Fintech

With the collapse of a16z-backed Synapse, BaaS fintech is a disaster and 10 million consumers could be harmed

Published

8 months ago

25 May, 2024

With the collapse of a16z-backed Synapse, BaaS fintech is a disaster and 10 million consumers could be harmed

Last year, the world of fintech startups – protagonist of the venture capital heyday of 2021 – started to crumble as VC funding became limited. As we enter mid-2024, large portions of the industry today are an absolute mess, particularly banking as a service which, ironically, experts told us last year was the bright spot.

The failure of Synapse fintech banking-as-a-service (BaaS) is, perhaps, the most dramatic thing happening now. While that’s certainly not the only bad news, it shows how treacherous things are for the often interdependent fintech world when a key player finds itself in trouble.

Synapse’s problems have damaged and destroyed a lot of other startups and affected consumers across the country.

To recap: San Francisco-based Synapse ran a service that allowed others (mostly fintechs) to incorporate banking services into their offerings. For example, a software provider specializing in payroll for 1,099 companies with numerous contractors used Synapse to provide instant payment functionality; others used it to offer specialized credit/debit cards. It provides these types of services as an intermediary between banking partner Evolve Bank & Trust and business banking startup Mercury, among other clients.

Synapse has raised a total of just over $50 million in venture capital over its lifetime, including a 2019 Series B raise of $33 million led by Angela Strange of Andreessen Horowitz. The start faltered in 2023 with layoffs AND filed for Chapter 11 in April this year, hoping to sell its assets in a $9.7 million fire sale to another fintech, TabaPay. But TabaPay walked. It’s not entirely clear why. Synapse placed a lot of blame on Evolve, as well as Mercury, both of which raised their hands and told TechCrunch they were not responsible. Once responsive, Synapse CEO and co-founder Sankaet Pathak no longer responds to our requests for comment.

But the result is that Synapse is now on the verge of being forced to completely liquidate under Chapter 7, and many other fintechs and their customers are paying the price for Synapse’s demise.

For example, Synapse client teen banking startup Copper had to do this abruptly discontinue its bank deposit accounts and debit cards on May 13 due to Synapse’s difficulties. This leaves an unknown number of consumers, mostly families, without access to the funds they had confidently deposited into Copper accounts.

For its part, Copper says it is still operational and has another product, its financial education app Earn, that is unaffected and doing well. However, it is now working to pivot its business towards a white-label family banking product, in partnership with other, as yet unnamed, larger American banks, which it hopes to launch later this year.

Crypto app Juno’s funds were also hit by Synapse’s collapse, CNBC reported. A Maryland teacher named Chris Buckler said in a May 21 statement that he was barred from accessing funds he held from Juno because of issues related to Synapse’s bankruptcy.

“I am increasingly desperate and don’t know where to turn,” Bucker wrote, as reported by CNBC. “I have almost $38,000 tied up due to the interruption of transaction processing. It took me years to save this money.”

Meanwhile, Mainvest, a fintech financier for restaurant businesses, actually is close due to the mess at Synapse. An unknown number of employees are losing their jobs. On its website, the company said: “Unfortunately, after exploring all available alternatives, a mix of internal and external factors have led us to the difficult decision to cease operations of Mainvest and dissolve the company.”

Based on Synapse documents, up to 100 fintechs and 10 million end customers may have been affected by the company’s collapse, industry observer and Fintech Business Weekly author Jason Mikula estimated in a statement to TechCrunch.

“But that may underestimate the total damage,” he added, “since some of these customers do things like handle payroll for small businesses.”

The long-term negative and serious impact of what happened to Synapse will be significant “across fintech, especially consumer-facing services,” Mikula told TechCrunch.

“While regulators do not have direct jurisdiction over middleware providers, which includes companies like Unit, Synctera and Treasury Prime, they can exercise their power over their banking partners,” Mikula added. “I would expect a greater focus on ongoing due diligence on the financial condition of these types of middleware providers, none of which are profitable, and a greater focus on business continuity and operational resilience for banks engaged in BaaS operating models.”

Perhaps not all BaaS companies should be grouped together. This is what Peter Hazlehurst, founder and CEO of another BaaS startup Synctera, is quick to point out.

