How thousands of Americans got caught in fintech’s false promise and lost access to bank accounts

When
Natasha
Craft
first
got
a

Yotta
banking
account
in
2021,
she
loved
using
it
so
much
she
told
her
friends
to
sign
up.

The
app
made
saving
money
fun
and
easy,
and
Craft,
a
now
25-year-old

FedEx
driver
from
Mishawaka,
Indiana,
was
busy
getting
her
financial
life
in
order
and
planning
a
wedding.
Craft
had
her
wages
deposited
directly
into
a
Yotta
account
and
used
the
startup’s
debit
card
to
pay
for
all
her
expenses.

The
app
—
which
gamifies
personal
finance
with
weekly
sweepstakes
and
other
flashy
features
—
even
occasionally
covered
some
of
her
transactions.

“There
were
times
I
would
go
buy
something
and
get
that
purchase
for
free,”
Craft
told
CNBC.

Today,
her
entire
life
savings
—
$7,006
—
is
locked
up
in
a
complicated
dispute
playing
out
in
bankruptcy
court,
online
forums
like

Reddit
and
regulatory
channels.
And
Yotta,
an
array
of
other
startups
and
their
banks
have
been
caught
in
a
moment
of
reckoning
for
the
fintech
industry.

For
customers,
fintech
promised
the
best
of
both
worlds:
The
innovation,
ease
of
use
and
fun
of
the
newest
apps
combined
with
the
safety
of
government-backed
accounts
held
at
real
banks.

The
startups
prominently

displayed
protections
afforded
by
the
Federal
Deposit
Insurance
Corp.,
lending
credibility
to
their
novel
offerings.
After
all,
since
its
1934
inception,
no
depositor
“has
ever
lost
a
penny
of
FDIC-insured
deposits,”
according
to
the
agency’s

website.

But
the
widening

fallout
over
the
collapse
of
a
fintech
middleman
called
Synapse
has
revealed
that
promise
of
safety
as
a
mirage.

Starting
May
11,
more
than
100,000
Americans
with

$265
million
in
deposits
were
locked
out
of
their
accounts.
Roughly
85,000
of
those
customers
were
at
Yotta
alone,

according
to
the
startup’s
co-founder,
Adam
Moelis.

CNBC
reached
out
to
fintech
customers
whose
lives
have
been
upended
by
the
Synapse
debacle.

They
come
from
all
walks
and
stages
of
life,
from
Craft,
the
Indiana
FedEx
driver;
to
the
owner
of
a
chain
of
preschools
in
Oakland,
California;
a
talent
analyst
for


Disney
living
in
New
York
City;
and
a
computer
engineer
in
Santa
Barbara,
California.
A
high
school

teacher
in
Maryland.
A
parent
in
Bristol,
Connecticut,
who
opened
an
account
for
his
daughter.
A
social
worker
in
Seattle
saving
up
for
dental
work
after
Adderall
abuse
ruined
her
teeth.

Since
Yotta,
like
most
popular
fintech
apps,
wasn’t
itself
a
bank,
it
relied
on
partner
institutions
including
Tennessee-based

Evolve
Bank
&
Trust
to
offer
checking
accounts
and
debit
cards.
In
between
Yotta
and
Evolve
was
a
crucial
middleman,
Synapse,
keeping
track
of
balances
and
monitoring
fraud.

Founded
in
2014
by
a
first-time
entrepreneur
named

Sankaet
Pathak,
Synapse
was
a
player
in
the
“banking-as-a-service”
segment
alongside
companies
like
Unit
and

Synctera.
Synapse
helped
customer-facing
startups
like
Yotta
quickly
access
the
rails
of
the
regulated
banking
industry.

It
had
contracts
with
100
fintech
companies
and
10
million
end
users,
according
to
an
April
court
filing.

