Senators urge owners, partners and VC supporters of Fintech Synapse to restore customers’ access to their money

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A group of senators have teamed up to urge Synapse’s owners and bank and fintech partners to “immediately restore customers’ access to their funds.” As part of their demands, the senators held both the company’s partners and investors accountable for customers’ lost money.

In a letter shared publicly on Monday, US Senator Sherrod Brown (D-OH), Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, Senators Ron Wyden (D-OR), Tammy Baldwin (D-WI), and John Fetterman (D-PA) reported that customers of companies that partnered with banking-as-a-service startup Synapse have been unable to access their money since mid-May.

The letter was addressed to W. Scott Stafford, chairman and CEO of Evolve Bank & Trust, but was also sent to Synapse’s major investors, as well as the company’s major bank and fintech partners. Recipients include former Synapse CEO Sanket Pathak; venture firms Andreessen Horowitz, Core Innovation Capital and Trinity Ventures; American Bank; AMG National Trust; Trust and Lineage Banks; and fintech companies Copper, Juno, Mercury, YieldStreet and Yottaa.

San Francisco-based Synapse operated a service that allowed others (mainly fintechs) to incorporate banking services into their offerings. For example, one software provider specializing in payroll for 1099 contractor-heavy businesses used Synapse to offer an instant payment feature; others used it to provide specialized credit/debit cards. Until last year, it was providing those types of services as an intermediary between banking partner Evolve Bank & Trust and business banking startup Mercury, until Evolve and Mercury decided to work directly with each other and keep Synapse as the middleman.

Synapse has raised more than $50 million in venture capital over its lifetime, including a $33 million Series B round led by Andreesen Horowitz’s Angela Strange in 2019. The startup faltered as layoffs loomed in 2023 and filed for Chapter 11 in April this year, hoping to sell its assets to another fintech, TabaPay, in a $9.7 million fire sale. But TabaPay didn’t do that. It’s not entirely clear why. Synapse placed much of the blame on Evolve and Mercury, both of which threw up their hands and told TechCrunch they weren’t responsible. Synapse CEO and co-founder Sanket Pathak is no longer responding to our requests for comment.

As a result, Synapse was forced to file for Chapter 7 bankruptcy in May, ending its entire business. Customers have dropped out ever since.

Government officials were not letting the fintech partners off easily and cited their role in the situation.

In their letter, the senators said it is the responsibility of all the various players — including the V.C.s who support them — “to ensure the security and accessibility of end-user funds.”

He urged everyone to work together so that all customer deposits frozen due to the Synapse bankruptcy can be made available immediately.

Specifically, he wrote: “Each of you is responsible for the customers whose accounts have been frozen. Consumer-facing fintech firms sold their products to the public as safe, trusted alternatives to banks. Because of those promises, consumers embraced their products and made deposits through their apps and websites. Venture capital firms funded Synapse without insisting on adequate controls to protect consumers. They profited while Synapse presented itself as a trustworthy financial infrastructure provider. But they failed to ensure that Synapse could follow through on its commitments. Banks joined forces with Synapse in an effort to find new revenue sources. These partnerships made it possible for Synapse to market services ultimately provided by banks.”

The senators also expressed concern and concern over “a potential shortfall of $65 to $96 million between the amounts owed to consumers and the funds held on their behalf by Synapse’s partner banks”, calling it “deeply troubling and completely unacceptable”.

He added: “In time we will find out who is ultimately responsible for this mess, but in the meantime, the priority must be to restore consumers’ access to the internet.” All Of their money.”

In their letter, the senators also took aim at the banking-as-a-service model, saying the Synapse bankruptcy “exposed the inherent weaknesses of this tripartite business model and denied hardworking Americans and small businesses access to their own money.”

Last week has been full of drama in the world of banking-as-a-service. On June 26, Evolve Bank announced that it had been the victim of a cyberattack and data breach that may have impacted its partner companies as well. According to the company, the incident involved data and personal information of “certain Evolve retail Bank customers and customers of financial technology partners” such as Affirm, Mercury, Built, Alloy, and Stripe. On June 29, fintech company Wise announced that personal data of some of its customers may have been stolen in a data breach. Last week, Thread Bank — a popular partner of BaaS startups like Unit — faced enforcement action from the FDIC. Notably, the order issued to Thread, as the publication Payments reported, “is unique in that it explicitly calls out the bank’s banking-as-a-service (BaaS) and loans-as-a-service (LaaS) programs.”

TechCrunch reached out to Sanket Pathak, former CEO of Evolve Bank and Synapse, for comment. Evolve declined to comment.

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