Synapse Files For Bankruptcy, TabaPay To Acquire Assets & Affiliates
SoLo Funds Outage Leaves Users In Dire Straits, CFPB Bans BloomTech & Its Founder From Student Lending
Hey all, Jason here.
Well, my seven-week travel bender is finally over! Capped it off with a couple days in Turkey to speak at Istanbul Fintech Week, which I thoroughly enjoyed. Now, back home and heads-down on a couple longer-term projects.
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If you enjoy reading this newsletter each Sunday and find value in it, please consider supporting me (and finhealth non-profits!) by signing up for a paid subscription. It wouldn’t be possible to do what I do without the support of readers like you!Synapse Files For Bankruptcy, TabaPay To Acquire Its Assets & Affiliates, Pending Court Approval
Synapse, which raised over $50 million in capital from investors that included a16z, Core Innovation Capital, Trinity Ventures, and 500 Global (formerly 500 Startups), has filed Chapter 11 bankruptcy and announced TabaPay will acquire some of its assets and affiliates, in a deal first reported on by Fintech Business Weekly last month, pending approval by the bankruptcy court.
TabaPay provides payment processing infrastructure used by well-known fintechs like Chime, Klarna, SoFi, Dave, Upgrade, and numerous others through partnerships with a who’s who of BaaS banks that includes Evolve Bank & Trust, CBW Bank, Cross River, Sutton, Coastal, Lead, Pathward, Stride, and The Bancorp.
Rodney Robinson, cofounder and President of TabaPay, explained to Fintech Business Weekly that the company’s existing business primarily generates transaction revenue from merchant acquiring. By adding Synapse’s capabilities, Robinson said, TabaPay will be able to sell additional capabilities to existing clients and diversify revenue sources with deposits and interchange.
According to Robinson, TabaPay had been discussing a potential acquisition of Synapse for about year, before ultimately coming to a final agreement last week.
Terms of the deal couldn’t immediately be discerned, and, as of the time of publication, Synapse’s bankruptcy filing was not publicly available.
Synapse cofounder and CEO Sankaet Pathak blamed the bankruptcy on the company’s ongoing dispute with one-time client Mercury, saying on social media, “Chap 11 is because of mercury [sic] and issues they’ve been creating behind the scenes. Without that, it would have been a sale like any other.”
Asked about Pathak’s comment, a representative for Mercury said, “We won't speculate on why Synapse filed for bankruptcy. As has previously been publicly reported, Mercury has significant claims against Synapse. We will continue to pursue those through the appropriate forums and uphold our confidentiality obligations.”
Given the bankruptcy, it is likely that VCs will see their equity stakes wiped out, while Synapse’s creditors battle it out for their share from what’s left of the company.
Forbes reported that the acquisition would include Synapse’s state lending and brokerage licenses as well as its credit and debit card issuing platform and that Synapse CEO Sankaet Pathak would join TabaPay in a role to be announced next week.
In a statement about the proposed acquisition, Pathak said in part, “The Synapse team will maintain its cohesion operationally as part of ensuring there are no immediate changes in operational processes or to [clients’] business model. Our ultimate goal is to seamlessly integrate, operating as a unified financial infrastructure platform and delivering unparalleled products to our collective customer bases.”
The news appears to mark the end of the road for the company that appears to have inspired a16z partner and Synapse board member Angela Strange to coin the phrase “every company will be a fintech company.”
For those that have been following Synapse’s slow-motion collapse, the news of the bankruptcy filing and proposed asset and affiliate acquisition are likely unsurprising — though as recently as late December, Synapse CEO Pathak disputed one-time client Mercury’s characterization of Synapse as being in “financial freefall,” amid tit-for-tat filings in which each company claims the other owes it as much as $30 million.
Acquiring the assets of Synapse through a bankruptcy proceeding should allow TabaPay to dodge taking on any of the known — and, perhaps, more importantly, unknown — legal and regulatory liabilities Synapse faces, which include the $30 million dispute with Mercury and still-unanswered questions over whether Synapse or Evolve is responsible for more than $13 million in missing end customer funds.
TabaPay President Robinson said that, as part of the acquisition process, TabaPay is ensuring Synapse’s records balance and reconcile to the actual underlying funds held at Synapse’s partner banks.
Still, even with the protection of the Chapter 11 bankruptcy, by acquiring Synapse’s technology, existing clients, and team, including Pathak himself, TabaPay is taking on significant reputational risk, which has the potential to impact its relationships with its existing clients and partner banks and risks drawing fresh, unwanted regulatory scrutiny.
Asked about this, TabaPay’s Robinson said the company didn’t have any concerns.