Until
recently,
the
BaaS
model
was
a
growth
engine
that
seemed
to
benefit
everybody.
Instead
of
spending
years
and
millions
of
dollars
trying
to
acquire
or
become
banks,
startups
got
quick
access
to
essential
services
they
needed
to
offer.
The
small
banks
that
catered
to
them
got
a
source
of
deposits
in
a
time
dominated
by
giants
like


JPMorgan
Chase.

But
in
May,
Synapse,
in
the
throes
of
bankruptcy,
turned
off
a
critical
system
that
Yotta’s
bank
used
to
process
transactions.
In
doing
so,
it
threw
thousands
of
Americans
into
financial
limbo,
and
a
growing
segment
of
the
fintech
industry
into
turmoil.

“There
is
a
reckoning
underway
that
involves
questions
about
the
banking-as-a-service
model,”
said

Michele
Alt,
a
former
lawyer
for
the
Office
of
the
Comptroller
of
the
Currency
and
a
current
partner
at
consulting
firm
Klaros
Group.
She
believes
the
Synapse
failure
will
prove
to
be
an
“aberration,”
she
added.

The
most
popular
finance
apps
in
the
country,
including


Block’s
Cash
App,


PayPal
and

Chime,
partner
with
banks
instead
of
owning
them.
They
account
for
60%
of
all
new
fintech
account
openings,
according
to
data
provider
Curinos.
Block
and
PayPal
are
publicly
traded;
Chime
is
expected
to
launch
an
IPO
next
year.

Block,
PayPal
and
Chime
didn’t
provide
comment
for
this
article.

While
industry
experts
say
those
firms
have
far
more
robust
ledgering
and
daily
reconciliation
abilities
than
Synapse,
they
may
still
be
riskier
than
direct
bank
relationships,
especially
for
those
relying
on
them
as
a
primary
account.

“If
it’s
your
spending
money,
you
need
to
be
dealing
directly
with
a
bank,”

Scott
Sanborn,
CEO
of


LendingClub,
told
CNBC.
“Otherwise,
how
do
you,
as
a
consumer,
know
if
the
conditions
are
met
to
get
FDIC
coverage?”

Sanborn
knows
both
sides
of
the
fintech
divide:
LendingClub
started
as
a
fintech
lender
that
partnered
with
banks
until
it

bought
Boston-based
Radius
in
early
2020
for
$185
million,
eventually
becoming
a
fully
regulated
bank.

Sanborn
said
acquiring
Radius
Bank
opened
his
eyes
to
the
risks
of
the
“banking-as-a-service”
space.
Regulators
focus
not
on
Synapse
and
other
middlemen,
but
on
the
banks
they
partner
with,
expecting
them
to
monitor
risks
and
prevent
fraud
and
money
laundering,
he
said.

But
many
of
the
tiny
banks
running
BaaS
businesses
like
Radius
simply
don’t
have
the
personnel
or
resources
to
do
the
job
properly,
Sanborn
said.
He
shuttered
most
of
the
lender’s
fintech
business
as
soon
as
he
could,
he
says.

“We
are
one
of
those
people
who
said,
‘Something
bad
is
going
to
happen,'”
Sanborn
said.

A
spokeswoman
for
the

Financial
Technology
Association,
a
Washington,
D.C.-based
trade
group
representing
large
players
including
Block,
PayPal
and
Chime,
said
in
a
statement
that
it
is
“inaccurate
to
claim
that
banks
are
the
only
trusted
actors
in
financial
services.”

“Consumers
and
small
businesses
trust
fintech
companies
to
better
meet
their
needs
and
provide
more
accessible,
affordable,
and
secure
services
than
incumbent
providers,”
the
spokeswoman
said.

“Established
fintech
companies
are
well-regulated
and
work
with
partner
banks
to
build
strong
compliance
programs
that
protect
consumer
funds,”
she
said.
Furthermore,
regulators
ought
to
take
a
“risk-based
approach”
to
supervising
fintech-bank
partnerships,
she
added.

The
implications
of
the
Synapse
disaster
may
be
far-reaching.
Regulators
have
already
been
moving
to
punish
the
banks
that
provide
services
to
fintechs,
and
that
will
undoubtedly
continue.
Evolve
itself
was

reprimanded by
the
Federal
Reserve
last
month
for
failing
to
properly
manage
its
fintech
partnerships.

