Financial technology (Fintech) startup Synapse announced bankruptcy earlier this month, affecting hundreds of Fintech companies and tens of thousands of users. It was discovered that there was a nearly $100 million funding gap with partner bank Evolve, while claims of user funds being insured by the Federal Deposit Insurance Corporation (FDIC) were rebutted as not falling under FDIC protection. Currently, the bankruptcy liquidation process is at a standstill.
Synapse, established in 2019, provided Banking-as-a-Service (BaaS) including services like real-time payments, credit cards, and debit cards. It allowed thousands of startups to embed Synapse’s banking services into their products, serving as a financial intermediary between multiple banks and tech companies.
As a notable Fintech company, Synapse raised $33 million in Series B funding led by A16z in 2019. However, facing economic downturns, the company encountered difficulties in 2023 and filed for Chapter 7 bankruptcy under U.S. law in April of this year, leaving myriad businesses and users facing financial issues due to Synapse’s collapse.
One such user application, Yotta Savings, popular among American households since 2019 for its unique lottery incentive system offering cash rewards, savings interest, and financial cards, claimed FDIC protection for user funds. However, post-Synapse bankruptcy, approximately 200,000 Fintech app users, including 85,000 Yotta users, were reportedly not covered under FDIC-insured accounts, with a total of $112 million in inaccessible funds.
Former FDIC chair Jelena McWilliams, appointed as the trustee for the Synapse case, revealed discrepancies of $65 to $96 million between Synapse accounts and partner banks, suggesting not merely financial oversights but potentially pre-bankruptcy losses.
FDIC clarified that it does not intervene or compensate for bankruptcies of non-bank entities like Synapse. Therefore, affected consumers may eventually recover some or all funds through the bankruptcy proceedings, albeit with considerable delay.
In conclusion, while Fintech companies like Synapse offer innovative banking services, consumers and investors must exercise caution due to regulatory grey areas and the limited authority of oversight agencies when intervening in non-bank Fintech bankruptcies.