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A fintech meltdown is reverberating in a small corner of the banking world
The collapse of the new fintech Synapse is having repercussions in a small corner of the banking world, leaving thousands of customers without access to their money and a mystery about millions of dollars that have disappeared.
Four small US banks hold some of the money. No one knows for sure where the rest went.
The saga surrounding the bankruptcy of Synapse, a 10-year-old fintech company, puts new focus on how the loose webs of partnerships between venture-backed startups and FDIC-backed lenders can go so wrong.
Regulators are taking a closer look at these relationships and warning several banks to tighten their controls when working with fintech companies.
Earlier this month, the Federal Reserve hit one of Synapse’s partner banks with an enforcement action that identified weaknesses in the risk management around such partnerships.
‘Banking as a Service’
Synapse was part of a wave of new fintech companies that emerged in the aftermath of the 2008 financial crisis, when Silicon Valley-style digital bank startups promised to shake up the world of traditional finance.
In just a decade, it has become a key intermediary between dozens of fintech companies and community banks, offering what it calls “banking as a service.”
Provided digital banking equipment such as Mercury, Dave (DAVE), and Juno with access to checking accounts and debit cards that they could offer to their customers. It was able to do this through partnerships with FDIC-backed banks that, in return, gained a new source of deposits and fee income.
Traditional lenders that partnered with Synapse included Evolve Bank & Trust, American Bank, AMG National Trust, and Lineage Bank, all small banks when compared to giants like JPMorgan Chase (JPM) or Bank of America (TAS).
The largest was Evolve, which had about $1.5 billion in assets at the end of the first quarter.
The pitch Synapse effectively gave to these smaller banks was “we’ll bring the deposits; you don’t have to do much,” according to Jason Mikula, an independent fintech consultant who publishes a weekly newsletter and follows Synapse.
“That turned out to be inaccurate, in my opinion,” Mikula added.
Jelena McWilliams, former chairman of the FDIC, is Synapse’s bankruptcy trustee. (PATRICK T. FALLON/AFP via Getty Images) (PATRICK T. FALLON via Getty Images)
The problems arose shortly after Synapse filed for bankruptcy in April after it failed to reach an agreement with Evolve over the liquidation of the funds.
Three weeks into the bankruptcy proceedings, Synapse cut off Evolve’s access to its technology system. This, in turn, forced Evolve and its other partner banks to freeze customer accounts.
Both parties blamed each other as the culprits.
“Synapse’s abrupt shutdown of critical systems without prior notice and failure to provide required records placed end users at unnecessary risk by impairing our ability to verify transactions, confirm end user balances, and comply with applicable law,” it said. Evolve in a statement.
The story continues
Synapse CEO Sankaet Pathak dismissed that claim, accusing Evolve of having the means to close a deficit but delaying the return of customer funds.
“The debtor has been forced to play a vicious game of ‘whack-a-mole’ with Evolve’s unreasonable demands as conditions for unfreezing depositors’ accounts, while depositors suffer from lack of access to their funds,” Pathak said in court documents last month.
The end result is that thousands of fintech customers have lost access to their money.
“The Synapse bankruptcy left tens of thousands of end users of financial technology platforms who were Synapse customers without access to their funds,” Jelena McWilliams, Synapse’s court-appointed trustee and a former FDIC chairwoman, wrote in a letter last week to the heads of five federal banking regulators.
There was another problem: no one seemed to know where all the money was.
In early June, McWilliams said there was an $85 million shortfall, with the four banks accounting for just $180 million of the $265 million owed by end users.
More recently, she said the deficit range was $65 million to $96 million.
Some money was returned to customers. McWilliams said on June 21 that more than $100 million “has been distributed by some partner banks.”
Blind spots
Banking regulators have been concerned for some time about partnerships between Silicon Valley-style digital startups and FDIC-backed banks.
Acting Comptroller of the Currency Michael Hsu used a September 2023 speech to discuss potential blind spots for regulators as these relationships become more confusing.
“Banks and technology companies, in an effort to provide a ‘seamless’ customer experience, are coming together in ways that make it more difficult for customers, regulators, and the industry to distinguish between where the bank stops and where the technology company begins” , Hsu said in the speech.
Last June, regulators issued a final joint statement guidance about how creditors should handle these relationships.
These partnerships are not yet widespread across the banking sector, although the use of this model is accelerating as banks of all sizes look for ways to attract deposits and earn more revenue.
Acting Comptroller of the Currency Michael Hsu raised concerns about ties between banks and financial technology companies. (REUTERS/Evelyn Hockstein) (REUTERS/Reuters)
Less than 2% of U.S. banks will use the banking-as-a-service model in 2023, according to S&P Global Market Intelligence.
