At the time of writing, Tuesday (May 28), the ripple effects of Synapses‘s failure continues to ripple. But with every statement, with reports that customers can’t get their money back, that sponsoring banks and other FinTechs have abandoned dealings with the funds… and even that other companies are facing an existential threat, there is a theme that is emerging:

The interconnectedness of it all.

At almost every level, the Banking-as-a-Service (BaaS) model can be put to the test.

Less than two years ago, as detailed in this space, Synapse, which among other offerings provided U.S. checking accounts to customers, had planned expansion into Latin America and India. In 2019, and in previous years, the company raised $33 million in a Series B funding round led by Andreessen Horowitz and existing investors Trinity Ventures and Core Innovation Capital.

Fast forward to April of this year, and the company has filed for Chapter 11 bankruptcy, entered into a deal to be acquired by TabaPayand then the $9.7 million deal to buy vanished seemingly as quickly as it had materialized.

Court documents note this Synapse exists as “one of the first, if not the first, technology company to pioneer a Banking as a Services (Baas) platform for fintechs and partner financial institutions that have agreements… to efficiently interface with each other to enable transactions (i.e., the buying and selling) of their financial products and services to fintech end users.”

Will the direct model prevail?

The territory of intermediaries seems tenuous. Synapse acted as an intermediary between Evolve Bank and Trust (PYMNTS has reached out to Evolve for comment) and FinTech business banking Mercury – but the two firms have struck a deal to work directly with each other, ending the use of Synapse as an intermediary.

As reported by PYMNTS – and even before the events that shook BaaS – integrated banking company First Treasure he said he was changing his model.

“We have been saying for years that the future of banking is integrated, with regulated institutions and technology companies working closely together to deliver critical financial services within new channels and apps,” CEO Chris Dean wrote when announcing the change in February .

“However, it has become increasingly clear to me that the future of embedded banking comes through FinTech partnerships directly between banks. The market is settling into this model and it is happening quickly.”

Treasury Prime has announced the launch of a “Bank-Direct” product, which allows banks to manage the entirety of their relationships with FinTech customers. While not necessarily what we might consider a “pure” intermediary – Treasury Prime has acted as an aggregator connecting FinTech to different banks – the pivot speaks to a general reconsideration of what BaaS might mean in the future.

Customers as victims?

Although Synapse is in chapter 11, various media sources they noted that a conversion to Chapter 7 could be an eventuality, which would lead to the liquidation of the company. The specter of liquidation, we note, raises questions about what can be recovered, how long it will take… and what will happen to customers who have relied on the interconnected relationships between Evolve and Synapse.

A key example is this Mainvest, which brought together small businesses and investors via its online platform. The company is shutting down operations and said in a statement on its website that “Due to the ongoing dispute between Evolve Bank and Synapse, all payment processing on Mainvest is currently unavailable, including withdrawals and bank connections.”

Copperanother FinTech that has relied on Synapse, announced that it will discontinue at least some of its offerings, including bank deposit accounts and debit cards. In terms of the expanded ecosystem, Synapse’s approximately 100 FinTech partners are estimated to have 10 million end customers.

Regulators behind the scenes

There is one certainty here: regulators will look more closely at the role third parties play in connecting banks and FinTechs – and what the risk frameworks and ultimate responsibilities will be.

The Consumer Financial Protection Bureau (CFPB), which was just given the green light by the Supreme Court, will have great importance in this case, given reports that individual customers have been unable to access the funds, because their accounts were frozen.

The question is also far from being resolved as to who will ultimately regulate FinTechs: intermediaries and other players probably operate in a gray area where they are not governed by the FDIC or the central bank, because digital-only players do not I am. , namely the banks.

At least in some cases, as individual customers are affected and as accounts are frozen and unfrozen, the question is whether backstops will be necessary if various companies are unable to trace who owns what in which accounts.

Another issue under discussion is what will happen to sponsor banks, which will also likely be subject to more oversight. These banks, which in turn provide services to FinTechs, may also face a thrill, especially regarding the possibility of “engaging” FinTechs amidst all this uncertainty.

Synapse said that Evolve is responsible for a $50 million shortfall in end-user funds. Somewhere else, as seen earlier this year the FDIC has issued consent orders against two banks, Sutton Bank and Piermont Bank, focused on issues related to third-party relationships and banking as a service — and how banks oversee third-party risk.

Finance everything

As recently as last month, CB Insights noted that FinTech financing fell 16% quarter-over-quarter, measured against the first three months of this year. Overall, venture capital deals (across all industries, not just FinTech) are at a seven-year low, and bright spots within FinTech remain concentrated in digital healthcare companies and retail. It may not be far-fetched to think that BaaS will attract the caution of would-be investors as the industry continues to falter.

See more in: Bank-Direct, banking, banking regulation, Bank as a service, Evolve Bank and Trust, FinTech, fintech partnerships, MainVest, News, PIMNTI news, Synapses, TabaPay, First Treasure

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