The Interconnectedness of the Banking-as-a-Service Model: Synapse’s Bankruptcy and Ripple Effects

The collapse of Synapse, a pioneer in the Banking as a Service (BaaS) model, has sent shockwaves through the financial technology industry. With reports of customers unable to retrieve their money, sponsor banks and other FinTechs severing ties, and other firms facing existential threats, the interconnectedness of the BaaS model is being put to the test.

Less than two years ago, Synapse was on the brink of expansion, raising $33 million in funding led by Andreessen Horowitz. However, in April of this year, the company filed for Chapter 11 bankruptcy and a potential acquisition deal fell through.

The shift towards a direct model in banking partnerships is becoming more apparent, with firms like Treasury Prime pivoting to a “Bank-Direct” product. This move reflects a broader reconsideration of the BaaS model and the role of intermediaries like Synapse.

As the fate of Synapse hangs in the balance, regulators are expected to scrutinize the role of third parties in connecting banks and FinTechs. The Consumer Financial Protection Bureau (CFPB) may play a significant role in determining the liabilities and risk frameworks in the aftermath of Synapse’s collapse.

The ripple effects of Synapse’s bankruptcy are being felt across the industry, with FinTech funding down and investor caution rising. The future of BaaS remains uncertain as the sector continues to evolve and adapt to the changing landscape of financial technology.