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When Adam Moelis co-founded a fintech startup called Yotta in 2019, he wanted to give Americans a new way to save money to cushion the ups and downs of life.
Instead, his company inadvertently caused great distress to thousands of customers who relied on Yotta accounts to receive paychecks, pay bills and save for emergencies.
The crisis began on May 11, when a dispute between two of Yotta’s banking partners — fintech middleman Synapse and Tennessee-based Evolve Bank & Trust — led to the suspension of accounts at Yotta and at least two dozen other startups. Synapse filed for bankruptcy earlier this year after several key customers left the company due to disagreements over tracking customer funds.
In the last three weeks, 85,000 Yotta customers were locked out of their accounts with a total savings of $112 million, Moelis told CNBC. The disruption has upended lives, forced users to borrow money for groceries and thrown upcoming events such as surgeries or weddings into question, he said.
“The stories are heartbreaking,” Moelis said. “We never thought something like this could happen. We have worked with banks that are members of the FDIC. We never imagined that such a scenario could occur and that no regulator would step in and help.”
Boom & bust
The ongoing chaos has laid bare the risks in a corner of the fintech industry that has gained prominence during a boom in venture investing – and is likely to linger for years to come as regulators tighten scrutiny of the area.
The so-called “banking as a service” model 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 held deposits.
The heart of the dispute between Synapse and Evolve Bank concerns a fundamental function of finance: keeping accurate records of transactions and balances. Synapse and Evolve disagree about how much of Yotta’s funds are held at Evolve and how much at other banks that Synapse has worked with.
Synapse did not respond to requests for comment and Evolve has blamed Synapse for the collapse.
The Synapse bankruptcy has particularly affected lesser-known consumer fintech firms, especially after larger fintech companies like Mercury and Dave fled the Synapse platform last year.
This makes Yotta one of the largest affected companies, which encouraged its users to save money with free weekly lottery competitions. Accounts at crypto firm Juno and Copper, which offered savings accounts for families and young people, were also frozen.
Nonsystemic collapse
Moelis, who has been in contact with other fintech principals affected by the Synapse outage, estimates that a total of at least 200,000 customer accounts with funds are suspended. While Synapse has said in court filings that it has 10 million end users, it is likely that active accounts are far smaller, Moelis said.
Adam Moelis, co-founder of Yotta Savings.
Courtesy: Yotta
The fintech co-founder said he believes the relatively limited scale of the problem and the fact that most of those affected are not wealthy gave regulators permission to let the situation continue. Last year, regulators quickly intervened in the regional banking crisis that threatened uninsured deposits of startups and wealthy families, he noted.
“If this had happened on a larger scale, I think regulators would have done something by now,” he said. “We have real, everyday Americans who aren’t necessarily wealthy and don’t have the ability to lobby who are affected.”
The Federal Reserve and the Federal Deposit Insurance Corp. have declined to comment on the issue. Agency officials noted their efforts to encourage banks to manage the risks of using fintech partners.
“Money doesn’t just disappear”
But developments in the California bankruptcy court overseeing the Synapse failure give Moelis hope that at least some relief — perhaps a partial release of funds — could be coming.
Last week, former FDIC Chair Jelena McWilliams was named a trustee of Synapse. Their task is to develop a plan to maintain Synapse systems and develop a solution “that allows funds to be returned to end users, i.e. the rightful owners of those funds, as quickly as possible,” said Judge Martin Barash.
For his part, Moelis said he is neither on Evolve nor Synapse’s side in their dispute – he just wants the situation resolved.
“I don’t know who’s right or wrong,” he said. “We know how much money has gone into the system and we are sure that is the right number. The money doesn’t just disappear, it has to be somewhere.”
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2024-06-01 12:00:01
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