Synapse, a banking-as-a-service (BaaS) company, filed for bankruptcy in April of this year after a year of financial and operational challenges, including disputes with its banking partners, two rounds of layoffs, and an incident where many Synapse customers were unable to access their accounts.
The Chapter 11 trustee appointed to oversee Synapse's bankruptcy has struggled to reconcile all funds, with
This development has shed light on a troubling phenomenon: many cutting-edge fintech companies, which bring much-needed disruption to a sector that has stagnated for decades, still lack the essential infrastructure to effectively reconcile transactions, track funds, and maintain visibility into their ledgers.
Synapse's crisis underscores this pervasive issue in fintech and highlights the urgent need for investment in technology and automated processes.
A Prevalent Problem
The Chapter 11 trustee has encountered significant challenges in reconciling funds and ensuring accurate distribution to customers. These efforts have been hampered by missing data and uncooperative former employees.
Despite making some progress in distributing funds from demand deposit accounts (DDAs), the trustee faces substantial hurdles in reconciling more complex "for benefit of" (FBO) accounts, where discrepancies in Synapse's records have complicated efforts. Partner banks have identified numerous discrepancies in Synapse Brokerage's program ledgers, further complicating the reconciliation process.
These challenges are not unique to Synapse and underscore a broader issue within the fintech industry: the struggle to maintain robust financial infrastructure capable of reconciling transactions and safeguarding customer funds.
Despite their commitment to tech-driven efficiency, many large fintechs face significant challenges when it comes to managing key tasks such as reconciling payments and maintaining accurate ledgers. As these problems persist, they draw greater scrutiny from regulators, potential banking partners step back, investors raise more questions and most importantly, fintechs lose the most critical thing for every company that handles money – consumer trust.
Reconciliation and Ledgering Challenges
Why exactly are these seemingly standard financial processes so difficult?
First, fintech companies – and most businesses in general – lack the necessary technology to handle reconciliation at scale. While fintechs are known for digitizing and automating their own services and products, most of them tend to rely on antiquated manual systems to manage internal processes such as reconciliation, using Excel held together by a patchwork of macros and SQL scripts. Many companies delay addressing this issue until it becomes unmanageable.
Second, these fintechs handle extremely high volumes of transactions and complex flows of funds —e.g., pay-ins and pay-outs and a growing number of data sources connected to each flow of funds (banks, PSPs, ERPs, billing systems, internal databases etc.) – which further complicates ledger management. The risk of error increases exponentially, and when something goes wrong, simply tracking a single transaction and identifying the break in the chain can be a Herculean task.
And third, even if an individual company has a strong handle on its internal ledgering, there's still the risk that its partners' or customers' bookkeeping standards may not meet the same level of rigor, potentially leading to inconsistencies when multiple companies collaborate.
The Stakes of Inaccurate Ledgering
In Synapse's case, these challenges converged to deliver the final blow. The trustee's inability to reconcile accounts exacerbated internal financial issues and disputes with key partners, exposing gaps that have strained Synapse's relationships with customers, partners, investors, and more. Due to the high stakes, accurate reconciliation is crucial for fintech companies. Losing track of customers' money diminishes trust and business viability. Without the ability to track funds, protecting customers' financial security becomes impossible.
With Synapse's recent shortcomings bringing these issues under the spotlight, regulators are beginning to impose even stricter oversight over fintechs and their partner banks. Companies that fail to effectively manage their ledgering and reconciliation processes risk severe consequences, including financial losses, reputational damage and harming their relationships with partner banks.
The Solution: Technology and Automation
Though the finance operations sector has long been neglected, a new generation of tools is available to help fintech companies manage reconciliation and ledgering more effectively. These advanced technologies can handle high transaction volumes and complex fund flows, providing real-time visibility, a high level of accuracy, and operational efficiency.
To avoid the pitfalls experienced by Synapse, fintech companies should, first and foremost, prioritize minimizing or eliminating the risk of losing track of customers' funds. This requires investing in advanced technology that seamlessly integrates into their operations, automates critical processes, and streamlines operations prone to inconsistencies and discrepancies.
Automated reconciliation systems offer several benefits, beginning with real-time accuracy. These systems ensure that transactions are accurately matched and discrepancies promptly identified, reducing the risk of errors. Automated reconciliation also streamlines financial processes, minimizing the manual workload. This not only frees up employees to focus on more pressing tasks but also enables more efficient scaling of operations, while reducing the number of human errors.
The ability to maintain accurate and transparent financial records in real time will bolster customer trust and loyalty and ensure compliance with financial regulations by providing accurate and timely financial data.
Another advantage is resilience and adaptability. Automated systems can quickly adapt to changing financial environments and regulatory requirements, providing a stable foundation for growth.
Learning from Past Mistakes
Though difficult for those involved, the Synapse crisis ultimately offers hopeful lessons for the fintech industry. Investing in technology and automation is crucial to prevent similar crises and secure long-term success. These investments are essential for maintaining accurate financial records, building customer trust, ensuring regulatory compliance, and achieving operational efficiency. By learning from Synapse's challenges and embracing advanced technology to mitigate them, fintech companies can safeguard their operations and position themselves for future success in an industry where competition continues to be fierce.
