Evolve Bank’s transformation from a regional bank in Arkansas to a key financial technology (fintech) enabler epitomized the integration of traditional banking and digital innovation. However, its partnership with Synapse, a software provider that mismanaged over $96 million in customer funds, exposed operational and governance lapses in managing fintech deposits. As Synapse filed for bankruptcy in 2024, customers of fintech platforms found their funds inaccessible. This revealed the fragility of fintech–bank relationships and gaps in customer protection mechanisms.

Evolve Bank and the Synapse partnership

Evolve’s transformation from a small community bank to a fintech powerhouse began in 2005 when Scot Lenoir acquired the institution. Its strategic pivot to fintech accelerated in 2017 through a partnership with Synapse, a San Francisco-based software company led by founder Sankaet Pathak. Synapse acted as a middleman, providing fintech firms with access to regulated financial services through Evolve.

Under this arrangement, Synapse commingled customer funds in accounts at Evolve, ensuring their safekeeping while Evolve issued debit cards and facilitated transactions. Between 2019 and 2023, Synapse funneled over $1 billion into Evolve, cementing their relationship as a cornerstone of the fintech ecosystem.

However, cracks began to emerge in 2022. Fintech clients like Mercury raised concerns about Synapse’s reliability, opting for direct relationships with Evolve. This shift revealed broader issues about the financial accountability of intermediaries. Regulators have since flagged the need for stricter rules governing such relationships.

Synapse’s collapse and missing funds

Synapse’s bankruptcy filing in April 2024 sent shock waves across the fintech sector. Over 100,000 customers were left unable to access their funds stored in Synapse-linked accounts at Evolve. Alarmingly, $96 million in customer deposits remains unaccounted for across multiple banks, including Evolve.

A court-appointed mediator revealed systemic failures in record-keeping, exacerbating the crisis. Evolve charged $26 million in fees directly from Synapse-managed accounts between 2019 and 2023, which Synapse alleges were unauthorized. Adding to the complexity, Synapse had transferred $60 million of customer funds to Lineage Bank in 2022, further clouding accountability.

The missing funds have left customers like Lorena Baculima in financial ruin. Baculima, who used the app Juno to manage her savings, discovered that her $130,000 deposit was effectively lost when she attempted a withdrawal. Cases like hers highlight the devastating impact of these failures on ordinary consumers who trusted fintech platforms to safeguard their money.

Silicon Valley Bank collapse: mismatch in asset-liability management

Silicon Valley Bank (SVB), once a cornerstone for the tech startup ecosystem, experienced a dramatic downfall in 2023 due to its reliance on long-term government securities and a concentrated client base of technology firms. These factors made the bank especially susceptible to fluctuations in interest rates. When the Federal Reserve initiated a series of rapid interest rate hikes in 2022 and 2023 to combat inflation, the value of SVB’s bond portfolio dropped significantly. This mismatch in its asset-liability management meant that the bank could not liquidate its investments without incurring substantial losses.

Compounded by its clients’ high sensitivity to market shifts, the bank experienced a swift erosion of depositor confidence, culminating in a bank run. SVB’s collapse, the largest bank failure since the 2008 financial crisis, underscored systemic vulnerabilities in liquidity management and sectoral overexposure. The incident highlighted how a heavy reliance on one industry — in SVB’s case, tech startups — can amplify risks during economic downturns or market shocks. Furthermore, the crisis revealed the broader implications of rapid interest-rate adjustments for financial institutions that inadequately hedge against such risks. Regulatory reviews following SVB’s failure have reignited discussions about the importance of stress-testing, diversification of client bases, and robust risk management practices for banks to withstand volatile economic conditions.

Common threads: systemic issues in financial management

The crises at Evolve Bank and SVB reveal the pervasive risks stemming from a lack of diversification and governance shortcomings in the financial sector. Evolve’s heavy reliance on fintech deposits parallels SVB’s dependency on tech startups, underscoring the dangers of concentration risks. In both cases, a single sector’s vulnerability translated into significant institutional instability. Without sufficient diversification of their deposit bases, these banks became highly susceptible to sector-specific shocks, such as fintech volatility in Evolve’s case and interest rate sensitivity in SVB’s. This lack of diversification amplified their fragility during periods of economic stress.