But regulators are nonetheless becoming more aggressive in calling out such relationships. The banking-as-a-service model accounted for 13.5% of regulators’ public enforcement actions in 2023, according to S&P.
In January, the FDIC issued a consent order to one of Synapse’s partner banks, Franklin, Tennessee-based Lineage, which identified weaknesses related to its banking-as-a-service program and ordered the bank to submit a plan to how to achieve an “orderly termination” with significant fintech partners.
The following month, New York-based Piermont Bank; Attica, Ohio-based Sutton Bank; and Blue Ridge Bank, based in Martinsville, Virginia, received consent orders from regulators related to alleged deficiencies in their banking businesses.
Then, earlier this month, the Fed issued an enforcement action against Evolve, saying that examinations conducted in 2023 “found that Evolve engaged in unsafe and harmful banking practices by failing to implement an effective risk management framework” for its partnerships with fintech companies.
Regulators asked Evolve to improve its risk management policies and practices by “implementing appropriate oversight and monitoring of these relationships.” They also noted that the action was “independent of the bankruptcy proceedings regarding Synapse.”
An Evolve spokesperson said the recent order was “similar to orders received by others in the industry” and “does not impact our existing business, customers or warehouses.”
The bank account Affirm (AFRM), Mastercard (BAD) and Stripe as notable fintech partnerships on their website.
In the past, it has also partnered with two now-bankrupt crypto companies, FTX and BlockFi, as well as Bytechip, a financial services company that had its Evolve accounts frozen late last year. allegation violated federal law by laundering money for fraudsters.
Adding to its recent challenges, Evolve said Wednesday that some customer data had been illegally spread on the dark web as a result of “a cybersecurity incident involving a known cybercriminal organization.”
“Evolve has engaged the appropriate law enforcement authorities to assist in our investigation and response efforts,” the bank said. “This incident has been contained, and there is no ongoing threat.”
David Hollerith is a senior reporter at Yahoo Finance covering banking, cryptocurrencies and other areas of finance.
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The spotlight next week will shift somewhat to the Federal Reserve’s second-quarter earnings season and monetary policy. Market watchers will be treated to results from several major names, including Dow 30 components Goldman Sachs (GS), UnitedHealth (UNH), Johnson & Johnson (JNJ) and American Express (AXP), along with streaming giant Netflix (NFLX).
The Fed will still attract some attention as investors will be eager to hear from a packed lineup of central bank speakers just before the policy meeting lockout period.
In terms of the economic calendar, after fifteen days of labor market and inflation indicators, activity data will gain momentum in the form of the latest retail sales and industrial production reports.
Earnings Highlight: Monday, July 15 – Goldman Sachs (GS) and BlackRock (Black). See the full earnings calendar.
Earnings Highlight: Tuesday, July 16 – UnitedHealth (UNH), Bank of America (BAC), Progressive (PGR), Morgan Stanley (IN), PNC Financial (PNC) and JB Hunt Transport (JBHT). See the full earnings calendar.
Earnings Highlight: Wednesday, July 17 – Johnson & Johnson (JNJ), US Bancorp (USB), Morgan Children (KMI), United Airlines (UAL) and Ally Financial (ALLY). See the full earnings calendar.
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Earnings Highlight: Friday, July 19 – American Express (AXP), Halliburton (THANKS) and Travelers (VRT (return to recoverable value)) See the full earnings calendar.
IPO Observation: Hospital and healthcare clinic operator Ardent Health Partners (TARDT), insurance service provider Twfg (TWFG) and the biotechnology company Lirum Therapeutics (LRTX) are expected to price their IPOs and begin trading next week. The analyst quiet period ends at Rectitude (RECT) to free up analysts to publish ratings.
Police cars outside the residence of Thomas Matthew Crooks, the suspected shooter at a Trump rally on Saturday, investigate the area in Pennsylvania. Following the incident, one rally attendee was killed, two rally attendees are in critical condition and Donald Trump suffered a non-fatal gunshot wound. The shooter is dead after being shot dead by the United States Secret Service. (Photo by Kyle Mazza/Anadolu via Getty Images)
Investors will initially favor traditional safe-haven assets and may lean toward trades more closely tied to former President Donald Trump’s chances of winning the White House after he survived an assassination attempt, according to market watchers.
“There will undoubtedly be some protectionist or safe-haven flows into Asia early this morning,” said Nick Twidale, chief market analyst at ATFX Global Markets. “I suspect gold could test all-time highs, we’ll see the yen being bought and the dollar, and flows into Treasuries as well.”
