Tangled Web With FinTechs, Middlemen, Banks

In biology, a synapse is essentially a conduit, a place in the brain where neurons connect and communicate.

In financial services, the recent news that TabaPay would be ending its planned acquisition of the FinTech Synapse Financial Technologies brings to mind a different type of connectivity:

The links woven between FinTechs, sponsor banks, their efforts to expand banking as a service … and the risks that can be inherent therein.

Here are the details thus far:

As reported on Thursday (May 9), and as of this writing, TabaPay, a payments processor, has pulled out of its deal to buy Synapse, which focuses on banking as a service (BaaS).

Under the terms of the deal, TabaPay was set to pay $9.7 million to acquire Synapse’s assets.

Synapse, for its part, had been focused on acting as a middleware firm, enabling deposits and credit, and virtual cards.

Synapse has done so through its platform “hubs,” and through a modular approach to BaaS – which lets those clients essentially operate within financial services without needing to obtain a bank charter.

The middleman model is one that connects banks with non-bank entities that want to take deposits and to lend to end customers.

The deal would have helped TabaPay to offer new financial services for FinTechs and for traditional financial institutions (FIs).

As a bit of background, sponsor banks are, well, banks — operating at the state or the federal level — that link up with FinTech partners so the latter can bring their financial innovations to other enterprises or to the masses.

Evolve Bank and Trust had been providing sponsor bank services to Synapse since 2017. But as reported here this week by TechCrunch, there had been some dispute between Synapse and Evolve, which notified Synapse of the intent to end the relationship and work directly with Mercury, a business banking FinTech, rather than using Synapse as an intermediary.

Mercury, one of Synapse’s largest clients, ended its relationship with Synapse, which subsequently laid off 40% of its staff.

Funds Under the Microscope

One of the closing conditions of the TabaPay deal to buy Synapse, detailed by Fintech Business Weekly, hinged in on  the stipulation that Evolve must fully fund what are known as FBO (or “for benefit of”) accounts that receives funds for third parties. Synapse says Evolve hasn’t done so, Evolve says it has, according to reports … and TabaPay has walked away, it seems, amid the finger-pointing.

Posts on Medium from Synapse CEO Sankaet Pathak allege that Mercury moved just about $50 million in FBO funds into Evolve. The Synapse CEO wrote, along with screenshots, that this “suggests that [Mercury] moved more money than you should have… [It] indicates that you do not have proper reconciliation procedures in place.”

The Evolution of BaaS — and Whither the Middlemen?

The machinations and paths as Synapse proceeds through bankruptcy are winding, and a work in progress. But the events give a nod to the ever-changing role, and the pressures on, the “middleware” or middleman relationships within BaaS.

In an interview with Karen Webster, Ingo Payments CEO Drew Webster said that “BaaS 1.0 was, in some ways, tech companies focused on enabling tech companies. They would build a cloud core and bring together all kinds of third-party vendors to manage what we would call money mobility.” But he noted that regulators are now turning their attention to the downstream risks associated with know your customer (KYC), compliance and risk management, fraud, and the financial safety of FinTechs and their partners.

We may be seeing a groundswell of more direct relationships within BaaS, as FinTechs sell directly to banks. Treasury Prime is an example here. The company has once marketed its BaaS platform to FinTechs, helping them connect to banks. Earlier this year, Treasury Prime, which operates a banking-as-a-service platform, let go of about half of its staff and shifted its focus to sell directly to banks. Once, its efforts had focused on FinTechs. And in that bid for connectivity, the company helped FinTechs and banks partners up. Now the firm will provide its offerings directly to banks, as the traditional FIs manage their own FinTech relationships.

The BaaS provider shifts come against the backdrop where PYMNTS Intelligence has noted that roughly two-thirds of banks and credit unions have entered into at least one FinTech partnership in the past three years, with 76% of banks viewing FinTech partnerships as necessary to meeting customer expectations.