Operational weaknesses further exacerbated the crises, highlighting governance failures at both institutions. Synapse’s mismanagement of customer accounts at Evolve mirrored SVB’s poor handling of its asset-liability mismatches, exposing deficiencies in oversight and decision-making frameworks. Additionally, the regulatory environment allowed both banks to operate with less scrutiny due to their classification as smaller or mid-sized institutions, revealing potential loopholes in financial oversight.

The crises have reignited debates over whether current regulatory thresholds adequately capture the risks posed by institutions that, while smaller in size, can still have systemic impacts. Addressing these gaps requires not only enhanced regulation but also a cultural shift toward stronger governance and risk management practices within financial institutions.

The fragile dynamics of fintech and banking partnerships: lessons from deregulation

The dissolution of the partnership between Evolve Bank and Synapse Financial Technologies highlights the intricate balance between fostering innovation and managing risk in an era of evolving financial deregulation. Evolve Bank, a traditional institution, partnered with Synapse, a fintech firm offering application programming interface-driven financial solutions, to meet the growing demand for digital services. The partnership unraveled under the weight of misaligned incentives, regulatory scrutiny and questions about long-term sustainability. This failure underscores broader systemic concerns about how financial deregulation, when mismanaged, can exacerbate moral hazard — a situation in which an economic actor takes greater risks because it does not bear the full consequence of that risk — and destabilize collaborative ventures between fintechs and traditional banks.

The collapse illustrates the risks associated with partnerships that lack clear accountability frameworks. Synapse relied on Evolve’s regulatory infrastructure to scale operations, leveraging deregulation policies that reduced oversight barriers. However, Evolve struggled to manage the compliance risks introduced by Synapse’s rapid expansion and innovation-driven focus.

The misalignment of incentives between Evolve and Synapse, where Evolve bears the regulatory risks while Synapse enjoys the benefits of aggressive growth without facing the same consequences, displays the moral hazard problem inherent in the partnership. Such dynamics reflect a growing trend in the financial sector, where deregulation encourages aggressive growth but fails to mitigate the moral hazard that arises when one party disproportionately bears the risk.

Financial deregulation has played a dual role in shaping this landscape. On one hand, deregulation aimed to reduce compliance burdens and stimulate growth by enabling partnerships like Evolve and Synapse to thrive. By loosening constraints, policymakers sought to unlock the potential of fintech innovations, promote entrepreneurship and drive economic growth.

In theory, this should create a more dynamic financial ecosystem with increased access to services and improved efficiency. Without addressing the underlying problem of bailout expectations and moral hazard, however, deregulation can backfire. In this case, it created an environment where fintech firms operated with minimal accountability, leaving their banking partners to absorb the risks of failure.

The collapse also demonstrates how financial deregulation, if poorly sequenced, can destabilize even the most promising collaborations. While deregulation fosters innovation by reducing barriers, it also weakens the regulatory safeguards that incentivize prudence among decision-makers. As in broader financial markets, the absence of robust risk-sharing mechanisms between Evolve and Synapse allowed excessive risk-taking to flourish unchecked.

This imbalance highlights the need for policymakers to address moral hazard directly, ensuring that all parties involved in such partnerships have genuine skin in the game. Only then can deregulation achieve its intended benefits without exposing the financial system to unnecessary vulnerabilities.

Ultimately, the partnership’s failure serves as a cautionary tale for the future of fintech and traditional banking collaborations. Although financial deregulation can unlock growth and innovation, its success depends on sequencing reforms to align incentives and mitigate risks. Policymakers must design frameworks that encourage prudent risk-taking by holding all parties accountable for their actions. Without such safeguards, deregulation risks not only destabilizing individual partnerships but also undermining trust in the broader financial ecosystem.

By learning from this collapse, the financial industry can strike a balance between innovation and stability, ensuring that deregulation empowers sustainable growth rather than triggering systemic failures.

Navigating fintech partnerships

Successful collaborations between fintech and traditional banks require innovation-driven synergies and the establishment of shared accountability frameworks. The absence of these frameworks can lead to a “fragmented accountability ecosystem,” where both parties may overlook their responsibilities, increasing the likelihood of systemic failures.

This further highlights the importance of proactive stress-testing and the integration of adaptive compliance systems to mitigate risks in a rapidly evolving regulatory environment. Drawing from the collapse of partnerships like that between Evolve and Synapse, these insights underline the necessity for institutions to foster a culture of mutual transparency and prudence to navigate the complexities of the fintech era effectively.

[Lee Thompson-Kolar edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.