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When Adam Morris co-founded the fintech startup Yotta in 2019, he wanted to give Americans a new way to save to help ease life’s ups and downs.
Instead, his company unintentionally caused deep pain to thousands of customers who used Yotta accounts to receive their paychecks, pay bills, and save for emergencies.
The crisis began on May 11, when a dispute between two of Yotta’s banking partners, fintech intermediary Synapse and Tennessee-based Evolve Bank & Trust, led to the freezing of accounts for Yotta and at least two dozen startups. Synapse declared bankruptcy earlier this year after several major clients abandoned the company following disagreements over the tracking of customer funds.
Morris told CNBC that over the past three weeks, 85,000 Yotta customers with a combined savings of $112 million have lost access to their accounts. The disruption has upended lives, forcing users into debt for food and jeopardizing plans for things like surgery and weddings, he said.
“This story is heartbreaking,” Moelis said. “We never expected something like this to happen. We worked with FDIC-member banks. We never expected something like this to happen, and we never expected regulators to step in and help us.”
Boom and bust
The ongoing turmoil has exposed risks in a corner of fintech that rose to prominence amid a venture-investment boom, and the repercussions are likely to be felt for years to come as regulators step up scrutiny of the sector.
The so-called “banking as a service” model has allowed consumer fintech companies to quickly launch savings accounts and debit services, with companies like Synapse acting as a bridge between the startups and the FDIC-backed banks that ultimately hold the deposits.
The crux of the dispute between Synapse and Evolve Bank revolves around a fundamental function in finance: keeping an accurate ledger of transactions and balances. Synapse and Evolve don’t agree on how much of Yotta’s funds are held by Evolve and how much is held by other banks with which Synapse has partnerships.
Synapse did not respond to a request for comment, but Evolve holds Synapse responsible for the outage.
Synapse’s bankruptcy is Mercury and Dave I fled the Synapse platform in the past year.
Yotta, which encouraged users to save by offering free weekly lottery-style prizes, was one of the biggest companies to be affected. Cryptocurrency companies Juno and Copper, which offered savings accounts for families and teenagers, also had their accounts frozen.
Unsystematic meltdown
Morris, who has been in contact with executives at other fintech companies affected by Synapse’s collapse, estimates that at least 200,000 customer accounts with balances have been locked in total. Synapse has said in court filings that it has 10 million end users, but Morris said the number of active accounts is likely far less.
Adam Moelis, co-founder of Yotta Savings;
Provided by: Yotta
The fintech co-founder said he believes the relatively limited scope of the problem and the fact that most of those affected aren’t wealthy have allowed regulators to let it slide. He noted that regulators stepped in quickly last year to tackle a regional banking crisis that threatened uninsured deposits held by startups and the wealthy.
“My feeling is that if this was happening on a much larger scale, regulators would have done something by now,” he said. “The people affected are real, everyday Americans who are not necessarily wealthy or who don’t have the ability to lobby.”
The Federal Reserve and the Federal Deposit Insurance Corp. declined to comment on the matter. Representatives from both agencies pointed to efforts to encourage banks to manage the risks of using fintech partners.
“Money doesn’t disappear”
But developments in the California bankruptcy court overseeing Synapse’s collapse give Moelis hope that there may be at least some relief, possibly a return of some of his funds.
Last week, former FDIC chair Jelena McWilliams was appointed receiver for Synapse. Her job will be to develop a plan to keep Synapse’s system afloat and come up with a solution “that will return funds as expeditiously as possible to the end users, the rightful owners of those funds,” Judge Martin Barash said.
Meanwhile, Morris said he is not taking sides with either Evolve or Synapse in the dispute and just wants the situation to be resolved.
“I don’t know who’s right and who’s wrong,” he said. “We know how much money went into the system and we’re confident that’s the right number. The money doesn’t just disappear, it’s there somewhere.”
