A banking-as-a-service middleware platform's slide into bankruptcy is another sign of trouble for
It also suggests the remaining players will have to evolve to survive.
On April 19, instant payment platform TabaPay announced that it had entered into an agreement to acquire the assets and affiliates of Synapse Financial Technologies after Synapse filed for chapter 11 bankruptcy, pending approval in the bankruptcy court. Synapse, which supported banking-as-a-service relationships by connecting nonbank companies aiming to launch or embed financial products with licensed banks, has been
The banking-as-a-service space has experienced turmoil more broadly, with regulators
"Synapse was the
Synapse did not respond to a request for comment. But Synapse founder and CEO Sankaet Pathak wrote in a Medium post that "this integration is a catalyst for exponential growth." He added that customers could expect "both teams [to be] hands-on through the transition" and that Synapse would ensure continuity for its users.
In a comment on a LinkedIn post, Pathak pinned blame for the bankruptcy on Mercury and "issues they've been creating behind the scenes."
"We won't speculate on why Synapse filed for bankruptcy," said a Mercury spokesperson via email in response. "As has previously been publicly reported, Mercury has significant claims against Synapse. We will continue to pursue those through the appropriate forums and uphold our confidentiality obligations."
A press release announcing Synapse's acquisition by TabaPay said the two businesses provided complementary financial technology services and were "a great and natural fit."
"This is an exciting next chapter for TabaPay," said Lindsay Davis, head of marketing and strategy at the payments platform, in a statement. "Pending approval, the assets will be integrated to expand TabaPay's offering to new markets such as lending and brokerage, broaden support for our bank suite of solutions, as well as enhance our existing payment platform."
Jonah Crane, partner at Klaros Group, believes that Synapse interposed itself between bank and fintechs to a greater degree than other platforms. That might have accounted for its early demise.
"Synapse was perhaps uniquely out of step with the regulatory reality of operating responsible bank-fintech partnerships," he said. "The public reporting on challenges that banks and fintech partners have encountered using Synapse speak for themselves," such as its conflicts with Mercury and with Evolve Bank & Trust.
Still, its collapse is a sign that other middleware providers will have to change to survive.
"The economics of the business have changed," said Todd Baker, managing principal at Broadmoor Consulting. He foresees that an increase in compliance-related costs will be passed on by banks to the fintechs themselves;
In this case, the business case for "middle layer" software companies "looks very precarious," said Baker. "We'll likely see companies like Unit and Treasury Prime broadening their offerings to focus on banks needing an improved customer interface and experience for their digital offerings," perhaps even becoming acquisition targets for larger software companies.
Two of these middleware providers' selling points to banks is that they reduce the burden of sourcing and overseeing fintech partners, and they provide the technical infrastructure banks need without integrating into the bank's core, notes Henrichs.
But "as recent enforcement actions have shown, attempting to play in BaaS without bringing on additional resources doesn't work," he said. "In a world where the bank needs to make additional investments in people and technology to provide oversight that in theory the middleware provider was doing, the economics shift dramatically."
"Everyone traditionally serving as middleware is shifting their business model and reinvesting in compliance and core infrastructure," said Phil Goldfeder, CEO of the American Fintech Council, in a recent interview.
The American Fintech Council counts several banking-as-a-service banks among its members, but no middleware providers — a deliberate decision to communicate that the group represents regulated entities, said Goldfeder in a February interview.
Survival may also mean being swallowed up by a larger company.
"These middleware businesses have iterated on creating a shadow core that the community banks didn't have the resources to develop," said Kirsten Muetzel, who advises banks on financial risk management and compliance as founder and principal of KLM Advisory. "As the market matures, it makes sense to me that the middleware platforms would be absorbed into the core providers themselves and create an additional feature that the legacy cores would then be able to provide to the community bank sector."
At the same time, regional banks may find them an appealing acquisition target.
"The manner in which those services are offered will continue to evolve along with our progress in payments and technology," she said. "Any first mover will bump into issues along the growth trajectory, and the triumph is in knowing which issues to overcome and how to prioritize and manage the risks along the way."
Recent months have seen an uptick in enforcement actions against banks engaging in banking-as-a-service strategies. Observers are split on whether that enhanced scrutiny is temporary or terminal.
Crane still sees a place for this technology.
"Even now, there are new platforms raising money and targeting banks that want to support fintech partnerships with a modern tech stack," he said, naming Braid and Infinant as two examples.
"That suggests others see the same opportunity we do," he said. "There is still a great need for a technology platform to facilitate bank partnerships. The banks simply aren't going to build it themselves."
