sell its assets to TabaPay. However, TabaPay withdraws from the deal weeks later.

The 2023 Downfall

October 13: Evolve Bank & Trust and Mercury end their relationships with Synapse. Evolve and Synapse publicly address their disputes.

October 6: Synapse lays off 86 employees, about 40% of its workforce, following an earlier reduction of 18% due to macroeconomic conditions impacting its clients.

Impact on Fintech Industry

The collapse of Synapse has cast doubt on the viability of the banking-as-a-service model and digital banking, as millions of consumers remain unable to access their funds. The situation underscores the risks inherent in the fintech sector, where the failure of a single entity can have widespread repercussions.