Synapse

What did it do?

Synapse was a San Francisco-based intermediary that provided banking-as-a-service infrastructure to fintech companies. Working directly with around 100 fintechs such as Dave and Honey, it indirectly served 10 million retail customers. It said customer deposits were held in FDIC-insured bank accounts, but because it was not itself a bank, it offered no protection against its own failure.

Why did it shut down?

In 2023, as discrepancies in the company's ledgers piled up, the board discussed removing CEO Sankaet Pathak, but investors from Andreessen Horowitz opposed it. In April 2024 the company filed for Chapter 11, leaving tens of thousands of businesses and consumers unable to access their accounts. Jelena McWilliams, the former FDIC chair appointed as trustee, said there was a shortfall of between $65 million and $96 million between Synapse's records and those of the banks. The US Trustee's office sought to have the company liquidated under Chapter 7, citing gross mismanagement. According to data from Yotta Savings, which relied on Synapse, 13,725 customers recovered only $11.8 million of their $64.9 million in deposits.

The story

In the spring of 2024, tens of thousands of businesses and consumers in the US suddenly found they could not reach the savings held in their fintech apps. The money was in banks, but Synapse, the intermediary sitting between the banks and the apps, had gone bankrupt, and nobody could say for certain whose money was where.

Synapse was founded in San Francisco in 2014 by Sankaet Pathak and Bryan Keltner. It gave fintech companies without a banking licence access to bank infrastructure: the app found the customer, Synapse managed the accounts and the flow of money, and the money sat in partner banks. Backed by Andreessen Horowitz, the company raised $51 million from investors. Working directly with around 100 fintechs such as Dave and Honey, it indirectly reached 10 million retail customers, and in 2022 it was named among the 100 fastest-growing financial services companies in the US.

In its marketing, Synapse argued that deposits were held in FDIC-insured bank accounts and that this offered protection similar to a traditional bank account. But the company was not a bank, and it offered no protection whatsoever against its own failure. The warning signs came early: as far back as 2020, Forbes was asking why employees and customers were walking away from the company. In 2023, as discrepancies in the ledgers piled up, the board discussed removing Pathak, but investors from Andreessen Horowitz opposed it.

In April 2024 Synapse filed for Chapter 11. In May, Jelena McWilliams, the former FDIC chair appointed as trustee, said there was a shortfall of between $65 million and $96 million between the company's records and those of the banks. The US Trustee's office sought to have the company liquidated under Chapter 7, citing gross mismanagement. In November 2024 the CEO of Yotta Savings, which relied on Synapse, published data showing that 13,725 customers had recovered only $11.8 million of their $64.9 million in deposits. A lawsuit seeking class-action status was also filed against four partner banks, including Evolve Bank & Trust.

Synapse's story shows that in financial infrastructure the most boring-looking job, keeping complete records every single day, is in fact everything. However fast an intermediary layer grows, the whole chain collapses the moment it can no longer prove whose money is where.

Lessons for founders

• In any infrastructure that touches customer money, daily reconciliation is non-negotiable; if your records do not match the bank's every single day, stop growing.
• If your marketing mentions deposit insurance, tell users just as clearly which risks that insurance does not cover.
• When a board receives a serious operational warning, the deciding factor should be the safety of customers' money, not loyalty to investors.

Sources

1. Synapse Financial Technologies (Wikipedia)
2. Abrupt shutdown of financial middleman Synapse has frozen thousands of Americans' deposits (AP News, 2024-05-22)
3. A US Trustee wants troubled fintech Synapse to be liquidated via Chapter 7 bankruptcy, cites ‘gross mismanagement’ (TechCrunch, 2024-05-16)
4. 'I have no money': Thousands of Americans see their savings vanish in Synapse fintech crisis (CNBC, 2024-11-22)

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