When Chris Buckler opened an account with Juno — a savings app that advertises itself as a “complete bank replacement” — he thought he was being financially responsible. The app offered high returns on savings accounts, offered direct deposit for paychecks, doled out retailer gift cards as bonuses, and implied that user funds were federally insured, just like any legitimate bank account.

“I wanted to make sure I was getting the best interest for my money,” Buckler, a forty-three-year-old high school computer science teacher in Abingdon, Maryland, told the Lever. “I think I knew that [Juno] wasn’t necessarily a bank, but I saw that they were working with Evolve Bank & Trust and I did some research, and [Evolve is] a bank that’s been in business for a long time.”

Nearly eighteen months after he opened the Juno account, Buckler has lost all access to the $38,000 he has stored there — years of savings — thanks to the collapse of a different company called Synapse Financial Technologies, which provided digital transaction ledgers for financial technology (fintech) companies like Juno and their traditional bank partners. Synapse filed for bankruptcy in April and in May went completely offline, while allegedly failing to provide adequate transaction ledgers to its banking partners — leaving tens of thousands of users like Buckler unable to access their funds.

The epic meltdown of Synapse over the last several weeks illustrates the potential catastrophic consequences of the rise of “banking-as-a-service” companies, which use technology to partner with banking alternatives to offer banking-like services. Thanks to lax oversight and heavy industry lobbying, companies like Synapse operate outside the bounds of traditional banking rules but are being used by multiplying fintech startups, including digital wallets, crypto-trading platforms, buy-now-pay-later apps, and “fee-free” online banks to secure partnerships with traditional financial institutions.

That means many people might have money moving through these scantily regulated middleware companies without even knowing it.

“When a [fintech company] is completely independent — which is what Synapse is — those guys are outside of the purview of the banking regulators,” said Adam Rust, director of financial services at the Consumer Federation of America. “And that’s what this situation is making clear.”

The lack of regulation governing this new industry allowed just two Synapse employees to oversee nearly $650 million in customer funds, court documents show.

More than a billion users worldwide have money in “neobanks” like Juno that offer online banking and various rewards to users, according to one analysis by an industry consulting group. Here in the United States, smaller banks and financial institutions have been advocating for more partnerships with middleware companies like Synapse, which make it easier for them to partner with fintech apps so they can better compete with larger banks.

In court filings in its bankruptcy case, Synapse claimed it partnered with more than twenty financial institutions and on hundred fintech companies, and its collapse could affect ten million consumers, with tens of millions of dollars in user funds potentially on the line. And while experts say the Synapse collapse is the first of its kind, it may not be the last, since federal regulators have recently started raising concerns about other financial institutions partnered with banking-as-a-service companies.

According to a January analysis by S&P Global, a financial analytics company, last year banks with fintech partnerships were sanctioned by federal regulators for risky practices and mismanagement more than ever before, accounting for a “disproportionately large” 13.5 percent of all “severe enforcement actions issued by federal bank regulators.”

So far in 2024, at least seven more banks working with fintechs received enforcement actions related to their third-party partnerships from banking regulators including the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, federal records show.

“Every bank that touches [banking-as-a-service] is getting an enforcement action,” the CEO of Piermont Bank, which works with similar middleware companies as Synapse, told American Banker earlier this year. Piermont Bank entered into a consent order with banking regulators this spring due to alleged improper management of these relationships.

At the same time, many of these fintech companies are misleading the public about the security of their funds. Over the last year, according to a review by the Lever, a dozen fintech firms received warnings from the financial regulators for claiming that user funds were federally insured when in fact they were not.

Over the last year, a dozen fintech firms received warnings from the financial regulators for claiming that user funds were federally insured when in fact they were not.

Regulators, aware of the risk of these multiplying arrangements between fintech platforms and banks, have spent the last two years scrutinizing the relationships and issuing a number of enforcement actions. Yet the case of Synapse proves just how difficult it can be to hold these nebulous fintech companies accountable — and reveals the consequences for consumers when they fail.

“The regulatory piece needs attention, like big time,” Buckler said. “This is a major black hole in regulation, and it needs to be closed. The federal government was so quick to jump on Silicon Valley Bank and bail out the rich venture capitalists there, and yet, people of lower income who are going through this, it’s crickets from all levels of the government, just nothing.”

Synapse did not respond to a request for comment.

Synapse was founded in 2014 in San Francisco by Sankaet Pathak, an executive whose alleged mismanagement of the company drew headlines years before the problems at the middleware company came to a head this spring.

In the beginning, the company seemed like just another promising Silicon Valley venture. The company raised $33 million in venture funding in 2019 to develop its platform and had the backing of Andreessen Horowitz, a venture capital firm that helped finance Elon Musk’s takeover of Twitter.