Early market commentary suggested Trump’s shooting at a rally in Pennsylvania on Saturday could also prompt traders to increase his likelihood of success in the November election. His support for looser fiscal policy and higher tariffs is generally seen as likely to benefit the dollar and weaken Treasuries.
An indicator of market sentiment heading into the weekend: Bitcoin surged above $60,000, likely reflecting Trump’s pro-crypto stance.
Other assets positively linked to the so-called Trump trade include stocks of energy companies, private prisons, credit card companies and health insurers.
Traders will also be closely watching market measures of expected volatility on Monday, such as those in the tariff-sensitive Chinese yuan and Mexican peso, which have begun to price in the U.S. vote.
Trump said he was shot in the right ear after a shooting at his rally. His campaign said in a statement that he was “fine” after the incident, which prompted him to rush off the stage.
“Currencies will be the first major market on Monday in Asia to react to the weekend’s shots. There’s potential for extra volatility, and getting a clear reading could be especially difficult because liquidity will be hurt by Japan’s national holiday,” said Garfield Reynolds, Asia team leader for Bloomberg Markets Live.
Strategists had already expected a volatile run-up to the election, particularly as Democrats are still agonizing over President Joe Biden’s candidacy after his poor performance in last month’s debate raised questions about his age. Investors were also grappling with the possibility that the election could end in a drawn-out dispute or political violence.
But there is little precedent for events like those in Pennsylvania. When President Ronald Reagan was shot four decades ago, the stock market plunged before closing early. The next day, March 31, 1981, the S&P 500 rose more than 1% and benchmark 10-year Treasury yields fell 9 basis points to 13.13%, according to data compiled by Bloomberg.
Bond investors should pay particular attention as the attack is likely to boost Trump’s election chances and ultimately lead to concerns about the fiscal outlook, according to Marko Papic, chief strategist at California-based BCA Research Inc.
“The bond market must at some point become aware of President Trump’s greater chances of winning the White House than any of his rivals,” Papic wrote. “And I continue to believe that as his chances increase, so too must the likelihood of a bond market revolt.”
Kyle Rodda, senior financial markets analyst at Capital.com, said he was seeing client flows into Bitcoin and gold following the shooting.
“This news marks a turning point in American policy norms,” he said. “For markets, it means safe-haven trades, but more tilted toward non-traditional safe-havens.”
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Jio Financial share price: Should you buy this Reliance group stock on Monday ahead of Q1 FY2024 results?
Q1 2024 Results: Jio Financial Share Price will be in focus on Monday as the Reliance Group company has a fixed board meeting on July 15, 2024 to consider and approve the company’s unaudited standalone and consolidated financial results. Trust Group company informed about the Q1 2024 Results date on Wednesday last week via an exchange filing. According to stock market experts, Jio Financial Services Limited is poised to deliver impressive Q1 results for FY25 on solid operating income. They have forecast a healthy QoQ PAT for the company in Q1 FY25.
Jio Financial Services News
Speaking on the Jio Financial Services Q1 2024 results, Manish Chowdhury, Head of Research, StoxBox, said, “We believe Jio Financial Services is poised to deliver impressive results in Q1FY25 aided by its operating income, which is likely to show robust growth driven by strong investment income, which in turn should lead to healthy PAT growth on a sequential basis. Jio Financial Services continues to make strategic moves such as launching digital products and expanding its ecosystem, with a clear focus on future growth. The company has announced plans to introduce products for lending against stocks and mutual funds, leveraging Jio’s large user base, which could be a significant growth driver in the coming quarters.”
“Furthermore, with the NBFC receiving RBI approval to become a primary investment company, Jio Financial Services is well-positioned to unlock value from its investments. Overall, we expect the company to report robust numbers in the upcoming quarter,” the StoxBox expert added.
Jio Financial Stock Target Price
Speaking about the technical outlook of Jio Financial share price, Ganesh Dongre, Senior Manager, Technical Research at Anand Rathi, said, “Jio Financial Services share price is poised to make a fresh high at the ₹260 apiece level. If the stock breaks above this mark, the Reliance Group stock could make a fresh high by touching the ₹290-₹295 zone. Hence, those with Jio Finance stock in their portfolio are advised to stick to the script by keeping a stop loss at ₹205. If the stock breaks above ₹260 decisively, then one can upgrade the stop loss at ₹240 for the near-term target of ₹295.”
On the advice to new buyers regarding Jio Financial stock, Ganesh Dongre said, “New buyers are advised to wait for the breakout. Once the stock breaks above â‚ą260, one can buy this Reliance Group stock at the short term target of â‚ą295, keeping a stop loss of â‚ą240 apiece.”
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage firms, and not of Mint. Investors are advised to consult with certified experts before making any investment decisions.
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