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A tangled web of FinTechs, intermediaries and banks

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

When it comes to financial services, the recent news that TabaPay will complete its planned acquisition of FinTech Synapse Financial Technologies brings to mind a different kind of connectivity:

The connections between FinTechs, sponsoring banks, their efforts to expand banking as a service… and the risks that may involve.

Here are the details so far:

As we reported on Thursday (May 9), at the time of writing, TabaPay, a payment processor, has withdrawn from a deal to purchase Synapse, a company focused on banking as a service (BaaS).

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

Synapse, for its part, focused on operating as a middleware company enabling deposits and loans and virtual cards.

Synapse has done this through its platform “hubs” and modular approach to BaaS, which allows these customers to essentially operate within financial services without the need to obtain a bank card.

The intermediary model is one that connects banks with non-bank entities that want to accept deposits and provide loans to end customers.

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

As a reminder, sponsor banks are, well, banks – operating at the state or federal level – that connect with FinTech partners so that the latter can bring their financial innovations to other businesses or the masses.

Evolve Bank and Trust had provided sponsor banking services to Synapse since 2017. However, as TechCrunch reported this week, a dispute arose between Synapse and Evolve, which notified Synapse of its intention to end the relationship and work directly with Mercury, a FinTech business banking company, rather than using with Synapse as the intermediary.

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

Funds under the microscope

One of the closing conditions of TabaPay’s deal to buy Synapse, detailed by Fintech Business Weekly, was based on the stipulation that Evolve must fully fund so-called FBO (or “in favor”) accounts that receive funds on behalf of third parties. Synapse says Evolve didn’t do it, Evolve says it did – according to reports… and TabaPay seems to have left amid finger-pointing.

Posts on Medium by Synapse CEO Sankaet Pathak claim that Mercury only transferred about $50 million in FBO funds to Evolve. Synapse’s CEO wrote along with the screenshots that this “suggests that (Mercury) transferred more money than you should have… (It) indicates that you do not have appropriate reconciliation procedures in place.”

The evolution of BaaS – and where do the intermediaries go?

Synapse’s machinations and paths to bankruptcy are tortuous and ongoing. However, these developments are a nod to the ever-changing role and emphasis on “middleware” or intermediary relationships in BaaS.

In an interview with Karen Webster, Ingo Payments CEO Drew Webster said that “BaaS 1.0 was, in a sense, technology companies focused on supporting technology companies. They would build a cloud core and bring together all kinds of third-party providers to manage what we call money mobility.” However, he noted that regulators are now paying attention to further risks related to know-your-customer (KYC), compliance and risk management, fraud and the financial security of FinTechs and their partners.

We may be seeing an increase in more direct BaaS relationships as FinTech sells directly to banks. Treasury Prime is an example here. The company once sold its BaaS platform to FinTech companies, helping them connect with banks. Earlier this year, Treasury Prime, which operates a banking-as-a-service platform, laid off about half of its employees and focused on selling directly to banks. His efforts once focused on FinTechs. The company has helped FinTechs and bank partners in their quest for connectivity. Now the company will deliver its offerings directly to banks as traditional FIs manage their own relationships with FinTech.

The changes in BaaS providers come against the backdrop of PYMNTS Intelligence reporting that about two-thirds of banks and credit unions have entered into at least one FinTech partnership in the last three years, with 76% of banks considering a technology partnership FinTech considered necessary to meet customer expectations.