In 2019, the fintech market was booming, with tens of billions of dollars of investment cash flowing to startups like Synapse. Many such companies touted their new vision for the future as one of financial inclusion — targeting communities distrustful of traditional banks, and advertising no-fee banking or payment services.

“A lot of these companies really present — in some way, shape, or form — their mission as financial empowerment,” said Jesse Van Tol, the president of the National Community Reinvestment Coalition, an advocacy group focused on building wealth for low-income communities.

But that financial empowerment message can often be misleading, Van Tol added. “It really starts to look like what we call reverse redlining — the targeting of vulnerable communities for more expensive, sometimes abusive, products and services,” he said.

A report by a federal watchdog agency last year found no consensus in the literature around whether fintech companies actually benefit the underserved communities they target.

There are digital banking companies that specifically target black consumers, Latinos, and low-income communities. Other fintechs have partnered with smaller banks to potentially skirt state interest rate limits for loans, a 2023 Federal Reserve study found.

“There’s a range of really problematic activity,” Van Tol said. “There are people in this country that the banks seem to have given up on and who may not have access to a banking relationship and who may not trust banks. Certainly we see that those are the types of communities where these kinds of fintech neobank-type companies are succeeding the most.”

Even before the Synapse collapse, regulators were scrutinizing banks that partnered with the company, such as Evolve Bank & Trust, the institution associated with Buckler’s missing funds.

Evolve and its many fintech and crypto partners, including Synapse, have been under the microscope for years and have been investigated by federal and state regulators. The bank entered a consent agreement with the Department of Justice in 2022 over its improper lending practices, which caused black and Hispanic borrowers from the bank to pay higher rates for mortgage loans than white borrowers, according to federal prosecutors.

Evolve was also associated with the collapse of FTX, Sam Bankman-Fried’s cryptocurrency exchange that was mired with fraud. Evolve agreed to issue debit cards for FTX customers in October 2022, one month before FTX collapsed.

In a statement after the FTX collapse, Evolve said that customer funds “are safe and secure” and that “Evolve is holding onto these balances until the court overseeing the FTX bankruptcy allows us to release these funds.” Nearly all of FTX’s customers eventually got their money back — plus interest — roughly a year and a half after the exchange collapsed.

Federal regulators have taken notice of problems with companies like Synapse — and after governing with a light hand during the rapid ascent of fintechs and neobanks in 2018 and 2019, officials began to try to crack down.

In July 2021, three federal banking regulators proposed new interagency regulatory guidance for banks on “risks associated with third-party relationships,” essentially warning banks that they would be responsible for the risks that they took on by partnering with untested fintech companies.

The nascent fintech lobby immediately weighed in. The Financial Technology Association, a fintech lobbying group, asked regulators to consider the benefits of bank and fintech partnerships in risk assessments and “avoid one-size-fits-all” enforcement. Fintech companies, including Plaid, a company that specializes in payment processing and had to pay out millions over harvesting and selling users’ data without consent, told regulators that forcing banks to monitor their business partners “is not adaptive to the most modern technologies.”

The Financial Technology Association has spent $300,000 lobbying Congress on “policies and proposals impacting financial technology firms” and other issues since January 2023, disclosures show.

Additionally, the Electronic Transactions Association, another trade association representing fintechs, cautioned “against the agencies taking an overly prescriptive approach” and supports an “industry-led and principles-based framework,” the group wrote in response to the new guidance in 2021.

The group spent $2 million lobbying Congress, the Consumer Financial Protection Bureau, a federal consumer watchdog, and other regulators on a variety of proposed rules governing nonbanks, issues involving cryptocurrency regulations, and other issues related to banking and lending since January 2023, disclosures show.

The industry has also secured allies in Congress. After the Federal Deposit Insurance Corporation, which insures traditional bank accounts and reimburses depositors if a bank fails, scaled back collaborations with the private sector, three Republican lawmakers wrote a letter to the agency chairman in February saying the developments had “moved innovation backwards.”

As trade groups asked banking regulators for lenience, consumer groups pushed the regulators for additional enforcement.

“Financial technology firms provide access to innovative products and services by partnering with highly regulated financial institutions to meet the evolving needs of consumers and businesses of all sizes,” wrote the group, which included Rep. Patrick McHenry (R-NC), chairman of the Financial Services Committee.

McHenry’s top donor to his career reelection efforts was Signature Bank, a New York–based bank that collapsed in March 2023 due in part to “risky” bets on cryptocurrency companies and a run on deposits. The bank has given McHenry more than $278,000 for reelection efforts throughout his twenty-year career.

As trade groups asked banking regulators for lenience, consumer groups pushed the regulators for additional enforcement.

