The Daily Populous Saturday November 23rd, 2024 evening edition
Authored by cnbc.com and submitted by leeta0028

For 15 years, former Texas schoolteacher 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 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. Morris, like thousands of other customers, was snared in the collapse of a behind-the-scenes fintech firm called Synapse and has been locked out of her account for six months as of November. She held out hope that her money was still secure. Then she learned how much Evolve Bank & Trust, the lender where her funds were supposed to be held, was prepared to return to her. "We were informed last Monday that Evolve was only going to pay us $500 out of that $280,000," Morris said during a court hearing last week, her voice wavering. "It's just devastating." 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. But what is now clear is that regular Americans like Morris are bearing the brunt of that shortfall and will receive little or nothing from savings accounts that they believed were backed by the full faith and credit of the U.S. government. The losses demonstrate the risks of a system where customers didn't have direct relationships with banks, instead relying on startups to keep track of their funds, who offloaded that responsibility onto middlemen like Synapse.

Zach Jacobs, 37, of Tampa, Florida helped form a group called Fight For Our Funds after losing more than $94,000 that he had in a fintech savings account called Yotta. Courtesy: Zach Jacobs

There are thousands of others like Morris. 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. CNBC spoke to a dozen customers caught in this predicament, people who are owed sums ranging from $7,000 to well over $200,000. From FedEx drivers to small business owners, teachers to dentists, they described the loss of years of savings after turning to fintechs like Yotta for the higher interest rates on offer, for innovative features or because they were turned away from traditional banks. One Yotta customer, Zach Jacobs, logged onto Evolve's website on Nov. 4 to find he was getting back just $128.68 of the $94,468.92 he had deposited — and he decided to act.

Zoom In Icon Arrows pointing outwards Zach Jacobs decided to act after logging onto Evolve’s website on Nov. 4 to find he was getting just $128.68 of his $94,468.92 in deposits. Courtesy: Zach Jacobs

The 37-year-old Tampa, Florida-based business owner began organizing with other victims online, creating a board of volunteers for a group called Fight For Our Funds. It's his hope that they gain attention from press and politicians. So far, 3,454 people have signed on, saying they've lost a combined $30.4 million. "When you tell people about this, it's like, 'There's no way this can happen,'" Jacobs said. "A bank just robbed us. This is the first reverse bank robbery in the history of America." Andrew Meloan, a chemical engineer from Chicago, said he had hoped to see the return of $200,000 he'd deposited with Yotta. Early this month, he received an unexpected PayPal remittance from Evolve for $5. "When I signed up, they gave me an Evolve routing and account number," Meloan said. "Now they're saying they only have $5 of my money, and the rest is someplace else. I feel like I've been conned."

A bank just robbed us. This is the first reverse bank robbery in the history of America.” Zach Jacobs Yotta customer

Unlike meme stocks or crypto bets, in which the user naturally assumes some risk, most customers viewed funds held in Federal Deposit Insurance Corp.-backed accounts as the safest place to keep their money. People relied on accounts powered by Synapse for everyday expenses like buying groceries and paying rent, or for saving for major life events like home purchases or surgeries. 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. "We were assured that this was just a savings account," Morris said during last week's hearing. "We are not risk-takers, we're not gamblers." A Synapse contract that customers received after signing up for checking accounts stated that user money was insured by the FDIC for 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 contract states.

Abandoned by U.S. regulators who have so far declined to act, they are left with few clear options to recoup their money. 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. The next 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 are responsible for working to ensure that the bank operates in a safe and sound manner and complies with applicable laws, including laws protecting 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 for customers of fintech apps, improving the chances that they qualify for coverage in a future calamity and cutting the risk that funds would go missing. McWilliams, herself a former FDIC chair during the first Trump presidency, told the California judge handling the Synapse bankruptcy case last week she was "disheartened" that every financial regulator has decided not to help. The FDIC and Fed declined to comment for this story, and McWilliams didn't respond to emails.

Jelena McWilliams, chairman of the Federal Deposit Insurance Corporation, testifies during a House Financial Services Committee hearing in Rayburn Building titled "Oversight of Prudential Regulators: Ensuring the Safety, Soundness and Accountability of Megabanks and Other Depository Institutions," on Thursday, May 16, 2019. Tom Williams | CQ-Roll Call, Inc. | Getty Images

Things hadn't always seemed so dire. Early in the proceedings, McWilliams suggested to Judge Martin Barash that customers be given a partial payment, essentially spreading the pain among everyone. But that would've required more coordination between Evolve and the other lenders that held customer funds than what ultimately happened. As the hearings dragged on, the three other institutions, AMG National Trust, Lineage Bank and American Bank, began disbursing the funds they had, while Evolve took months to perform what it initially said would be a comprehensive reconciliation. Around the time Evolve completed its efforts in October, it said it could only figure out the user funds it held, not the location of the missing funds. That's at least partly because of "very large bulk transfers" of funds without identification of who owned the money, a lawyer for Evolve testified last week. As a result, the bankruptcy process has minted relative winners and losers. Some end users recently received all their funds back, while others, like Indiana FedEx driver Natasha Craft, received none, she told CNBC.

Natasha Craft, a 25-year-old FedEx driver from Mishawaka, Indiana. She has been locked out of her Yotta banking account since May 11. Courtesy: Natasha Craft

As of Nov. 12, the four banks released $193 million to customers, or more than 85% of what they held earlier in the year. The Nov. 13 hearing has provided the only public venue for victims to register their distress; dozens of victims queued up in the hopes they could testify about receiving a tiny fraction of what they're owed. The event went longer than three hours. "You can't imagine the panic when it said I was getting 81 cents," said Andreatte Caliguire, who said she is owed $22,000. "I have no money, I have no path forward, I have nothing."

cambreecanon on November 23rd, 2024 at 12:02 UTC »

So, there was a planet money episode on this and it explains the situation really well.

What the collapse of one fintech company tells us about bank regulations : Planet Money https://www.npr.org/2024/08/16/1197961372/fintech-banking-as-a-service-yotta-synapse-evolve

MasterCrab on November 23rd, 2024 at 10:18 UTC »

I remember watching a cofeezilla video about this and Yotta a few months back. Pretty sad to see that there hasn't been any meaningful progress for the victims.

cdbriggs on November 23rd, 2024 at 08:39 UTC »

being offered only $500 out of the $280,000 you had is wild