The collapse of Synapse Financial Technologies has prompted regulators to impose stricter requirements on banks working with fintechs, shifting the industry towards higher operational standards and potentially prompting a retreat from BaaS offerings.
The collapse of Synapse Financial Technologies has pushed banking-as-a-service from a fast-growing niche into a regulatory stress test. After customers were left unable to reach money held through fintech programmes, US supervisors moved beyond general warnings and towards specific demands: banks that hold pooled accounts for fintechs should be able to identify each beneficial owner, track the balance attached to that person and reconcile the records every day, even when the data are kept by an outside provider.
That shift was driven by a failure that exposed how fragile some multi-party arrangements had become. Reuters reported in September 2024 that the Federal Deposit Insurance Corporation was tightening record-keeping rules after Synapse filed for bankruptcy in April. Customers of partner banks, including Evolve Bank & Trust, saw accounts frozen. Regulators said the number affected could run into the tens of thousands, while a court-appointed trustee said in June there was an $85 million shortfall between what Synapse-linked partner banks held and what depositors were owed.
Washington has since made clear that it does not see this as an isolated breakdown. In July 2024, the Office of the Comptroller of the Currency, the Federal Reserve and the FDIC issued a joint statement covering all banks that use third parties to deliver deposit products to end users. The agencies said such arrangements can heighten operational, compliance, strategic, liquidity and concentration risk. They also singled out consumer harm, warning of end-user confusion and the misrepresentation of deposit-insurance cover, a sign that the concern extends well beyond back-office mechanics.
The Federal Reserve’s wider third-party risk guidance gives a sense of how deep banks are now expected to go. Due diligence, it says, should become more intensive as the activity becomes more critical or complex. Banks are expected to assess a partner’s legal and regulatory compliance, financial condition, business experience, data security and operational resilience. They should understand the third party’s business processes and information systems, identify gaps in service levels and spot interoperability problems before launch. If a provider lacks an operating history, refuses onsite access or cannot supply the information requested, the guidance says a bank should add controls or find another partner rather than assume the risk away.
That helps explain why ideas that once sounded like operational best practice are being turned into prescriptive obligations. The FDIC’s proposed custodial-account rule would require a direct contract when a third party keeps the records, spelling out roles and responsibilities and preserving the bank’s right to obtain the data even if the intermediary enters bankruptcy or insolvency. The proposal also calls for daily reconciliations and periodic validation by an independent person or entity. The agency estimated that between 600 and 1,100 insured depository institutions could be directly affected, with information-technology changes, testing and validation costs likely to follow.
Some banks have already responded by cutting back. Banking Dive reported in March 2024 that sponsor banks were offboarding fintech clients and, in some cases, retreating from BaaS altogether. Lineage Bank entered an FDIC consent order requiring a board-supervised risk-management programme, higher capital and the exit of some fintech partners, including Synctera. Synctera, founded in 2020, had grown to nine sponsor banks, with Coastal Community Bank as its first bank customer and Lineage as the first bank to go live with a fintech. Peter Hazlehurst, Synctera’s chief executive, argued that scale without control was the danger, saying banks should not try to manage “50 fintechs” and instead bring on “one or two a month at most”.
For fintechs, the pressure is beginning to alter strategy as well as compliance. S&P Global Market Intelligence reported in September 2024 that advisers had seen more interest in bank charters after the March 2023 banking turmoil and, later, after the Evolve-Synapse reconciliation problems showed what happens when ledgers do not match. Jonah Crane of Klaros said enquiries had increased even if few companies wanted to go the full distance. Adam Cohen of Skadden said tougher scrutiny had added to the appeal of getting a charter, but his colleague Mark Chorazak cautioned that “There must be compelling business needs to have a bank charter”. Few have managed it: S&P’s data showed that the most recent fintech-oriented de novo to begin operating was Agility Bank in April 2022, while Battle Bank’s conditional approval expired in July 2024 after it failed to meet conditions including raising $120 million in initial paid-in capital within 12 months.
The debate now is less about whether bank-fintech partnerships can survive than about what they must look like if they do. Hazlehurst told Banking Dive that consistent standards across the Federal Reserve and FDIC would help stop regulatory arbitrage, rather than pushing firms towards whichever supervisor appears easiest to satisfy. But the direction of travel is unmistakable. In the post-Synapse market, sponsor banks are expected to know exactly whose money they are holding, where the records sit, how quickly they can be checked and how the relationship can be unwound if a middleware provider fails. Infrastructure that was once marketed as invisible is now being treated as a core banking risk.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
