Why the Synapse bankruptcy has the fintech world on edge

livemint.com:

For months now, thousands of consumers have been unable to access money they thought was safely deposited at banks. They are victims of the bankruptcy of a little-known venture-backed startup called Synapse Financial Technologies, whose shutdown is harming not only consumers but also fintech startups that worked with it, as well as the broader fintech sector. The situation, now in bankruptcy court, is bringing additional regulatory scrutiny to fintech, demonstrating risks for consumers who deposit money via nonbank financial services providers, and creating uncertainty for fintech venture investors and entrepreneurs.

Synapse Financial Technologies is a San Francisco company that served as a middleman between fintech startups and licensed banks. Its fintech clients marketed financial products and got consumers to sign up. Synapse sent consumer money to partner banks where it was deposited.

Since its founding in 2014, Synapse has raised about $50 million from Andreessen Horowitz, Core Innovation Capital and Trinity Ventures for its banking-as-a-service business. The company was a pioneer of the banking-as-a-service model and helped make building fintech startups faster and easier. In part because of the rise of banking-as-a-service, venture investors put billions of dollars into consumer fintech startups in recent years.

Synapse itself serviced more than 100 fintech companies, including many of its current creditors, such as venture-backed companies Juno, Yotta Technologies, and Yieldstreet. Synapse filed for chapter 11 bankruptcy in April. Starting in May, banks including Evolve Bank & Trust and Lineage Bank froze access to accounts associated with Synapse, citing discrepancies in ledgers kept by Synapse.