(2024-11-22) I Have No Money; Thousands Of Americans See Their Savings Vanish In Synapse Fintech Crisis

'I have no money': Thousands of Americans see their savings vanish in Synapse fintech crisis. 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 — an account at the savings startup Yotta held at a real bank

The crisis started 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 Synapse's bankruptcy, which happened after an exodus of its fintech clients, a court-appointed trustee found that up to $96 million of customer funds was missing. The mystery of where those funds are hasn't been solved, despite six months of court-mediated efforts between the four banks involved. That's mostly because the estate of Andreessen Horowitz-backed Synapse doesn't have the money to hire an outside firm to perform a full reconciliation of its ledgers, according to Jelena McWilliams, the bankruptcy trustee.

While there's 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 CEO Adam Moelis.

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.

In June, the FDIC made it clear that its insurance fund doesn't cover the failure of nonbanks like Synapse, and that in the event of such a firm's failure, recovering funds through the courts wasn't guaranteed.

Some end users recently received all their funds back, while others, like Indiana FedEx driver Natasha Craft, received none, she told CNBC.

As of Nov. 12, the four banks released $193 million to customers, or more than 85% of what they held earlier in the year.

*Evolve says that "the vast majority" 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.

"Where those end user funds went after that is an important question, but unfortunately not one Evolve can answer with the data it currently has," the spokesman said.*

In statements released ahead of this month's hearing, Evolve said that other banks refused to participate in its efforts to create a master ledger, while AMG and Lineage said that Evolve's implication that they had the missing funds was "irresponsible and disingenuous."

Matt Levine: Synapse Still Can’t Find Its Money.

When you deposit money at a bank, you expect the bank to give it back to you. There are two things you might worry about, two sets of risks that might prevent the bank from giving you back your money. One, which we talk about a lot around here, and which is pretty central to the history and theory of banking and bank regulation, is that the bank might lose the money.

The other risk, which we talk about less, and which is sort of less intellectually interesting, is that the bank might lose track of the money.

This risk is also heavily regulated, though you hear about it less. That regulation is just less controversial.

with keeping track of the money, there are fewer trade-offs. Banks should entirely keep track of the money. Nobody is lobbying for “actually bank ledgers should be a bit more loosey-goosey.” The proper amount of losing track of the money is none.

I have never really understood the Synapse situation, but in my defense Synapse doesn’t understand it either.

Essentially, Synapse was a financial technology company connecting other fintechs to banks. If you put money into a fintech like Yotta, Yotta put the money in a real bank like Evolve, which held the money for you and which is FDIC-insured. But Synapse sat between Yotta and the bank and kept track of the money. Or didn’t. From an October report on the Troutman Pepper Financial Services website

Synapse functioned as a middleware provider between banks and fintechs. Synapse was a pioneer in what came to be known as “banking-as-a-service” (BaaS). In this role, Synapse opened accounts on behalf of approximately 100 fintech companies (and millions of end users) at four different partner banks.

None of the partner banks maintained a copy of Synapse’s account ledger. As a result, the partner banks and fintechs were all reliant on Synapse to determine how much each customer was owed at all times.

On April 22, 2024, Synapse filed for Chapter 11 bankruptcy. On May 11, the partner banks lost access to the records maintained by Synapse and were unable to determine which end-users rightfully should be able to withdraw their funds.

Synapse essentially told the world that only it would know where the money is. This ability to segment and distribute services across multiple banks meant that keeping each partner bank in the dark about what fraction of the whole deposit base the bank held was not an accident — it was part of the strategy.