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When Adam Moelis co-founder fintech startup called Yotta in 2019, he wanted to give Americans a new way to save money to help them cushion life’s ups and downs.
Instead, his company inadvertently became a source of deep pain for thousands of customers who relied on Yotta accounts to get paychecks, pay bills and save for emergencies.
The crisis began on May 11, when a dispute arose between two banking partners of Yotta, a fintech intermediary. Synapse and based in Tennessee Evoluv Bank and Trust — led to the blocking of the accounts of Yotta and at least two dozen other startups. Synapse stated bankruptcy earlier this year after several key clients left the firm over disagreements over tracking client funds.
Over the past three weeks, 85,000 Yotta customers with a combined $112 million in savings have been locked out of their accounts, Moelis told CNBC. The outage has upended lives, forced users to borrow money for food and cast doubt on upcoming events such as surgeries or weddings, he said.
“These stories are heartbreaking,” Moelis said. “We never imagined that something like this could happen. We have worked with banks that are members of the FDIC. We never imagined that such a scenario could materialize and that no regulator would step in and help.”
Boom and bust
The ongoing turmoil has exposed risks in an area of financial technology that rose to prominence during the venture capital boom – and will likely reverberate for years as regulators tighten their grip on the field.
The so-called banking-as-a-service model allowed consumer fintech companies to quickly launch savings accounts and debit services, with firms like Synapse acting as a bridge between the startups and the FDIC-backed banks that ultimately held the deposits.
The core of the dispute between Synapse and Evolve Bank revolves around a fundamental function of finance: maintaining accurate records of transactions and balances. Synapse and Evolve disagree about how much of Yotta’s funds are held by Evolve and how much is held by other banks Synapse has worked with.
Synapse did not respond to requests for comment, and Evolve accused Synapse in case of breakdown.
The Synapse bankruptcy mostly affected lesser-known consumer fintech firms, especially after larger fintech players, including Mercury And Dave left the Synapse platform last year.
As a result, Yotta, which encouraged users to save money through free weekly lottery draws, became one of the biggest companies hit. Accounts in a crypto firm Juno and in Copperwhich offered savings accounts to families and teenagers was also frozen.
Non-systemic crisis
Moelis, who has spoken with other fintech executives affected by the Synapse outage, estimates that at least 200,000 customer accounts with balances are frozen. Although Synapse has said in court papers that it has 10 million end users, it is likely that there are far fewer active accounts, Moelis said.
Adam Moelis, co-founder of Yotta Savings.
Best regards: Yotta
The fintech company’s co-founder said he believed the relatively limited scope of the problem and the fact that most of those affected were not wealthy gave regulators permission to let the situation play out. Last year, regulators quickly intervened in a regional banking crisis that threatened the uninsured deposits of startups and wealthy families, he said.
“In my opinion, if this were happening on a larger scale, I think the regulators would have done something by now,” he said. “We have real, everyday Americans who are not necessarily rich and don’t have the power to lobby, who are being influenced.”
The Federal Reserve and Federal Deposit Insurance Corporation declined to comment on the matter. Representatives of departments noted efforts they did this to encourage banks to manage the risks associated with using fintech partners.
“Money doesn’t just disappear”
But developments in the California bankruptcy court overseeing Synapse’s bankruptcy give Moelis hope that at least some relief – perhaps a partial release of funds – may be on the way.
Last week, former Federal Deposit Insurance Corporation (FDIC) Chairman Elena McWilliams was appointed trustee via Synapse. Her job is to develop a plan to maintain Synapse’s systems and create a solution “that will return funds to the end users, the rightful owners of those funds, as quickly as possible,” Judge Martin Barash said.
For his part, Moelis said he doesn’t support either Evolve or Synapse in their dispute – he just wants the situation to be resolved.
“I don’t know who is right and who is wrong,” he said. “We know how much money came into the system and we are confident that this is the correct figure. Money doesn’t just disappear, it has to be somewhere.”