Clients say they cannot access funds

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A dispute between a financial technology startup and its banking partners has potentially ensnared 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 serves as a middleman between customer-facing fintech brands and FDIC-backed banks, has had disagreements with several of its partners over how much it owes on customer balances. customers.

The situation deteriorated in April after Synapse filed for bankruptcy following the exodus of several key partners. On May 11, Synapse cut off access to a technology system that allowed lenders, including Evolve Bank & Trust, to process transactions and account information, according to the documents.

This has left users of several fintech services stranded without access to their funds, according to testimony filed this week in a California bankruptcy court.

One customer, a Maryland teacher named Chris Buckler, said in a May 21 filing that his funds in the Juno cryptocurrency app were blocked due to Synapse's bankruptcy.

“I'm getting more and more desperate and don't know who to turn to,” Bucker wrote. “I have almost $38,000 tied up as a result of the transaction processing disruption. It took me years to save this money.”

10 million 'end users'

Until recently, Synapse, which calls itself the largest “banking-as-a-service” provider, helped a wide swath of the American fintech universe provide services like checking accounts and debit cards. His former partners included Mercury, David and Juno, renowned fintech companies that serve segments including startups, freelancers, and cryptocurrency users.

Synapse had contracts with 20 banks and 100 fintechs, resulting in around 10 million end users, according to an April document from founder and CEO Sankaet Pathak.

Pathak did not immediately respond to an email seeking comment. An Evolve spokesperson declined to comment, instead pointing to a statement on the bank's website that read, in part:

“Synapse's abrupt shutdown of essential systems without prior notice and failure to provide necessary records unnecessarily endangered end users by hindering our ability to verify transactions, confirm end user balances, and comply with applicable law.” said the bank.

It is unclear why Synapse shut down the system and no explanation could be found in the docs.

'We are scared'

Another client, Joseph Dominguez of Sacramento, California, told the bankruptcy court on May 20 that he had more than $20,000 held in his Yotta fintech account.

“We are afraid of losing money if Synapse cannot provide accounting books and documents to Evolve or Yotta to prove that we are the rightful owners,” Dominguez wrote. “We don't know where our direct deposit has gone, we don't know where our pending withdrawals currently are.”

Freezing customer funds exposes vulnerabilities in the banking partnership as a service, or BAAS, model and a potential blind spot for regulatory oversight.

The BAAS model, most notably used by fintech company Chime before its IPO, allows Silicon Valley-style startups to leverage the capabilities of small, FDIC-backed banks. Together, the ecosystem helped these companies compete against American banking giants.

Regulators stay away

Customers mistakenly believed that because the funds were ultimately held in real banks, they were as safe and available as any other FDIC-insured account, said Jason Mikula, a consultant and newsletter writer who has followed this case closely.

“This is more than 10 million people who can't pay their mortgages, can't buy their food… This is another kind of disaster,” Mikula said.

Regulators have yet to take a role in the dispute, in part because the underlying banks involved have not failed, a point at which the FDIC would normally step in to compensate customers, Mikula added.

The FDIC and Federal Reserve did not immediately return calls seeking comment.

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In pleading with the judge in this case, Martin Barash, to help affected clients, Buckler noted in his testimony that while he had other resources besides the frozen account, others were not so lucky.

“So far the federal government is unwilling to help us,” Buckler wrote. “As you may have heard, there are millions of people affected who are in a much worse situation.”

Reached by phone Wednesday, Buckler said he had a message for Americans:

“I want to make people aware: yes, your money can be safe in the bank, but it is not safe if the fintech or the processor fails,” he said. “If this is another FTX, if they were doing strange deals with my money, then what?”

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