BaaS Middleware Consolidation Continues
Synapse is the latest banking-as-a-service platform to exit via a distressed acquisition: in the past year, Rize, Apto Payments, and Bond were acquired by Fifth Third, Qenta, and FIS, respectively.
Of the remaining standalone middleware players, both Synctera and Treasury Prime have undergone significant layoffs as they pivot to focus on selling software to banks; Unit has struggled to explain how it’s shifting its strategy to address today’s market realities; and several banks that work with middleware intermediaries, including Blue Ridge Bank, Choice Bank, and Piermont, have faced regulatory actions stemming from their BaaS programs.
It’s difficult to draw any firm conclusions from this latest development, as Synapse was facing a number of idiosyncratic challenges that don’t generalize to other BaaS platforms. Still, it’s the latest sign of the ongoing consolidation in fintech infrastructure — a trend that seems more likely than not to continue.
CFPB Order Bans BloomTech And Its Founder From Student Loan Industry
I think there’s general agreement that higher education in the United States is broken — tuition costs continue to grow significantly more quickly than inflation or incomes, while many students finance attendance through government loans that would likely be considered predatory if made by a private lender.
BloomTech, formerly known as Lambda School, became a Silicon Valley darling by appearing to offer a private market solution to both problems: a coding bootcamp education financed through income share agreements (ISAs), which, the company and its loquacious founder and CEO Austen Allred claimed, ensured that the company’s incentives were aligned with its students’.
Investors in the company include Silicon Valley stalwarts like Y Combinator, GV (Google Ventures), Gigafund, GGV, and Stripe.
Unlike public or private student loans, which typically carry a fixed term, interest rate, and payment schedule, with an ISA, a student agrees to repay a percentage of their future income — specifics, like minimum income thresholds before the ISA kicks in, caps on the maximum amount repaid, and other key product terms can vary substantially by program and ISA provider.
ISAs are hardly a new idea — Yale famously experimented with them in the 1970s, and then-student Bill Clinton used one to attend law school there, though he later opted to buy out what he owed, rather than repaying a share of his income over time.
While BloomTech hit all the right notes — helping low-income students upskill into careers in tech through its online courses with an “innovative” approaching to financing — coverage in The Information and The Verge in early 2020 revealed the company was falling far short of the promises it made.
Among other issues, the reporting at the time claimed that the quality of instruction in its six to nine month programs — which carried sticker prices of $20,000 to $30,000 — was lacking, with teaching assistants who weren’t familiar with the material they were supposed to be teaching leveraging freely available content from the web in some cases.
The most charitable read is that Allred and BloomTech sincerely have tried to offer an alternate path for students to improve their career and earning potential but didn’t understand the risks and requirements of the educational and financial industries in which they operated — though this is somewhat implausible, given Allred’s prior role marketing payday loans at now-bankrupt LendUp, where he would’ve interacted with legal and compliance staff and, presumably, developed some level of familiarity with relevant regulations.
The most cynical read is that Allred and BloomTech knowingly peddled dubious online courses to vulnerable students with false and misleading claims to support its real business: originating ISAs to sell to investors.
The truth, most likely, is somewhere in the middle.
Now, the company and CEO Allred personally have been banned from student lending activities as part of a consent order reached with the CFPB for violations of Dodd-Frank’s prohibition on UDAAP, violating the “Holder Rule,” and failing to disclose information required by TILA Reg Z.
The CFPB argues that BloomTech and CEO Allred deceived students by misrepresenting how ISAs worked and their benefits. Specifically, by representing that ISAs were not loans or debt, carried no finance charge, and were “risk free,” including by expressly making such statements in its ISA contracts, on BloomTech’s website, and in videos and social media posts, including on Allred’s personal accounts.
However, the CFPB argues, BloomTech’s ISAs are loans that create debt, as they enable students to purchase services and defer payment to a later date. The CFPB found that the finance charge for borrowers who completed repayment averaged $4,000, calculated as the total amount repaid through the ISA less the stated tuition price.
The Bureau also argues that BloomTech and Allred’s statements about job placement rates were false and misleading. From 2017 to 2019, BloomTech claimed an 86% placement rate in marketing materials targeting students — while giving its investors the more accurate rate of 50%.
At one point, the consent order says, Allred tweeted that BloomTech had achieved a 100% placement rate in a specific cohort, despite knowing the sample size was a single student.
Despite claiming high placement rates at top-tier companies like Google, Amazon, and other “Fortune 100 companies,” by 2018, the company knew that large corporates rarely hired its graduates into high-paying roles related to the courses they had taken. Internal memos acknowledged that placing students had largely been “manual and one-off,” which wasn’t possible to scale.
