For 15 years, former Texas teacher Kayla Morris put every dollar she had saved into a home for her growing family.
When she and her husband sold the house last year, they kept the proceeds, $282,153.87, in what they thought was a safe place – an account at Yotta savings company that was in a real bank.
Morris, like thousands of other customers, was caught up in the collapse of a behind-the-scenes fintech company called Synapse and has been locked out of his account for six months since November. He hoped that his money was still safe. Then he learned how much Evolve Bank & Trust, the lender where his money was supposed to be held, was willing to pay back.
“We were notified last Monday that Evolve would only pay us $500 of that $280,000,” Morris said during a court hearing last week, his voice shaking. “It just hurts.”
The crisis began in May when a dispute between Synapse and Evolve Bank over customer balances escalated and the fintech middleman blocked 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 connecting them with small lenders like Evolve.
Shortly after Synapse’s bankruptcy, which occurred after its fintech clients pulled out, a court-appointed trustee discovered that up to $96 million of client money was missing.
The mystery of the whereabouts of those funds remains unresolved, despite six months of mediation efforts between the four banks involved. That’s because the estate of Andreessen Horowitz-backed Synapse doesn’t have the money to hire an outside firm to do a full reconciliation of its ledgers, according to Jelena McWilliams, the bankruptcy trustee.
But what’s now clear is that ordinary Americans like Morris are bearing the brunt of the deficit and will get little or nothing from savings accounts.who believed they were backed by the full faith and credit of the US government.
The loss shows the vulnerability of a system where customers have no direct relationship with banks, instead relying on start-ups to keep track of their funds, which have outsourced that responsibility to vendors like Synapse.
There are thousands of others like Morris. While there are no full figures for those left behind, at Yotta alone, 13,725 customers said they were given a combined $11.8 million despite making $64.9 million in deposits, according to figures shared by Yotta founder and CEO Adam Moelis.
CNBC spoke with a dozen customers caught up in the crisis, people who owed money ranging from $7,000 to more than $200,000.
From FedEx drivers to small business owners, teachers to dentists, they described losing years of savings after turning to fintechs like Yotta for the high interest rates they offered, because of new features or because they were pushed out of traditional banks.
Zach Jacobs, 37, of Tampa, Fla., helped form a group called Fighting for Our Money after losing more than $94,000 he had in a fintech savings account called Yotta.
One Yotta customer, Zach Jacobs, logged on to Evolve’s website on November 4 to find he was getting back $128.68 of the $94,468.92 he had deposited – and decided to take action.
The Tampa, Florida-based business owner, 37, began organizing with other victims online, creating a volunteer board for a group called Fight For Our Funds. It is his hope that they get the attention of the media and politicians.
So far, 3,454 people have signed up, saying they lost $30.4 million.
“When you tell people about this, it’s like, ‘There’s no way this is happening,'” Jacobs said. “The bank just robbed us. This is the first bank robbery in American history.”
Zach Jacobs decided to take action after logging onto the Evolve website on November 4 to find he was only getting $128.68 of his $94,468.92 in deposits.
Andrew Meloan, a chemical engineer from Chicago, said he hoped to see a return of the $200,000 he invested in Yotta. Earlier this month, he received an unexpected PayPal payment from Evolve for $5.
“When I signed up, they gave me the Evolve router and account number,” Meloan said. “Now they say they only have $5 of my money, and the rest is somewhere else. I feel like I’m imprisoned.”
Unlike meme stocks or crypto bets, where the user naturally takes some risk, many customers look at the funds kept in accounts supported by the Federal Deposit Insurance Corp. as the safest place to keep their money. People rely on Synapse funded accounts for everyday expenses like buying groceries and paying rent, or saving for major life events like buying a home or having surgery.
Several people CNBC interviewed said signing up seemed like a good bet since Yotta and other fintechs advertise FDIC-insured deposits through Evolve.
“We were assured that this was just a savings account,” said Morris during last week’s hearing. “We are not strikers, we are not gamblers.”
The Synapse contract customers received after signing up for checking accounts said the user’s money was insured by the FDIC up to $250,000, according to a version seen by CNBC.
“According to the FDIC, no depositor has ever lost a penny of FDIC-insured funds,” the 26-page contract says.
Abandoned by US regulators who have so far refused to act, they are left with few clear ways to recover their money.
In June, the FDIC made it clear that its insurance fund does not cover the failure of banks such as Synapse, and that in the event of failure of this company, recovery of funds from the courts is not guaranteed.
The following month, the Federal Reserve said that as Evolve’s primary regulator it would monitor the bank’s progress in “returning all customer funds” to users.
“We have a responsibility to work to ensure that the bank operates in a safe and sound manner and complies with applicable laws, including laws that protect consumers,” Fed attorney general Mark E. Van Der Weide said in a letter.
In September, the FDIC proposed a new rule that would force banks to store detailed information on customers of fintech applications, improving their chances of being covered in a future crisis and limiting the risk that money will be lost.
Jelena McWilliams, former Chairman of the Federal Deposit Insurance Corporation, speaks at the Milken Institute Global Conference on May 2, 2023.
McWilliams, who was also the FDIC chairman during Trump’s first presidency, told the California judge presiding over Synapse’s bankruptcy case last week that he was “disappointed” that all the financial regulators decided not to help them.
The FDIC and Fed declined to comment for this story, and McWilliams did not respond to emails.
Things didn’t always look so bad. At the beginning of the trial, McWilliams suggested to Judge Martin Barash that the clients should be given some compensation, the most important of which is to spread the pain to everyone.
But that would have required more communication between Evolve and other lenders handling customer finances than ultimately happened.
As the lawsuits continued, three other institutions, AMG National Trust, Lineage Bank and American Bank, began disbursing their holdings, and Evolve took months to make what it initially said would be a full settlement.
When Evolve ended its efforts in October, it said it could only recover user funds it had managed, not replace missing funds. That’s at least partly due to the “transfer of large sums” of funds without identifying the money’s owner, an Evolve attorney said last week.
Because of this, the bankruptcy process has mixed winners and losers.
Some end users have just received all of their funds, while others, like Indiana FedEx driver Natasha Craft, have not, she told CNBC.
Natasha Craft, a 25-year-old FedEx driver from Mishawaka, Ind. He has been locked out of his Yotta bank account since May 11.
Evolve says that “most” of the money held for Yotta and other customers was moved to other banks in October and November 2023 with directions from Synapse, according to an Evolve spokesperson.
“Where those end-user funds went after that is an important question, but unfortunately there’s nothing Evolve can answer with the data they currently have,” the spokesperson said.
Yotta says Evolve does not provide the fintech firms and the trustee with details of how it decided to pay, “even though it has admitted in court that there was a deficit at Evolve before October 2023,” according to a spokesperson for the agency, who noted that several executives were present. you just left the bank. “We hope the regulators will take notice and take action.”
In a statement released ahead of this month’s hearing, Evolve said other banks refused to participate in its efforts to create a master ledger, while AMG and Lineage said Evolve’s claim that they had lost funds was “innocuous and unreasonable.”
With banks and other parties suing each other and lawsuits piling up, including attempts at class action, the window for cooperation is closing fast, Barash said last week.
“As time goes by, my opinion is that unless the banks concerned can fix this voluntarily, it may not be fixed,” said Barash. “There is nothing hopeful about what I am telling you.”
This article was originally published on NBCNews.com
