San Francisco, CA – A financial technology startup, Synapse, has found itself in the midst of a troubling situation that has left thousands of customers unable to access their funds. The unraveling of Synapse’s operations has raised questions about missing millions of dollars and shed light on the risks associated with partnerships between fintech firms and FDIC-backed banks.

Following Synapse’s bankruptcy filing, the whereabouts of the funds remain unclear, with only a portion of the money identified in accounts held by four small US banks. This case has underscored the need for regulatory scrutiny over loose partnerships between venture-backed fintech companies and traditional lenders, prompting warnings for banks to strengthen their risk management practices.

One of the key features of Synapse’s business model was providing “banking as a service” to digital banking companies like Mercury, Dave, and Juno. By partnering with FDIC-backed banks, Synapse facilitated access to checking accounts and debit cards for these fintech firms, offering a new source of deposits and fee revenue for the traditional lenders involved.

However, the fallout from Synapse’s bankruptcy has been significant, resulting in a freeze on customer accounts by partner banks such as Evolve Bank & Trust. Disputes between Synapse and its partners have escalated, with accusations of mismanagement and delays in returning customer funds. The situation has left many fintech customers stranded without access to their money.

In efforts to address the challenges posed by these partnerships, regulators have become more vigilant in monitoring such arrangements. Concerns have been raised about the blurred lines between banks and tech firms, as highlighted by Acting Comptroller of the Currency Michael Hsu in a speech discussing potential blind spots for regulators.

While the banking-as-a-service model is not yet widespread in the banking industry, regulators are taking a more proactive approach to enforcement actions related to these partnerships. Recent orders issued to partner banks of Synapse underscore the need for stronger risk management frameworks and oversight in dealings with fintech companies.

As the fallout from Synapse’s bankruptcy continues to unfold, the financial industry faces ongoing challenges in managing the risks associated with these innovative but complex partnerships. The case serves as a cautionary tale for both fintech firms and traditional banks as they navigate the evolving landscape of digital finance.