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A dispute between a fintech startup and its partner bank could leave millions of Americans unable to access their funds for nearly two weeks, according to recent court documents.
Synapse, an Andreessen Horowitz-backed startup that acts as a matchmaker between consumer-facing fintech brands and FDIC-backed banks, has been in disagreements with several partners since last year over the amount of debt it owes to customers.
The situation worsened in April when Synapse declared bankruptcy following the withdrawal of several key partners. On May 11, Synapse cut off access to technology systems that allow lenders, including Evolve Bank & Trust, to process transactions and account information, according to filings.
This has left users of several fintech services struggling to access their funds, according to testimony filed this week in California bankruptcy court.
One such customer, Maryland teacher Chris Buckler, said in a May 21 filing that his funds in cryptocurrency app Juno were locked up due to Synapse’s bankruptcy.
“I am becoming increasingly desperate and don’t know where to turn,” Buckler wrote. “Because transactions have stopped processing, I am left with nearly $38,000 in cash that has taken me years to save.”
10 million “end users”
Synapse, which bills itself as the largest “banking-as-a-service” provider, has until recently helped a wide swath of the U.S. fintech industry offer services such as checking accounts and debit cards. Previous partners have included Mercury. Dave Juno is a well-known fintech company that caters to segments such as startups, gig workers, and cryptocurrency users.
According to an April filing from founder and CEO Sankaet Pathak, Synapse has signed agreements with 20 banks and 100 fintech companies, resulting in roughly 10 million end users.
Pathak did not immediately respond to an email from CNBC seeking comment. A spokesperson for Evolve Bank & Trust declined to comment, instead pointing to a statement on the bank’s website that reads, “Synapse’s abrupt and unannounced shutdown of critical systems and failure to provide necessary records hindered our ability to verify transactions, verify end user balances and comply with applicable laws, unnecessarily putting end users at risk.”
It’s unclear why Synapse turned off the system, and no explanation was found in the filing.
“We’re scared.”
Another customer, Joseph Dominguez, of Sacramento, Calif., told a bankruptcy court on May 20 that more than $20,000 in funds were attached to his Yotta Fintech account.
“We are concerned that our money will be lost if Synapse cannot provide Evolve or Yotta with the ledgers and documentation proving we are the rightful owner,” Dominguez wrote. “We also do not know where our direct deposits have gone or where our pending withdrawals are currently being held.”
The freezing of customer funds has exposed vulnerabilities in the BAAS (bank-as-a-service) partnership model and potential blind spots in regulatory oversight.
The BAAS model, most commonly used by pre-IPO fintech company Chime, allows Silicon Valley-style startups to leverage the capabilities of smaller FDIC-backed banks, an ecosystem that has helped these companies compete with the biggest American banks.
Regulators stay away
Customers mistakenly believed that because their funds were ultimately held at real banks, they were as safe and accessible as any other FDIC-insured account, said Jason Mikula, a consultant and newsletter writer who has followed the case closely.
“More than 10 million people can’t pay their mortgages or buy groceries. This is a disaster on a different scale,” Mikula said.
Mikula added that one of the reasons regulators have not yet gotten involved in the dispute is because the banks involved have not failed, which would normally mean the FDIC would step in and fully compensate customers.
The FDIC and the Federal Reserve did not immediately return CNBC’s calls seeking comment.
caveat
Mr Buckler pleaded with the judge in the case, Martin Barasch, to help his affected customers, saying that while he had options other than locked accounts, others were not so lucky. stated in his testimony.
“Right now the federal government is not going to help us,” Buckler wrote, “and as you have heard, millions of people are affected and in even worse straits.”
In a phone interview Wednesday, Buckler said there was one thing he wanted to tell the American people. “I want the public to know that, yes, money in banks may be safe, but it’s not safe if fintechs and processors fail,” he said. “What if this is another FTX and they were cheating with my money?”
