Fintech
Fintech likely to face tighter scrutiny after Evolve hack
A data breach has sent shockwaves through the fintech industry, further strengthening the interconnectedness of the industry ecosystem.
Here are the facts: On June 26, Evolve Bank & Trust said it had suffered a cyberattack and data breach, resulting in the exposure of customer data. Evolve, a financial services provider dedicated to Banking-as-a-Service businesses, has counted among its customers companies such as Affirm, Wise, Mercury, Bilt, Alloy, Stripe, Branch, Dave, and EarnIn.
And now at least some of those high-profile fintechs have been hit by the data breach. Wise, which worked with Evolve between 2020 and 2023, he said that it is possible that some of its customers were affected. Mercury also he said on social media of having been affected by the breach and of having informed customers.
It doesn’t help that Evolve got involved in the complicated bankruptcy procedures From Synapsesa BaaS company backed by firms like Andreessen Horowitz and 500 Global. The two companies were intertwined in a partnership and the breakup was ugly, with both parties alleging mismanagement in court.
And while Synapse isn’t explicitly linked to the Evolve data breach, it’s another piece of the puzzle of how deep Evolve’s problems run. Here’s another piece: In June, the Federal Reserve required Evolve improves its risk management systems around fintech partnerships.
It’s a tough time for fintech as a whole: the industry has fallen out of favor as potential financiers have shifted to other areas, like artificial intelligence.
“It comes at a bad time,” said Nik Milanović, general partner at The Fintech Fund. “What companies are being funded right now? What companies are raising money? … A lot of people who were writing blog posts about the future of fintech three years ago are now writing the same blog posts about other industries.”
As fintech struggles to find a place among potential financiers, this focus is both suboptimal and inevitable, given the inherently sensitive nature of overseeing other people’s money.
The story continues
“This puts a lot more scrutiny on the ecosystem,” said Sarah Hinkfuss, a partner at Bain Capital Ventures. “The word that comes to mind is trust, right? Customers trust that these fintechs are going to be the custodians of their information and their financial well-being… So these fintechs need to be accountable to everyone they work with, all their counterparties, to make sure that those counterparties protect that trust, because that’s their most important asset.”
Simply put, financial technology is in the crosshairs and likely to be hurt.
“The calls for more rigorous oversight and higher, more consistent standards for verifying these partnerships have become especially relevant now,” Kate Hampton, NMI’s head of strategy, said in an email. “An outcome like a major security incident that impacts multiple ecosystem stakeholders and their customers is detrimental to financial technology as a whole.”
This all sounds like bad news, I know. But here’s some good news and a friendly reminder: At a basic level, the risks to customers are actually pretty low, but make sure you have a password manager, said QED partner Amias Gerety.
“The personal risk is mostly low because the personal credentials have already been compromised in another scenario,” Gerety told Fortune. “It’s definitely a good reminder to do some personal hygiene when it comes to cybersecurity, right? You wouldn’t go years without showering. You wouldn’t go years without changing your passwords.”
Ultimately, there’s a “this-story-has-it-all” quality here: we haven’t gotten to the senators who have expressed themselvesthe fact that Evolve has been targeted by Hackers linked to Russiaor how complicated the legal proceedings between Synapse and Evolve have become. But for now, the most important thing to remember is this: the problem that is unfolding now is a story that has been unfolding for years, and the result of an open secret.
“It’s worth repeating: It was well known in the fintech industry that Synapse had significant cultural, technological and operational challenges,” Gerety said. “I don’t think we can hold customers accountable for that, but I’ve told every fintech CEO who’s asked me, ‘Don’t work with Synapse. Don’t work with Evolve.’”
See you on Monday,
Allie Garfinkle
On Twitter: @agarfinks
E-mail: alexandra.garfinkle@fortune.com
Submit a quote for the Term Sheet newsletter Here.
Joe Abrams curated the deals section of today’s newsletter.
This story was originally published on Fortune.com