In
a
post-Synapse
update,
the
FDIC
made
it

clear
that
the
failure
of
nonbanks
won’t
trigger
FDIC
insurance,
and
that
even
when
fintechs
partner
with
banks,
customers
may
not
have
their
deposits
covered.

The
FDIC’s
exact
language
about
whether
fintech
customers
are
eligible
for
coverage:
“The
short
answer
is:

it
depends.”

While
their
circumstances
all
differed
vastly,
each
of
the
customers
CNBC
spoke
to
for
this
story
had
one
thing
in
common:
They
thought
the
FDIC
backing
of
Evolve
meant
that
their
funds
were
safe.

“For
us,
it
just
felt
like
they
were
a
bank,”
the
Oakland
preschool
owner
said
of
her
fintech
provider,
a
tuition
processor
called

Curacubby.
“You’d
tell
them
what
to
bill,
they
bill
it.
They’d
communicate
with
parents,
and
we
get
the
money.”

The
62-year-old
business
owner,
who
asked
CNBC
to
withhold
her
name
because
she
didn’t
want
to
alarm
employees
and
parents
of
her
schools,
said
she’s
taken
out
loans
and
tapped
credit
lines
after
$236,287
in
tuition
was
frozen
in
May.

Now,
the
prospect
of
selling
her
business
and
retiring
in
a
few
years
seems
much
further
out.

“I’m
assuming
I
probably
won’t
see
that
money,”
she
said,
“And
if
I
do,
how
long
is
it
going
to
take?”

When
Rick
Davies,
a
46-year-old
lead
engineer
for
a
men’s
clothing
company
that
owns
online
brands
including

Taylor
Stitch,
signed
up
for
an
account
with
crypto
app

Juno,
he
says
he
“distinctly
remembers”
being
comforted
by
seeing
the
FDIC
logo
of
Evolve.

“It
was
front
and
center
on
their
website,”
Davies
said.
“They
made
it
clear
that
it
was
Evolve
doing
the
banking,
which
I
knew
as
a
fintech
provider.
The
whole
package
seemed
legit
to
me.”

He’s
now
had
roughly
$10,000
frozen
for
weeks,
and
says
he’s
become
enraged
that
the
FDIC
hasn’t
helped
customers
yet.

For
Davies,
the
situation
is
even
more
baffling
after
regulators
swiftly
took
action
to
seize

Silicon
Valley
Bank
last
year,
protecting
uninsured
depositors
including
tech
investors
and
wealthy
families
in
the
process.
His
employer
banked
with
SVB,
which
collapsed
after
clients
withdrew
deposits
en
masse,
so
he
saw
how
fast
action
by
regulators
can
head
off
distress.

“The
dichotomy
between
the
FDIC
stepping
in
extremely
quickly
for
San
Francisco-based
tech
companies
and
their
impotence
in
the
face
of
this
similar,
more
consumer-oriented
situation
is
infuriating,”
Davies
said.

The
key
difference
with
SVB
is
that
none
of
the
banks
linked
with
Synapse
have
failed,
and
because
of
that,
the
regulator
hasn’t
moved
to
help
impacted
users.

Consumers
can
be
forgiven
for
not
understanding
the
nuance
of
FDIC
protection,
said
Alt,
the
former
OCC
lawyer.

“What
consumers
understood
was,
‘This
is
as
safe
as
money
in
the
bank,'”
Alt
said.
“But
the
FDIC
insurance
isn’t
a
pot
of
money
to
generally
make
people
whole,
it
is
there
to
make
depositors
of
a
failed
bank
whole.”

For
the
customers
involved
in
the
Synapse
mess,
the
worst-case
scenario
is
playing
out.

While
some
customers
have
had
funds
released
in
recent
weeks,
most
are
still
waiting.
Those
later
in
line
may
never
see
a
full
payout:
There
is
a
shortfall
of
up
to

$96
million
in
funds
that
are
owed
to
customers,
according
to
the
court-appointed
bankruptcy
trustee.