“There are mature companies with legitimate use cases served by companies like us and Unit, but the damage done by some of the fallout you’re reporting on is rearing its ugly heads,” he told TechCrunch. “Unfortunately, the problems many people are experiencing today were introduced to the platforms several years ago and have worsened over time despite not being visible until the last minute, when everything collapses at the same time.”

Hazlehurst says some classic Silicon Valley mistakes were made by early movers: People with computer engineering backgrounds wanted to “disrupt” the boring old banking system without fully understanding it.

“When I left Uber and founded Synctera, it became very clear to me that early players in the “BaaS” space built their platforms as quick fixes to exploit a neo/challenger banking “trend” without any real understanding of how to do so . run programs and the risks involved,” said Peter Hazlehurst.

“Banking and finance of any kind is serious business. It requires both skill and wisdom to build and manage. There are regulatory bodies that protect consumers from negative results like this for a reason,” she adds.

And he says that in those heady early days, banking partners – those who should have known better – did not act as a support in choosing fintech partners. “Working with these actors seemed like a really exciting opportunity to ‘evolve’ their business and they bought in blindly.”

To be fair, BaaS players and the neobanks that rely on them are not the only ones in trouble. We continually see news stories about how banks are being scrutinized for their relationships with BaaS providers and fintechs. For example, the FDIC was “concerned” that Choice Bank “had opened… accounts in legally risky countries” on behalf of digital banking startup Mercuryaccording to a report by The information. Officials also reportedly criticized Choice for allowing overseas Mercury customers to “open thousands of accounts using questionable methods to demonstrate they have a U.S. presence.”

Healy Jones of Kruze Consulting believes the Synapse situation won’t be a problem for the startup community moving forward. But you believe that regulatory clarity is necessary for consumer protection.

The FDIC needs to “come out with clear language about what is and what is not covered by FDIC insurance in a neobank that uses a third-party bank as the backend,” he said. “This will help keep the neo-banking sector calm,” she said.

As Gartner analyst Agustin Rubini told TechCrunch: “The Synapse case highlights the need for fintech companies to maintain high operational and compliance standards. As middleware providers, they must ensure accurate financial record keeping and transparent operations.”

From my perspective, as someone who has been covering the ups and downs of fintech for years, I don’t think all BaaS players are doomed. But I think this situation, combined with all the increased scrutiny, could make banks (both traditional and fintech) more reluctant to work with a BaaS player, instead opting to establish direct relationships with banks as Copper hopes to do.

The banking system is highly regulated and highly complicated, and when Silicon Valley players screw up, the ones who get hurt are ordinary human beings.

The rush to deploy capital in 2020 and 2021 has led many fintech companies to move quickly, partly as an effort to satisfy hungry investors seeking growth at all costs. Unfortunately, fintech is an industry where companies can’t move so quickly as to take shortcuts, especially those that evade compliance. The end result, as we can see in the case of Synapse, can be disastrous.

With funding already declining in the fintech sector, it is highly likely that the Synapse debacle will impact the future prospects of fintech fundraising, particularly for banking-as-a-service companies. Fears that another meltdown could occur are real and, let’s face it, valid.

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Fintech

US Agencies Request Information on Bank-Fintech Dealings

Published

6 months ago

30 July, 2024

FinCrypt Staff

Federal banking regulators have issued a statement reminding banks of the potential risks associated with third-party arrangements to provide bank deposit products and services.

The agencies support responsible innovation and banks that engage in these arrangements in a safe and fair manner and in compliance with applicable law. While these arrangements may offer benefits, supervisory experience has identified a number of safety and soundness, compliance, and consumer concerns with the management of these arrangements. The statement details potential risks and provides examples of effective risk management practices for these arrangements. Additionally, the statement reminds banks of existing legal requirements, guidance, and related resources and provides insights that the agencies have gained through their oversight. The statement does not establish new supervisory expectations.

Separately, the agencies requested additional information on a broad range of arrangements between banks and fintechs, including for deposit, payment, and lending products and services. The agencies are seeking input on the nature and implications of arrangements between banks and fintechs and effective risk management practices.

