Synapse collapse freezes nearly $160m from fintech users – here’s how it happened

The collapse and bankruptcy of BaaS fintech Synapse revealed how treacherous things can be for the often interdependent fintech world when a key player runs into trouble.

Synapse operated a service that allowed others (primarily fintechs) to incorporate banking services into their offerings. For example, a software vendor that specialized in payroll for 1,099 businesses with large contractors used Synapse to provide an instant payment feature; others have used it to offer specialized credit/debit cards.

The San Francisco-based startup has raised a total of just over $50 million in venture capital over its lifetime, including a $33 million Series B round in 2019 led by Andreessen’s Angela Strange Horowitz. Synapse faltered in 2023 with layoffs and filed for Chapter 11 in April of this year, hoping to sell its assets in a $9.7 million fire sale to another fintech, TabaPay. But TabaPay worked.

The result was that Synapse was forced into full liquidation under Chapter 7, and a host of other fintechs like Juno, Yotta, and Yieldstreet — and their clients — are paying the price for Synapse’s demise.

The disaster left observers questioning the concept of banking-as-a-service and digital banking as a whole, with millions of consumers with nearly $160 million in deposits left unable to access their funds.

Here’s a timeline of Synapse’s problems and the continued impact it has on banking consumers.

2024

Founder raises $11 million for new startup

August 22: Sankaet Pathak is steaming ahead on Foundation, his new robotics startup. On X, Pathak said the Foundation’s goal is to “automate GDP through artificial intelligence and robotics to free people from jobs, allowing them to pursue their passions.”

Almost $160 million in funds still frozen

July 7: Fintech Business Weekly reports that a “recent status conference in the ongoing Synapse bankruptcy did not offer much hope to end users whose funds were still frozen, efforts to reconcile and release the remaining funds, approximately $158.6 million, seeming to slow down.” This means that approximately $158.6 million was still owed to end users. However, an estimated $65 million to $95 million in funds were missing.

The senators are urging Synapse and its partners and supporters to restore customers’ access to their money

July 1: A group of senators joined together to urge Synapse’s owners and bank and fintech partners to “immediately restore customers’ access to their money.” As part of their demands, the senators implicated both the firm’s partners and venture capitalists as being responsible for the lack of client funds.

Synapse CEO moves on to start another company

June 12: Synapse CEO Sankaet Pathak has already raised $10 million for a new robotics company, even as questions remain about the whereabouts of Synapse’s $85 million in customer savings.

Fallout continues, more fintechs and millions of consumers affected

May 25: Based on Synapse filings, up to 100 fintechs and 10 million end customers were potentially affected by the company’s collapse by the end of May. For example, the funds of crypto app Juno and banking platform Yotta were also affected by the collapse of Synapse. Meanwhile, Mainvest, a fintech lender to restaurant businesses, said it was effectively shutting down as a result.

The US administrator is pushing for Chapter 7

May 16: A US trustee has filed an emergency motion to convert Synapse’s Chapter 11 debt reorganization into a Chapter 7 liquidation. The trustee said Synapse had “grossly” mismanaged its assets so that losses they were continuing with a “reasonable likelihood of reorganization” that would allow the company to come out the other side and continue.

Teen banking startup Copper is shutting down its banking operations

May 13: Teen banking startup Synapse customer Copper was forced to abruptly discontinue bank deposit accounts and debit cards as a result of Synapse’s difficulties. This left an unknown number of consumers, mostly families, without access to the funds they had confidently deposited into Copper’s accounts.

Asset sale cancelled

May 9: TabaPay said it has abandoned plans to buy Synapse’s assets. There was a lot of finger-pointing when that deal dissolved. Synapse’s CEO made allegations that the problem was banking partner Evolve Bank & Trust. And Evolve has denied those allegations, saying it is not involved and not to blame. Meanwhile, another player in the saga, Mercury, said Synapse’s allegations “have no merit.”

Synapse files for Chapter 11 bankruptcy, assets to be sold for $9.7 million

April 22: Synapse filed for Chapter 11 bankruptcy and said at the time that its assets would be acquired by instant payments company TabaPay, pending bankruptcy court approval. (Again, TabaPay would back out of the deal a few weeks later.)

2023

Synapse lays off staff, reports of tension with partner Evolve Bank

October 13: Evolve Bank & Trust and digital banking startup Mercury have ended their respective relationships with Synapse and are working directly with each other. Evolve and Synapse addressed the brouhaha here.

October 6: Synapse has confirmed that it has laid off 86 people, or about 40% of the company. That was just four months after the company laid off 18 percent of its workforce as “current macroeconomic conditions” began to affect its customers and platforms, denting anticipated growth. In 2019, TechCrunch reported on the Andreessen Horowitz-led company’s $33 million Series B raise after rebranding from SynapseFi.

Note: This article was updated after publication to clarify that Synapse has not yet been converted to Chapter 7.

Want more fintech news in your inbox? Sign up for TechCrunch Fintech Here.

Want to get in touch with a tip? Email me at [email protected] or message me on Signal at 408.204.3036. You can also drop a note to the entire TechCrunch crew at [email protected]. For more secure communications, click here to contact uswhich includes SecureDrop (instructions here) and links to encrypted messaging apps.