That’s
because
of
Synapse’s
shoddy
ledgers
and
its
system
of
pooling
users’
money
across
a
network
of
banks
in
ways
that
make
it
difficult
to
reconstruct
who
is
owed
what,
according
to
court
filings.

The
situation
is
so
tangled
that

Jelena
McWilliams,
a
former
FDIC
chairman
now
acting
as
trustee
over
the
Synapse
bankruptcy,
has
said
that
finding
all
the
customer
money
may
be
impossible.

Despite
weeks
of
work,
there
appears
to
be
little
progress
toward
fixing
the
hardest
part
of
the
Synapse
mess:
Users
whose
funds
were
pooled
in
“for
benefit
of,”
or
FBO,
accounts.
The
technique
has
been
used
by
brokerages
for
decades
to
give
wealth
management
customers
FDIC
coverage
on
their
cash,
but
its
use
in
fintech
is
more
novel.

“If
it’s
in
an
FBO
account,
you
don’t
even
know
who
the
end
customer
is,
you
just
have
this
giant
account,”
said
LendingClub’s
Sanborn.
“You’re
trusting
the
fintech
to
do
the
work.”

While
McWilliams
has
floated
a

partial
payment
to
end
users
weeks
ago,
an
idea
that
has
support
from
Yotta
co-founder
Moelis
and
others,
that
hasn’t
happened
yet.
Getting
consensus
from
the
banks
has
proven
difficult,
and
the
bankruptcy
judge
has
openly
mused
about
which
regulator
or
body
of
government
can
force
them
to
act.

The
case
is
“uncharted
territory,”
Judge

Martin
Barash
said,
and
because
depositors’
funds
aren’t
the
property
of
the
Synapse
estate,
Barash
said
it
wasn’t
clear
what
his
court
could
do.

Evolve
has
said
in

filings
that
it
has
“great
pause”
about
making
any
payments
until
a
full
reconciliation
happens.
It
has
further
said
that
Synapse
ledgers
show
that
nearly
all
of
the
deposits
held
for
Yotta

were
missing,
while
Synapse
has
said
that
Evolve
holds
the
funds.

“I
don’t
know
who’s
right
or
who’s
wrong,”
Moelis

told
CNBC.
“We
know
how
much
money
came
into
the
system,
and
we
are
certain
that
that’s
the
correct
number.
The
money
doesn’t
just
disappear;
it
has
to
be
somewhere.”

In
the
meantime,
the
former
Synapse
CEO
and
Evolve
have
had
an
eventful
few
weeks.

Pathak,
who
dialed
into
early
bankruptcy
hearings
while
in
Santorini,
Greece,
has
since
been
attempting
to
raise
funds
for
a
new
robotics
startup,
using
marketing
materials
with

misleading
claims
about
its
ties
with
automaker


General
Motors.

And
only
days
after
being

censured
by
the
Federal
Reserve
about
its
management
of
technology
partners,
Evolve
was

attacked
by
Russian
hackers
who
posted
user
data
from
an
array
of
fintech
firms,
including
Social
Security
numbers,
to
a
dark
web
forum
for
criminals.

For
customers,
it’s
mostly
been
a
waiting
game.

Craft,
the
Indiana
FexEx
driver,
said
she
had
to
borrow
money
from
her
mother
and
grandmother
for
expenses.
She
worries
about
how
she’ll
pay
for
catering
at
her
upcoming
wedding.

“We
were
led
to
believe
that
our
money
was
FDIC-insured
at
Yotta,
as
it
was
plastered
all
over
the
website,”
Craft
said.
“Finding
out
that
what
FDIC
really
means,
that
was
the
biggest
punch
to
the
gut.”

She
now
has
an
account
at

Chase,
the
largest
and
most
profitable
American
bank
in
history.

—

With
contributions
from
CNBC’s
Gabriel
Cortes.