For 15 years, former Texas school teacher Kayla Morris put every dollar she could save into a home for her growing family.
When she and her husband sold the house last year, they kept the proceeds, $282,153.87, in what they thought was a safe place – an account when Savings Yotta started it was held at a real bank.
Morris, like thousands of other customers, was caught up in the collapse of behind-the-scenes fintech company Synapse and was locked out of his account for six months from November. He was confident that his money was still safe. Then he learned how much Evolve Bank & Trust, the lender to whom the money was owed, was willing to go back to him.
“We were informed last Monday that Evolve would only give us $500 out of the $280,000,” Morris said during a court hearing last week, his voice shaking. “It’s just destructive.”
The crisis began in May when a dispute between Synapse and Evolve Bank over customer balances erupted and the fintech middleman disabled access to a key system used to process transactions. Synapse has helped fintech startups like Yotta and Juno, which are not banks, offer checking accounts and debit cards by connecting them with smaller lenders like Evolve.
In the wake of Synapse’s bankruptcy filing, which occurred after the exit of its fintech clients, a court-appointed panel found that approximately $96 million in client funds were missing.
The mystery of the whereabouts of the money has not been solved, despite six months of court efforts between the four banks involved. That’s because Andreessen Horowitz-backed Synapse doesn’t have the money to hire an outside firm to do a full reconciliation of its accounts, according to Jelena McWilliams, a bankruptcy attorney.
But what has become clear is that ordinary Americans like Morris are bearing the brunt of the deficit and will receive little or nothing from savings accounts.which they believed they had the full faith and trust of the US government.
The loss shows the risk of a system where customers had no direct relationship with the banks, instead relying on the first to save their money, who put that responsibility on middlemen like Synapse.
There are thousands of others like Morris. Although the number of those who remained unchanged is not yet complete, at Yotta alone, 13,725 customers say they are being offered $10,880 despite having put $67 million in deposits, according to figures shared by Yotta co-founder and CEO Adam Moelis.
CNBC spoke to 12 consumers who were caught in the crisis, people with debts ranging from $7,000 to $200,000.
From FedEx drivers to small business owners, teachers to dentists, they explained the loss of years of savings after turning to fintechs like Yotta for high interest rates when offered, for new products or because they were kicked out of traditional banks.
Zach Jacobs, 37, of Tampa, Fla., helped form a group called Fight for Our Money after losing more than $94.00 in a fintech savings account called Yotta.
Another Yotta customer, Zach Jacobs, logged onto Evolve’s website on November 4 to find he was only getting $128.
The 37-year-old Tampa, Florida business owner began organizing with other victims online, creating a volunteer board for a group called Fight For Our Funds. It is his hope that they get attention from the press and politicians.
So far, 3,452 people have signed up, saying they have lost 34 million dollars.
“When you tell people about this, it’s like, ‘There’s no way this is going to happen,'” Jacobs said. “The knife just robbed us. This is the first bank robbery in American history. “
Zach Jacobs decided to do something after visiting the Evolve website on Nov.
Andrew Meloan, a chemical engineer from Chicago, said he expected to see a return on the $200,000 he had invested in Yotta. Earlier this month, he received an unexpected PayPal payment from Evolve for $5.
“When I signed up, they gave me the Evolve method and account number,” Meloan said. “Now they are saying they only have $5 of my money, the rest is somewhere else. I feel like I’ve been raped.”
Unlike meme stocks or crypto bets, in which the user usually takes some risk, many consumers saw money saved in Federal Deposit Insurance Corp.-backed accounts as a safe place to keep their money. People relied on accounts managed by Synapse for everyday expenses like buying groceries and paying rent, or saving for major life events like buying a house or having surgery.
Several people CNBC interviewed said the signing seemed like a good bet since Yotta and other fintechs advertised that deposits were FDIC-insured through Evolve.
“We were assured that this was just a savings account,” Morris said during a hearing last week. “We are not people who take risks, we are not gamblers.”
The Synapse contract that customers received after signing up for checking accounts stated that the user’s money was insured by the FDIC up to $250,000, according to a version seen by CNBC.
“According to the FDIC, no depositor has ever lost a penny of FDIC-insured funds,” the 26-page agreement states.
Abandoned by US diplomats who have so far refused to act, they are left with few clear options to get their money back.
In June, the FDIC clarified that its insurance fund does not cover the failure of non-banks like Synapse, and that if the company fails, recovery through the courts is not guaranteed.
The following month, the Federal Reserve said that as Evolve’s primary federal regulator it would monitor the bank’s progress in “returning all customer funds” to users.
“We have a duty to work to ensure that the bank operates in a safe manner and complies with applicable laws, including laws that protect consumers,” Fed general counsel Mark E. Van Der Weide said in a letter.
In September, the FDIC proposed a new rule that would force banks to keep detailed records of customers of fintech applications, improving the chances that they qualify for coverage in the event of a disaster and cutting the risk that funds go missing.
Jelena McWilliams, former Chairman of the Federal Deposit Insurance Corporation, speaks at the Milken Institute Global Conference on May 2, 2023.
McWilliams, a former FDIC chairman during Trump’s first administration, told a California judge handling the Synapse bankruptcy case last week that he was “disappointed” that the entire financial regulator had decided not to help.
The FDIC and the Fed declined to comment on the matter, and McWilliams did not respond to emails.
Things had never seemed so difficult. At the beginning of the case, McWilliams recommended to Judge Martin Barash that the clients should be given compensation, thus spreading the pain among everyone.
But that would require more coordination between Evolve and the other lenders that handled the consumer’s money than it did.
As the court proceedings continued, three other institutions namely AMG National Trust, Lineage Bank and American Bank, began withdrawing the money they had, while Evolve took a month to do what it had said it would do.
Around the time Evolve ended its testing in October, it said it was only able to see the user’s money it handled, not the amount of money that didn’t exist. This is due to the “massive movement” of money without identifying the owner of the money, Evolve’s lawyer testified last week.
As a result, the bankruptcy process has created relative winners and losers.
Some end users recently received all of their money back, while others, like Indiana FedEx driver Natasha Craft, have not, she told CNBC.
Natasha Craft, a 25-year-old FedEx driver from Mishawaka, Ind. His Yotta bank account has been frozen since May 11.
Evolve says that a “substantial” amount of money held by Yotta and other customers was transferred to other banks in October and November 2023 via Synapse, according to an Evolve spokesperson.
“Where the end users’ money went is an important question, but unfortunately not one Evolve can answer with the data it currently has,” the spokesperson said.
Yotta says Evolve has given fintech firms and the trustee has no idea how it plans to pay, “despite admitting in court that there was a deficit at Evolve before October 2023,” according to the first spokesperson, who noted that the directors said they had just left the bank. “We hope the judges take notice and act.”
In a statement released before this month’s hearing, Evolve said other banks declined to participate in the bankruptcy effort, while AMG and Lineage said Evolve’s claim that they had missing funds was “irrelevant and false.”
As banks and other parties accuse each other and lawsuits mount, including pending class action efforts, the window for cooperation is closing quickly, Barash said last week.
“In the long run, my view is that unless the banks involved are able to resolve this voluntarily, it may not be resolved,” said Barash. “I have no confidence in what I’m telling you.”
This article was originally published on NBCNews.com
