It is troubling to see the financial issues that Synapse currently faces as a once-promising contributor in the middleware space. As Synapse continues to deal with its financial downfall, it is crucial for its partnering companies, including both banks and FinTechs, to evaluate its exposure and take proactive actions to mitigate potential risks now and in the future. Although Synapse’s current situation can be characterized as financially ineffective and operationally uncontrolled, the BaaS industry should still be considered the future of finance, expanding opportunities to the masses. With a different business model, providers similar to Synapse can continue to be extremely innovative while remaining focused on compliance and controls.
Synapses’ current situation encapsulates some key considerations for partners moving forward.
- Financial Vulnerability: With partners reliant on Synapse for revenue and providing services, they put themselves in a position of financial and operational vulnerability. We talk a lot about AML and regulatory compliance, but this situation makes clear that partners should ensure their provider has internal controls that are tested and monitored, and that appropriate vendor due diligence is completed on a middleware provider.
- Operational Disruptions: Operational disruptions have the potential to be an impending issue as the flow of funds can be halted by the outcome of Synapse’s bankruptcy. Partners should make sure their provider has a way to keep end-users and partners whole.
- Regulatory Risks: Synapse’s situation underscores the importance of partnering with companies that have the foundational elements to withstand scrutiny as the BaaS space becomes a primary target of regulators. Due diligence is crucial to mitigate repeat risks in the future.
- Reputational Fallout: In terms of this situation, companies associated with Synapse may face reputational damage. In order to mitigate potential future relationships, transparent communication with stakeholders is a necessity to preserve trust.
Action Steps for Partnering Companies
Synapse has been under intense scrutiny due to thousands of client accounts being frozen or their funds not being accessible. Roughly 200,000 users with accounts ranging from $5,000 to over $60,000 have been tied up into unreachable accounts. This should cause partnering companies to take proactive steps in order to minimize the damage that can be caused by Synapse’s downfall.
Immediate Risk Assessment: The pending downfall of Synapse should force current partners to take active steps in order to mitigate risks. This process should begin with partners conducting an immediate risk assessment through identifying potential financial and operational impacts.
Develop Contingency Plans: Partners relying heavily on Synapse for services should re-evaluate their existing contingency plans and financial forecasts. Furthermore, partners should be developing contingency plans to ensure the use of alternate strategies.
Communicate with Regulators: Staying proactive with your regulators, sharing with them your internal controls, monitoring programs, and wind down plans in the event of a similar issue will be critical.
Synapse’s collapse is a stark reminder of the volatility in the tech sector and the importance of robust risk management practices. With the continued innovation of the Fintech sector, it is vital to reinforce the commitment to due diligence and strategic foresight. Visit www.fraxtional.co to learn how we can help.
