Thousands of Americans see their savings vanish in Synapse fintech crisis
November 23, 2024
0 6 minutes read
For 15 years, former Texas schoolteacher Kayla Morris put every dollar she could save into a home for her growing family.
When she and her husband sold the house last year, they stowed away the proceeds, $282,153.87, in what they thought of as a safe place ā an account at the savings startupĀ YottaĀ held at a real bank.
Morris, like thousands of other customers, was snared in the collapse of a behind-the-scenes fintech firm called Synapse and has been locked out of her account for six months as of November. She held out hope that her money was still secure. Then she learned how much Evolve Bank & Trust, the lender where her funds wereĀ supposed to be held, was prepared to return to her.
āWe were informed last Monday that Evolve was only going to pay us $500 out of that $280,000,ā Morris said during a court hearing last week, her voice wavering. āItās just devastating.ā
The crisisĀ startedĀ in May when a dispute between Synapse and Evolve Bank over customer balances boiled over and the fintech middleman turned off access to a key system used to process transactions. Synapse helped fintech startups like Yotta and Juno, which are not banks, offer checking accounts and debit cards by hooking them up with small lenders like Evolve.
In the immediate aftermath of Synapseās bankruptcy, which happened after an exodus of its fintech clients, a court-appointed trustee found that up to $96 million of customer funds wasĀ missing.
The mystery of where those fundsĀ areĀ hasnāt been solved, despite six months of court-mediated efforts between the four banks involved. Thatās mostly because the estate ofĀ Andreessen Horowitz-backed Synapse doesnāt have the money to hire an outside firm to perform a full reconciliation of its ledgers, according to Jelena McWilliams, the bankruptcy trustee.
But what is now clear is that regular Americans like Morris are bearing the brunt of that shortfall and will receive little or nothing from savings accountsĀ that they believed were backed by theĀ full faith and credit of the U.S. government.
The losses demonstrate the risks of a system where customers didnāt have direct relationships with banks, instead relying on startups to keep track of their funds, who offloaded that responsibility onto middlemen like Synapse.
There are thousands of others like Morris. While thereās not yet a full tally of those left shortchanged, at Yotta alone, 13,725 customers say they are being offered a combined $11.8 million despite putting in $64.9 million in deposits, according to figures shared by Yotta co-founder and CEOĀ Adam Moelis.
CNBC spoke to a dozen customers caught in this predicament, people who are owed sums ranging from $7,000 to well over $200,000.
From FedEx drivers to small business owners, teachers to dentists, they described the loss of years of savings after turning to fintechs like Yotta for the higher interest rates on offer, for innovative features or because they were turned away from traditional banks.
Zach Jacobs, 37, of Tampa, Fla., helped form a group called Fight For Our Funds after losing more than $94,000 that he had in a fintech savings account called Yotta.
One Yotta customer, Zach Jacobs, logged onto Evolveās website on Nov. 4 to find he was getting back just $128.68 of the $94,468.92 he had deposited ā and he decided to act.
The 37-year-old Tampa, Florida-based business owner began organizing with other victims online, creating a board of volunteers for a group calledĀ Fight For Our Funds. Itās his hope that they gain attention from press and politicians.
So far, 3,454 people have signed on, saying theyāve lost a combined $30.4 million.
āWhen you tell people about this, itās like, āThereās no way this can happen,āā Jacobs said. āA bank just robbed us. This is the first reverse bank robbery in the history of America.ā
Zach Jacobs decided to act after logging onto Evolveās website on Nov. 4 to find he was getting just $128.68 of his $94,468.92 in deposits.
Andrew Meloan, a chemical engineer from Chicago, said he had hoped to see the return of $200,000 heād deposited with Yotta. Early this month, he received an unexpected PayPal remittance from Evolve for $5.
āWhen I signed up, they gave me an Evolve routing and account number,ā Meloan said. āNow theyāre saying they only have $5 of my money, and the rest is someplace else. I feel like Iāve been conned.ā
Unlike meme stocks or crypto bets, in which the user naturally assumes some risk, most customers viewed funds held in Federal Deposit Insurance Corp.-backed accounts as the safest place to keep their money. People relied on accounts powered by Synapse for everyday expenses like buying groceries and paying rent, or for saving for major life events like home purchases or surgeries.