The agencies are considering whether to take additional steps to ensure that banks effectively manage the risks associated with these different types of arrangements.

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Fintech

What changes in financial regulation have impacted the development of financial technology?

Published

6 months ago

30 July, 2024

FinCrypt Staff

Exploring the complex landscape of global financial regulation, we gather insights from leading fintech leaders, including CEOs and finance experts. From the game-changing impact of PSD2 to the significant role of GDPR in data security, explore the four key regulatory changes that have reshaped fintech development, answering the question: “What changes in financial regulation have impacted fintech development?”

PSD2 revolutionizes access to financial technology
GDPR Improves Fintech Data Privacy
Regulatory Sandboxes Drive Fintech Innovation
GDPR Impacts Fintech Data Security

PSD2 revolutionizes access to financial technology

When it comes to regulatory impact on fintech development, nothing comes close to PSD2. This EU regulation has created a new level playing field for market players of all sizes, from fintech startups to established banks. It has had a ripple effect on other markets around the world, inspiring similar regulatory frameworks and driving global innovation in fintech.

The Payment Services Directive (PSD2), the EU law in force since 2018, has revolutionized the fintech industry by requiring banks to provide third-party payment providers (TPPs) with access to payment services and customer account information via open APIs. This has democratized access to financial data, fostering the development of personalized financial instruments and seamless payment solutions. Advanced security measures such as Strong Customer Authentication (SCA) have increased consumer trust, pushing both fintech companies and traditional banks to innovate and collaborate more effectively, resulting in a dynamic and consumer-friendly financial ecosystem.

The impact of PSD2 has extended beyond the EU, inspiring similar regulations around the world. Countries such as the UK, Australia and Canada have launched their own open banking initiatives, spurred by the benefits seen in the EU. PSD2 has highlighted the benefits of open banking, also prompting US financial institutions and fintech companies to explore similar initiatives voluntarily.

This has led to a global wave of fintech innovation, with financial institutions and fintech companies offering more integrated, personalized and secure services. The EU’s leadership in open banking through PSD2 has set a global standard, promoting regulatory harmonization and fostering an interconnected and innovative global financial ecosystem.

Looking ahead, the EU’s PSD3 proposals and Financial Data Access (FIDA) regulations promise to further advance open banking. PSD3 aims to refine and build on PSD2, with a focus on improving transaction security, fraud prevention, and integration between banks and TPPs. FIDA will expand data sharing beyond payment accounts to include areas such as insurance and investments, paving the way for more comprehensive financial products and services.

These developments are set to further enhance connectivity, efficiency and innovation in financial services, cementing open banking as a key component of the global financial infrastructure.

Sebastian Malczyk

General Manager, Technology and Product Consultant Fintech, Insurtech, Miquido

GDPR Improves Fintech Data Privacy

Privacy and data protection have been taken to another level by the General Data Protection Regulation (GDPR), forcing fintech companies to tighten their data management. In compliance with the GDPR, organizations must ensure that personal data is processed fairly, transparently, and securely.

This has led to increased innovation in fintech towards technologies such as encryption and anonymization for data protection. GDPR was described as a top priority in the data protection strategies of 92% of US-based companies surveyed by PwC.

Arid Islam

Financial Expert, Sterlinx Global

Regulatory Sandboxes Drive Fintech Innovation

Since the UK’s Financial Conduct Authority (FCA) pioneered sandbox regulatory frameworks in 2016 to enable fintech startups to explore new products and services, similar frameworks have been introduced in other countries.

This has reduced the “crippling effect on innovation” caused by a “one size fits all” regulatory approach, which would also require machines to be built to complete regulatory compliance before any testing. Successful applications within sandboxes give regulators the confidence to move forward and address gaps in laws, regulations, or supervisory approaches. This has led to widespread adoption of new technologies and business models and helped channel private sector dynamism, while keeping consumers protected and imposing appropriate regulatory requirements.

George Blandford

Co-founder, UK Linkology

GDPR Impacts Fintech Data Security

A big change in financial regulations that has had a real impact on fintech is the 2018 EU General Data Protection Regulation (GDPR). I have seen how GDPR has pushed us to focus more on user privacy and data security.

