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A dispute between a fintech startup and its banking partners may have trapped millions of Americans, leaving them without access to their money for nearly two weeks, according to recent court documents.
Since last year, Synapse, an Andreessen Horowitz-backed startup that acts as an intermediary between customer-facing fintech brands and FDIC-backed banks, has had disagreements with several of its partners over how much debt the company owes to customers.
The situation worsened in April after Synapse filed for bankruptcy following the departure of several key partners. On May 11, Synapse blocked access to a technology system that allowed lenders, including Evolve Bank & Trust, to process transactions and account information, the filings said.
This has left users of several fintech services unable to access their funds, according to testimony filed in a California bankruptcy court this week.
One customer, a Maryland teacher named Chris Buckler, said in a report filed May 21 that his funds were frozen at crypto app Juno due to the Synapse bankruptcy.
“I am increasingly desperate and don’t know where to turn,” Buckler wrote. “I have almost $38,000 tied up by stopping transaction processing. It took years to save this money.”
10 million “end users”
Until recently, Synapse, which bills itself as the largest “banking as a service” provider, helped much of the U.S. fintech universe provide services like checking accounts and debit cards. Previous partners have included Mercury, Dave and Juno, well-known fintech companies that serve segments such as startups, gig workers and crypto users.
Synapse had contracts with 20 banks and 100 fintech companies, resulting in about 10 million end users, according to an April filing from founder and CEO Sankaet Pathak.
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 said, in part: “Synapse’s abrupt shutdown of essential systems without notice and failure to provide necessary records placed end users at unnecessary risk.” by preventing us from verifying transactions, confirming end-user balances, and complying with applicable law.”
It is unclear why Synapse shut down the system, and no explanation could be found in the records.
‘We are scared’
Another customer, Joseph Dominguez of Sacramento, California, told the bankruptcy court on May 20 that more than $20,000 was withheld from his Yotta Fintech account.
“We are afraid that money will be lost if Synapse Evolve or Yotta cannot provide books and documents to prove that we are the rightful owners,” Dominguez wrote. “We don’t know where our direct deposit went, we don’t know where our pending withdrawals are currently being held.”
Freezing customer funds exposes the vulnerabilities of the Banking-as-a-Service or BAAS partnership model and a potential blind spot for regulatory oversight.
The BAAS model, most notably used by pre-IPO fintech firm Chime, allows Silicon Valley-style startups to leverage the capabilities of small, FDIC-backed banks. Together, the ecosystem helped these companies compete against the giants of American banking.
Regulators stay away
“Customers mistakenly believed that the funds were as safe and available as any other FDIC-insured accounts because the funds were ultimately held at real banks,” said Jason Mikula, a consultant and newsletter author who has followed this case closely.
“That’s more than 10 million people who can’t pay their mortgages and buy their food. … This is another disaster,” Mikula said.
Regulators have not yet taken a role in the dispute, in part because the banks involved have not failed – the point at which the FDIC would normally intervene to restore customers to health, Mikula added.
The FDIC and Federal Reserve did not immediately respond to CNBC’s calls for comment.
A warning
When he asked the judge in the case, Martin Barash, to help the affected customers, Buckler noted in his testimony that while he had other resources besides the blocked account, others were not so lucky.
“So far, the federal government has not been willing to help us,” Buckler wrote. “As you have heard, there are millions of sufferers who have it much worse.”
When reached by phone Wednesday, Buckler said he had a message for Americans: “I want to make people aware that your money may be safe at the bank, but it’s not safe if the fintech or the processor fails,” he said. “If this is another FTX, if they were to do weird business with my money, then what?”
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2024-05-22 22:18:41
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