Several people CNBC interviewed said signing up seemed like a good bet since Yotta and other fintechs advertised that deposits were FDIC-insured through Evolve.
āWe were assured that this was just a savings account,ā Morris said during last weekās hearing. āWe are not risk-takers, weāre not gamblers.ā
A Synapse contract that customers received after signing up for checking accounts stated that user money was insured by the FDIC for up to $250,000, according to a version seen by CNBC.
āAccording to the FDIC, no depositor has ever lost a penny of FDIC-insured funds,ā the 26 page contract states.
Abandoned by U.S. regulators who have so far declined to act, they are left with few clear options to recoup their money.
In June, the FDIC made itĀ clearĀ that its insurance fund doesnāt cover the failure of nonbanks like Synapse, and that in the event of such a firmās failure, recovering funds through the courts wasnāt guaranteed.
The next month, the Federal ReserveĀ saidĀ that as Evolveās primary federal regulator it would monitor the bankās progress āin returning all customer fundsā to users.
āWe are responsible for working to ensure that the bank operates in a safe and sound manner and complies with applicable laws, including laws protecting consumers,ā Fed general counsel Mark E. Van Der Weide said in aĀ letter.
In September, the FDICĀ proposedĀ a new rule that would force banks to keep detailed records for customers of fintech apps, improving the chances that they qualify for coverage in a future calamity and cutting the risk that funds would go missing.
Jelena McWilliams, former Chairman of the Federal Deposit Insurance Corporation, speaks at the Milken Institute Global Conference on May 2, 2023.
McWilliams, herself a former FDIC chair during the first Trump presidency, told the California judge handling the Synapse bankruptcy case last week she was ādisheartenedā that every financial regulator has decided not to help.
The FDIC and Fed declined to comment for this story, and McWilliams didnāt respond to emails.
Things hadnāt always seemed so dire. Early in the proceedings, McWilliams suggested to JudgeĀ Martin BarashĀ that customers be given a partial payment, essentially spreading the pain among everyone.
But that wouldāve required more coordination between Evolve and the other lenders that held customer funds than what ultimately happened.
As the hearings dragged on, the three other institutions, AMG National Trust, Lineage Bank and American Bank, began disbursing the funds they had, while Evolve took months to perform what it initially said would be a comprehensive reconciliation.
Around the time EvolveĀ completedĀ its efforts in October, it said it could only figure out the user funds it held, not the location of the missing funds. Thatās at least partly because of āvery large bulk transfersā of funds without identification of who owned the money, a lawyer for Evolve testified last week.
As a result, the bankruptcy process has minted relative winners and losers.
Some end users recently received all their funds back, while others, like Indiana FedEx driverĀ Natasha Craft, received none, she told CNBC.
Natasha Craft, a 25-year-old FedEx driver from Mishawaka, Ind. She has been locked out of her Yotta banking account since May 11.
Evolve says that āthe vast majorityā of funds held for Yotta and other customers were moved to other banks in October and November of 2023 on directions from Synapse, according to an Evolve spokesman.
āWhere those end user funds went after that is an important question, but unfortunately not one Evolve can answer with the data it currently has,ā the spokesman said.
Yotta says that Evolve has given fintech firms and the trustee no information about how it determined payouts, ādespite acknowledging in court that a shortfall existed at Evolve prior to October 2023,ā according to a spokesman for the startup, who noted that several executives have recently left the bank. āWe hope regulators take notice and act.ā
InĀ statementsĀ released ahead of this monthās hearing, Evolve said that other banks refused to participate in its efforts to create a master ledger, while AMG and Lineage said that Evolveās implication that they had the missing funds was āirresponsible and disingenuous.ā
As the banks and other parties hurl accusations at each other and lawsuits pile up, including pending class-action efforts, the window for cooperation is rapidly closing, Barash said last week.
āAs time goes by, my impression is that unless the banks that are involved can sort this out voluntarily, it may not get sorted out,ā Barash said. āThereās nothing optimistic about what Iām telling you.ā
This article was originally published on NBCNews.com
