In biology, synapses are essentially conduits, locations in the brain where neurons connect and communicate.
In financial services, the recent news that TabaPay is ending its planned acquisition of FinTech Synapse Financial Technologies is a reminder of a different kind of connection.
The connections between FinTech, sponsor banks, efforts to expand banking-as-a-service, and the risks that may be inherent therein.
Here are the details so far:
As reported on Thursday (May 9), and as of this writing, payment processing company TabaPay has pulled out of a deal to acquire Synapse, which focuses on banking as a service (BaaS).
Under the terms of the deal, TabaPay was to pay $9.7 million to acquire Synapse's assets.
Synapse focused on its role as a middleware company that enabled savings, credit, and virtual cards.
Synapse achieved this through its platform “hubs” and modular approach to BaaS. This essentially allows these clients to operate within financial services without obtaining a banking license.
The intermediary model is a model that connects banks with non-bank entities that wish to accept deposits or make loans to end customers.
The partnership would have helped TabaPay offer new financial services for fintech companies and traditional financial institutions (FIs).
For a little background, a sponsor bank is a bank operating at the state or federal level that partners with a FinTech partner to enable the latter to bring financial innovation to other businesses and the public.
Evolve Bank and Trust had provided sponsor banking services to Synapse since 2017. However, as TechCrunch reported here this week, there has been a dispute between Synapse and Evolve, and he has notified Synapse of his intention to end the relationship and work directly with Mercury. It is a business that banks FinTech rather than using Synapse as an intermediary.
Mercury, one of Synapse's largest customers, ended its relationship with Synapse, and Synapse subsequently laid off 40% of its employees.
funds under the microscope
As detailed by Fintech Business Weekly, one of the conditions of TabaPay's acquisition of Synapse is that Evolve must fully fund so-called FBO (or “for-profit”) accounts that receive funds on behalf of third parties. It was subject to the condition that it must not be done. Reportedly, Synapse claims Evolve doesn't do that, Evolve says it does…and TabaPay appears to have walked away amid the accusations.
A Medium post by Synapse CEO Sankaet Pathak claims that Mercury transferred only about $50 million of its FBO funds to Evolve. Along with a screenshot, Synapse's CEO wrote that this “suggests: [Mercury] I ended up spending more money than necessary… [It] This indicates that proper adjustment procedures are not in place. ”
The evolution of BaaS — and where are the intermediaries?
The plot and path that led to Synapse's bankruptcy is a winding one and a work in progress. However, these events illustrate the ever-changing roles and pressures on the relationships of “middleware” or intermediaries within BaaS.
In an interview with Karen Webster, Ingo Payments CEO Drew Webster said: They will build a cloud core and bring together all kinds of third-party vendors to manage so-called money mobility. But he noted that regulators are now focusing on downstream risks related to know-your-customer (KYC), compliance and risk management, fraud, and financial security for fintech companies and their partners.
FinTechs selling directly to banks could spark more direct relationships within BaaS. Financial Prime is an example here. The company previously pitched its BaaS platform to fintech companies, helping them connect with banks. Earlier this year, Banking-as-a-Service platform Treasury Prime laid off about half its staff and shifted its focus to selling directly to banks. Previously, the company focused on fintech. And in its connectivity efforts, the company helped fintech companies partner with banks. The company will now serve banks directly, as traditional financial institutions managed their own fintech relationships.
Change among BaaS providers: nearly two-thirds of banks and credit unions have entered into at least one FinTech partnership in the past three years, and 76% of banks believe they need a FinTech partnership to satisfy their customers. This is the reason why PYMNTS Intelligence points out that Expectations.