GDPR means we have to handle personal data much more carefully. At Leverage, we have had to step up our game to meet these new rules. We have improved our data encryption and started doing regular security audits. It was a little tricky at first, but it has made our systems much more secure.

For example, we’ve added features that give users more control over their data, like simple consent tools and clear privacy notices. These changes have helped us comply with GDPR and made our customers feel more confident in how we handle their information.

I believe that GDPR has made fintech companies, including us at Leverage, more transparent and secure. It has helped build trust with our users, showing them that we take data protection seriously.

Dr. Rhett Stubbendeck

CEO & Co-Founder, Leverage Planning

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Fintech

M2P Fintech About to Raise $80M

Published

6 months ago

30 July, 2024

FinCrypt Staff

Application Programming Interface (API) Infrastructure Platform M2P Financial Technology has reached the final round to raise $80 million, at a valuation of $900 million.

Specifically, M2P Fintech, formerly known as Yap, is closing a new funding round involving new and existing investors, according to entrackr.com. The India-based company, which last raised funding two and a half years ago, previously secured $56 million in a round led by Insight Partners, earning a post-money valuation of $650 million.

A source indicated that M2P Fintech is ready to raise $80 million in this new funding round, led by a new investor. Existing backers, including Insight Partners, are also expected to participate. The new funding is expected to go toward enhancing the company’s technology infrastructure and driving growth in domestic and international markets.

What does M2P Fintech do?

M2P Fintech’s API platform enables businesses to provide branded financial services through partnerships with fintech companies while maintaining regulatory compliance. In addition to its operations in India, the company is active in Nepal, UAE, Australia, New Zealand, Philippines, Bahrain, Egypt, and many other countries.

Another source revealed that M2P Fintech’s valuation in this funding round is expected to be between USD 880 million and USD 900 million (post-money). The company has reportedly received a term sheet and the deal is expected to be publicly announced soon. The Tiger Global-backed company has acquired six companies to date, including Goals101, Syntizen, and BSG ITSOFT, to enhance its service offerings.

According to TheKredible, Beenext is the company’s largest shareholder with over 13% ownership, while the co-founders collectively own 34% of the company. Although M2P Fintech has yet to release its FY24 financials, it has reported a significant increase in operating revenue. However, this growth has also been accompanied by a substantial increase in losses.

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Fintech

Scottish financial technology firm Aveni secures £11m to expand AI offering

Published

6 months ago

30 July, 2024

FinCrypt Staff

Aveni, Investment Management, AI, NLP, UK

By Gloria Methri

Today

To come
Aveni Assistance
Aveni Detection

Artificial intelligence Financial Technology Aveni has announced one of the largest Series A investments in a Scottish company this year, amounting to £11 million. The investment is led by Puma Private Equity with participation from Par Equity, Lloyds Banking Group and Nationwide.

Aveni combines AI expertise with extensive financial services experience to create large language models (LLMs) and AI products designed specifically for the financial services industry. It is trusted by some of the UK’s leading financial services firms. It has seen significant business growth over the past two years through its conformity and productivity solutions, Aveni Detect and Aveni Assist.

This investment will enable Aveni to build on the success of its existing products, further consolidate its presence in the sector and introduce advanced technologies through FinLLM, a large-scale language model specifically for financial services.

FinLLM is being developed in partnership with new investors Lloyds Banking Group and Nationwide. It is a large, industry-aligned language model that aims to set the standard for transparent, responsible and ethical adoption of generative AI in UK financial services.

Following the investment, the team developing the FinLLM will be based at the Edinburgh Futures Institute, in a state-of-the-art facility.

Joseph Twigg, CEO of Aveniexplained, “The financial services industry doesn’t need AI models that can quote Shakespeare; it needs AI models that deliver transparency, trust, and most importantly, fairness. The way to achieve this is to develop small, highly tuned language models, trained on financial services data, and reviewed by financial services experts for specific financial services use cases. Generative AI is the most significant technological evolution of our generation, and we are in the early stages of adoption. This represents a significant opportunity for Aveni and our partners. The goal with FinLLM is to set a new standard for the controlled, responsible, and ethical adoption of generative AI, outperforming all other generic models in our select financial services use cases.”