The story of a fintech domino effect where one startup's fall can put many of its peers and their customers in trouble, thanks to their rather interdependent nature of operations.
VC funding has been in an increasingly bubble-like environment for the past few years. The ecstasy of startup funding in 2021 was driven to reality last year, and today, banking-as-a-service (BaaS) and other fintechs are suffering from the aftermath.
Synapse, backed by a16z, is a financial middleman that enables online banking service embeddings for others, often fintech businesses. The features included instant payments, specialized credit and debit cards, and similar. The company raised around $50 million in total throughout its years of operation, with the notable $33 million Series B raise led by Angela Strange at a16z.
In 2023, Synapse laid off 40% of its staff, and this year in April, filed for Chapter 11, trying to sell $9.7 million in assets to SoftBank-backed TabaPay. The deal didn't go through in the end. Currently, Synapse is close to being forced to liquidate everything under Chapter 7 and is creating heavy challenges for its fintech peers, from frozen funds to stopped payments processing.
The collapse was blamed by Synapse on fintechs Mercury and Evolve, where Mercury decided to work directly with Evolve and no longer saw a need to work with an intermediary - Synapse.
One of the startups most gravely impacted by the Synapse implosion is the fun gift card earning app largely dependent on digital banks and fintech services, Copper.
The fintech companies hit the heaviest by Synapse’s troubles.
Copper discontinued debit cards and its banking deposit accounts on May 13th, though its landing page and other public-facing walls don't, or hardly reflect that. The fintech's representatives said that it's operational regardless, that its educational earnings app is unaffected, and that future product plans are in place.
Impacted was also Juno, a cash-to-crypto payments app, where users reported to outlets having been blocked from accessing funds. Another digital lender that works exclusively with restaurants, Mainvest, was forced by the Synapse fall to start shutting down, dissolving the company.
Not long after, the implosion reached a popular fintech startup called Yotta. CNBC reported that 85,000 of Yotta's customers collectively holding around $112 million in savings have been locked out of their accounts.
Yotta CEO Adam Moelis was quick to comment, saying they never expected anything like this, especially working with FDIC-member banks, and that no regulator would help in such a situation. Yotta was said in the report to be the largest fintech to be impacted by Synapse's bankruptcy.
Yotta, being the largest of the bunch of startups burned by Synapse's bankruptcy, was covered by a prominent career online and not-so online scam investigator on YouTube, Coffeezilla. Initially, it was shown how many influential finance YouTubers have been promoting Yotta that's turned its savings app into a casino, and how many people talking about their funds frozen on Yotta there are — people interviewed by the sleuth.
Some sums mentioned as locked were $60,000, $98,000, $94,000, and others - just from several people. Coffeezilla himself explains that what started as a "no-lose'' savings-to-lottery app has since become a full you-can-lose gambling platform. To Coffeezilla, Yotta CEO said that the transition was into sweepstakes, not a casino.
Coffeezilla also mentioned and showed videos that despite Yotta having frozen customer funds, new podcast issues are still promoting the platform. Jason Mikula, author of Fintech Business Weekly and a prominent figure in the industry, joined Coffeezilla for the interview, explaining to viewers how Synapse, an "adapter" sitting between traditional finance and fintech, is key to the frozen funds and other issues.
Synapse revoked on May 11 Evolve bank's access to its dashboard/ledger, Evolve functionally froze all of these fintech apps' access and stopped processing payments. Mikula also noted that customers are led to believe by such fintechs that their funds will be FDIC-insured, when in reality, depositors and users are protected only when the given bank fails - and here, a bank hasn't failed, as of yet. The middleware (Synapse), not the bank (Evolve), has failed.
The Information reported that such discrepancies on Synapse's side were known long before the downfall and bankruptcy - around 2 years.
Jason Mikula said to outlets that as many as 100 fintechs and 10 million of their customers could be impacted by Synapse's fall alone. Then, Mikula explained to TechCrunch the level of interdependence between fintech startups, especially those with BaaS models, and said that estimating the number of fintechs affected might not be enough because some of them are "running payroll for small business".
Other experts like BaaS startup Synctera CEO Peter Hazlehurst said to TechCrunch that maybe all BaaS companies shouldn't be lumped together. That's most likely how domino effects are made possible.
Hazlehurst said that what we're seeing in fintech now is also due to the early Silicon Valley founders' wishes to disrupt banking without fully understanding the banking system. He reiterated that when he left Uber and founded Synctera, the earliest players in BaaS were trying to follow the trend of "neo/challenger" banks without having sufficient knowledge.
Other commentators on the Synapse collapse stressed that the FDIC should bring some "clear language" for neobanks and third-party banking services regarding insurance and the related processes.