In a joint statement in 2021, consumer advocacy groups — the Center for Responsible Lending, the National Consumer Law Center, the National Fair Housing Alliance, and the Consumer Federation of America — urged regulators to consider implementing stricter guidelines on how fintech companies partner with banks to avoid state laws governing interest rate caps and other issues.

“Some third-party partnerships are being used in an attempt to enable the third party to avoid state licensing, interest rate caps or other state consumer protection laws and make loans that are illegal, often in the vast majority of states,” the groups wrote. “There are many legitimate purposes of bank partnerships with third parties, but assisting a third party in the violation or evasion of state laws is not one of them.”

Shortly thereafter, in April 2022, the Consumer Financial Protection Bureau announced it was invoking a new authority to start supervising fintech companies that were “posing risks to consumers.”

“Given the rapid growth of consumer offerings by nonbanks, the [Bureau] is now utilizing a dormant authority to hold nonbanks to the same standards that banks are held to,” Rohit Chopra, the agency’s director, said at the time.

However, the consumer watchdog agency’s oversight is limited: it can only supervise banks and financial institutions with more than $10 billion in assets as well as other companies that it defines as “larger participants” in a given consumer market. The agency has estimated that only seventeen fintech companies — which it said would cover about 9 percent of consumers using banking alternatives — would be under its supervision. That leaves a patchwork of regulations from federal banking regulators and states to govern the smaller companies.

“At present, there is no Federal program for supervision of nonbank covered persons in the market for general-use digital consumer payment applications with respect to Federal consumer financial law compliance,” the agency wrote in a November 2023 rule proposal.

Michael J. Hsu, acting comptroller of the currency, which helps regulate banks and other financial institutions, recently hinted at the need for more fintech regulations during a February speech at Vanderbilt University.

“The prospect of banking being rebundled by nonbank entities outside of the bank regulatory perimeter bears careful monitoring because of the financial stability implications,” Hsu said. “Companies that started off simply facilitating payments now offer customers the ability to deposit paychecks directly into their accounts, earn yield on the cash held there, and access credit, all with a few clicks of a mouse or taps on a phone.”

Letters submitted to the bankruptcy judge overseeing the Synapse collapse and online comments suggest many of the users involved were confused about how or whether their money was insured by the government through the Federal Deposit Insurance Corporation.

“We thought we were safe because of the [Federal Deposit Insurance Corporation] insurance statements,” wrote a man in the bankruptcy case who said he and his wife lost access to $20,000 in savings that they had in an account with a neobank that was using Synapse’s services.

Juno did not return a request for comment about its insurance disclosures and the Synapse debacle.

Following Synapse’s collapse, the Federal Deposit Insurance Corporation issued a statement on May 31 regarding banking with third-party apps like Juno and others, and made clear that funds held in fintech companies are not federally insured.

“It is important to be aware that nonbank companies themselves are never [Federal Deposit Insurance Corporation]–insured,” the corporation wrote — adding that even if the third-party app claims to work with an insured bank, the funds are not insured unless they are held in the bank itself.

“[Federal Deposit Insurance Corporation] deposit insurance does not protect against the insolvency or bankruptcy of a nonbank company,” the corporation wrote.

In fact, because of the way Synapse funneled users’ funds through brokerage accounts and subsidiaries, it’s unclear to what extent funds wrapped up in the Synapse collapse are insured or covered by bankruptcy protections at all, or if regulators are able to step in and help.

In 2022, regulators issued a rule banning companies from misleading users about federal deposit insurance, saying such claims amount to false advertising. Since then, twenty-three companies have been hit with warnings, records show.

Those companies include Atmos Financial, a banking-alternative that offers “bank accounts that fund solar”; Zil Money Corporation, a “payment management platform” made to solve “payment challenges” for growing businesses; and PrizePool, a banking-alternative partnered with Evolve that offers “banking made fun with real cash prizes.”

But governing through enforcement actions rather than preemptive rules has left consumers scrambling to figure out whether or not their funds are protected — and the actions may not apply to middleware companies at all.

“There are all these enforcement actions. . . . That’s what the regulators can do, look into [the banks],” Rust said. “[Regulators] are probably scrutinizing Evolve right now, but they aren’t scrutinizing Synapse, because they can’t.”

Meanwhile, the only recourse for Synapse victims like Buckler thus far has been to watch the situation play out in bankruptcy courts and hope that consumers can retrieve at least a portion of their funds, which is what happened when crypto exchanges like the Celsius Network and FTX failed in 2022.

Buckler says he’s better off than some of the other victims with money tied up in the Synapse collapse. But he says his house needs some major repairs and his seventeen-year-old car “still works fine, but it’s not going to last forever.”

“It’s basically going to require a little bit more continued financial sacrifice and discipline to rebuild my reserves back up,” he said. “I guess at this point, the regulators aren’t terribly willing to do anything to help us out. So we just have to wait for this to play out.”

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