BloomTech marketed that its interests were aligned with it students by making claims like, “We don’t get paid until you do” and “we only make money when you do.” Only BloomTech sold many of the ISAs it originated to investors for an upfront fee of $7,000 to $10,000, contradicting its marketing claims about aligned incentives.
By representing that BloomTech’s incentives were aligned with its students due to the structure of the ISAs, students reasonably relied on BloomTech to act in their interests, the CFPB argues.
By taking unreasonable advantage of this reliance by selling ISAs it originated while failing to deliver on the career development promises it deceptively made, BloomTech engaged in “abusive” practices, in violation of Dodd-Frank’s prohibition of UDAAPs.
BloomTech further violated the “Holder Rule” by failing to include a required notice in ISA contracts in consumer credit contracts that it sold.
Finally, BloomTech violated the Truth in Lending Act (TILA) and its implementing rules, Regulation Z, by failing to disclose key facts to student borrowers, including the amount financed, finance charge, and annual percentage rate. Even when BloomTech began including a TILA disclosure in late 2021, it still did not comply with all applicable provisions of TILA Reg Z.
Consent Order Bans BloomTech, Allred From Engaging In Any Student Lending Activity
BloomTech ceased offering ISAs to potential students in early 2024 and now offers students the choice of paying in full upfront, paying in installments, or refers students to private lender Climb Credit.
The consent order BloomTech and Allred reached with the CFPB permanently bans the company from engaging in consumer lending activities and personally bars Allred from engaging in student lending for a period of 10 years.
BloomTech is required to instruct the servicer of its ISAs to cease collecting on some outstanding agreements and to modify others; currently enrolled students must be given the option to withdraw and have BloomTech rescind their ISA or remain enrolled after being informed of the finance charge the ISA carries.
The order also requires BloomTech to pay a $64,235 penalty and for Allred to personally pay a $100,000 penalty.
In a statement Allred shared to X, he said in part (spacing adjusted):
“We decided to settle the matter because it was clear that ongoing litigation would be extremely time consuming, incredibly expensive, and distract us from our core mission.
We do so without agreeing to or denying any of the allegations in the consent order. BloomTech continues to focus on its core mission: improving the lives of students and enabling them to fulfill their economic potential. While it’s been frustrating, we’re glad to put this behind us.”
News of the consent order sparked heated debate on social media, with critics celebrating the action against BloomTech, while supporters’ reactions varied from lamenting the “dangers” of building a startup in a regulated industry…
…to borderline conspiracy theories that the government “came after” Allred and BloomTech because they “threatened” establishment universities:
SoLo Funds Appears To Botch Tech Transition, Leaving Users Unable To Access Funds For More Than Five Days
Unlicensed peer-to-peer payday lender SoLo Funds appears to have botched a transition from using now-bankrupt Synapse and Evolve Bank & Trust to Treasury Prime and Bangor Savings Bank, causing an extended outage that began on Tuesday, April 16th, that, as of the time of publication, appears to be unresolved.
In addition to its unlicensed payday loan product, which California, DC, and Connecticut have taken regulatory actions against, SoLo Funds appears to be planning to offer demand deposit accounts and debit cards through its new banking partner, Bangor Savings Bank via middleware platform Treasury Prime.
Users took to social media to complain that they were unable to access the service, even as SoLo Funds continues to debit their accounts for loan repayments.
Blocked from applying for new loans, SoLo’s customers complained about potentially incurring late or overdraft fees, with one desperate user joking about starting an OnlyFans account to make ends meet — with SoLo lauding the user as being “industrious” in a since-deleted tweet:
SoLo Funds’ outage as it appears to transition from Synapse and Evolve to Treasury Prime and Bangor illustrates often overlooked risks in banking-as-a-service and bank/fintech partnerships: fintechs and their bank partners often fail to adequately plan for adverse outcomes, like the fintech needing to switch bank partners or wind down altogether.
Fintechs like SoLo Funds, their middleware partners, and even the banks themselves may lack adequate change management processes to ensure end users are able to access services they have come to depend on without interruption.
SoLo Funds’ unplanned outage is even higher stakes for its users, given the vulnerable, lower-income audience the company serves.
When RushCard suffered an outage, also due to a failed technology transition, leaving its prepaid cardholders unable to access their own funds to pay for necessities, the firm was ultimately ordered to pay fines and restitution totaling $13 million to settle the matter.
Representative for SoLo Funds, Treasury Prime, and Bangor Savings Bank did not immediately respond to requests for comment by the time of publication.
Other Good Reads
Can I Speak To Your Supervisor? The Importance of Bank Supervision (Liberty Street Economics)
BaaS in the UK (Fintech Brainfood)
The Tortured Fintech Analysts Department (Fintech Takes)
What Happened To Those Bull Market Corporate Blockchain Projects? (Forbes)
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