Banking-as-a-service platform provider Synapse laid off about 40% of its staff on Monday, less than four months after cutting 18% of its headcount in June.
Synapse, which provides technology that connects fintech companies and banks, said in an email that it laid off 112 employees — 86 of them full-time, the rest contractors — across job functions after losing a major client last week to long-time bank partner Evolve Bank & Trust.
"We deeply regret saying goodbye to incredibly talented and dedicated members of the Synapse team," the company said in an emailed statement. "However, we have a strong group in place to manage all of our operations and support our customers going forward."
As regulatory scrutiny of the BaaS industry has steadily increased, companies like Synapse are under "considerable stress," said Todd Baker, a business and law professor at Columbia University and managing principal at Broadmoor Consulting.
"The business model that these companies follow is to create a layer in between the partner banks and fintechs wanting to use their services," Baker said. "What appears to be happening is that the double layer structure and, frankly, inattention to compliance matters, has created a significant issue for all of these companies with the bank regulators."
Evolve declined to comment. The layoffs were first reported by Jason Mikula in a
Synapse serves as an intermediary or provider of "middleware"
Last Friday, Synapse CEO Sankaet Pathak said in a company-wide Slack message that Mercury, a fintech that offers banking services to startups and one of the BaaS platform's largest clients, opted not to renew its contract, and would instead work directly with Evolve. Pathak also said in the message, which was seen by American Banker, that on the same day that Mercury said it wouldn't renew its contract, Evolve told Synapse that the bank would withhold a rebate payment until the BaaS platform could post a $50 million reserve.
"Over the prior several months, I have been engaging in CEO-to-chairman discussions with Evolve, believing that we were both acting in good faith to move our partnership forward positively," Pathak said in the message. "Unfortunately this past week Evolve took shocking and disappointing actions, contradictory to our discussions and inconsistent with our contractual arrangements…Rest assured, we are actively addressing this situation with Evolve, and I am hopeful that we will reach a positive resolution."
On Monday, about half the company was unemployed. In an email to laid-off employees sent by Chief People Officer Jack Doan, Synapse said that it wouldn't provide financial assistance to the cut staff, but that the platform's investors, CoreVC and a16z, would help find jobs with their portfolio companies.
Trimming close to half the staff, which people close to the matter said was unexpected, follows Synapse's June layoffs of 18% of the workforce. Pathak said in a
"While this is a challenging time, we remain confident in the underlying fundamentals and potential of our business," Pathak said in the June post. "The steps we are taking will position us for continued success and allow us to adapt to the evolving needs of our clients and the market."
Baker said that while macroeconomic conditions are making fintechs cut expenses, the main dynamic
Evolve, which first partnered with Synapse in 2017, has collected its
Mercury confirmed with American Banker that it has updated its APIs to connect directly to Evolve, instead of through Synapse. The fintech, which won a deluge of clients and deposits following the failure of Silicon Valley Bank, also told American Banker that customers' funds won't be moving and bank account numbers will stay the same.
The Federal Reserve, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and state regulators supervise banks, and the Consumer Financial Protection Bureau has some oversight of the fintechs, but the middleware companies are less visible, said Konrad Alt, co-founder and partner of consulting firm Klaros Group.
The Fed, FDIC and OCC issued interagency guidance earlier this year highlighting that banks are accountable for the risk management of third-party providers.
The interagency report recommends practices for financial institutions to manage relationships with fintechs and other third parties.
Some small fintechs don't have a choice but to partner with middleware companies like Synctera, Solid and Synapse, which provide easy-to-scale, cost-effective technology, Alt said, which is especially important in the currently-challenging fundraising and venture capital environment.
"[The BaaS] market is contracting," Alt said. "It's contracting on both sides. You have a reduced amount of capital going to startups, and you have banks that are under pressure to be more selective. Both of those things, I think, operate to make it a more challenging environment for these intermediary companies."
Alt added that, although he isn't an insider at any specific company, he wouldn't be surprised to see consolidation in the sector, or see some of the companies go out of business.
Banks that offer BaaS have come under regulatory fire for compliance concerns in the last year.
