Thousands of Americans see their savings disappear

For 15 years, former Texas schoolteacher Kayla Morris invested every dollar she could save on a house for her growing family.

When she and her husband sold the house last year, they stashed the proceeds, $282,153.87, in what they considered a safe place: a savings startup account Yotta had at a real bank.

Morris, like thousands of other customers, was caught up in the collapse of a behind-the-scenes financial technology company called Synapse and was locked out of her account for six months starting in November. He hoped his money was still safe. Then he learned how much Evolve Bank & Trust, the lender where they were supposed to keep his funds, was willing to pay him back.

“Last Monday we were informed that Evolve was only going to pay us $500 of that $280,000,” Morris said during a court hearing last week, his voice breaking. “It's just devastating.”

The crisis began in May when a dispute between Synapse and Evolve Bank over customer balances erupted and the fintech intermediary cut 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 connecting them with small lenders like Evolve.

Immediately after Synapse's bankruptcy, which came after an exodus of its fintech clients, a court-appointed receiver discovered that up to $96 million of client funds were missing.

The mystery of where those funds are has not been solved, despite six months of court-mediated efforts between the four banks involved. That's primarily because Synapse's estate, backed by Andreessen Horowitz, doesn't have the money to hire an outside firm to perform a full reconciliation of its accounting books, according to bankruptcy trustee Jelena McWilliams.

But what is now clear is that ordinary Americans like Morris are the hardest hit by that shortfall and will receive little or nothing from savings accounts. which they believed were backed by the full faith and credit of the United States government.

The losses demonstrate the risks of a system in which customers did not have direct relationships with banks, but instead depended on new companies to track their funds, which offloaded that responsibility to intermediaries like Synapse.

There are thousands of people like Morris. While there is still no full count of those left defrauded, at Yotta alone, 13,725 customers say they are being offered a combined total of $11.8 million despite having made $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 situation, people who are owed sums ranging from $7,000 to more than $200,000.

From FedEx drivers to small business owners, from teachers to dentists, they described losing years of savings after turning to fintechs like Yotta for the higher interest rates they offered, innovative features or because they were rejected by banks traditional.

A Yotta customer, Zach Jacobs, logged into Evolve's website on Nov. 4 and discovered he was getting back just $128.68 of the $94,468.92 he had deposited, and decided to take action.

The 37-year-old Tampa, Florida-based business owner began organizing with other victims online, creating a volunteer board for a group called Fight For Our Funds. Their hope is that they will attract the attention of the press and politicians.

So far, 3,454 people have signed up and claim they have lost a combined total of $30.4 million.

“When you tell people about this, it's like, 'There's no way this could happen,'” Jacobs said. “We just got robbed by a bank. This is the first reverse bank robbery in American history.”

Andrew Meloan, a chemical engineer from Chicago, said he hoped to see the return of $200,000 he had deposited with Yotta. Earlier this month, he received an unexpected PayPal shipment from Evolve for $5.

“When I signed up, they gave me an Evolve account and routing number,” Meloan said. “Now they say they only have five dollars of my money and the rest is somewhere else. I feel like I've been scammed.”

Unlike meme stocks or crypto betting, where the user naturally assumes some risk, most customers considered funds held in accounts backed by the Federal Deposit Insurance Corp. to be the safest place to keep their money. People relied on Synapse-powered accounts for everyday expenses, like buying groceries and paying rent, or to save for important life events, like home purchases or surgeries.

Several people interviewed by CNBC said signing up seemed like a good bet since Yotta and other fintechs announced that deposits were FDIC-insured through Evolve.

“They assured us this was just a savings account,” Morris said during last week's hearing. “We don't take risks, we're not gamblers.”

A Synapse contract that customers received after signing up for checking accounts stated that the user's money was FDIC insured 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 US regulators who have so far refused to act, they are left with few clear options to get their money back.

In June, the FDIC made clear that its insurance fund does not cover the bankruptcy of nonbank entities like Synapse, and that in the event of the bankruptcy of such a company, recovery of funds through the courts was not guaranteed.

The following month, the Federal Reserve said that as Evolve's top 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 safely and soundly and complies with applicable laws, including laws that protect consumers,” Fed General Counsel Mark E. Van Der Weide said in a statement. letter.

In September, the FDIC proposed a new rule that would require banks to keep detailed records of fintech app customers, improving the chances that they will qualify for coverage in a future calamity and reducing the risk that funds will be lost.

McWilliams, a former FDIC chair during Trump's first presidency, last week told the California judge handling the Synapse bankruptcy case that she was “disheartened” that all financial regulators had decided not to help.

The FDIC and Federal Reserve declined to comment for this story, and McWilliams did not respond to emails.

Things hadn't always seemed so dire. Early in the process, McWilliams suggested to Judge Martin Barash that the clients receive a partial payment, essentially spreading the pain among everyone.

But that would have required more coordination between Evolve and the other lenders holding customer funds than what ultimately happened.

As the hearings dragged on, the other three institutions, AMG National Trust, Lineage Bank and American Bank, began disbursing the funds they had, while it took Evolve months to complete what it initially said would be a comprehensive settlement.

When Evolve completed its efforts in October, it said it could only find out the user funds it had, not the location of the missing funds. This is due, at least in part, to “very large bulk transfers” of funds without identification of who owned the money, an attorney for Evolve testified last week.

As a result, the bankruptcy process has yielded relatively winners and losers.

Some end users recently received all of their funds, while others, like Indiana FedEx driver Natasha Craft, received none, she told CNBC.

As of Nov. 12, the four banks released $193 million to customers, or more than 85% of what they had at the beginning of the year.

The November 13 hearing was the only public venue for victims to express their anguish; Dozens of victims lined up hoping to testify and receive a small fraction of what they were owed. The event lasted more than three hours.

“You can't imagine the panic when they told me I was going to get 81 cents,” said Andreatte Caliguire, who said she was owed $22,000. “I have no money, I have no way forward, I have nothing.”

Evolve says that “the vast majority” of funds held by Yotta and other clients were moved to other banks in October and November 2023 at the direction of Synapse, according to an Evolve spokesperson.

“Where those end-user funds went is an important question, but unfortunately no Evolve can answer with the data it currently has,” the spokesperson said.

Yotta says Evolve has not provided the fintech companies or the administrator with information about how it determines payments, “despite acknowledging in court that a shortfall existed at Evolve before October 2023,” according to a spokesperson for the startup. , who noted that several executives have recently left the bank. “We hope regulators take notice and act.”

In statements released before this month's hearing, Evolve said other banks refused to participate in its efforts to create a ledger, while AMG and Lineage said Evolve's implication that they held the missing funds was “irresponsible and false.”

As banks and other parties hurl accusations at each other and lawsuits, including pending class-action lawsuits, pile up, the window for cooperation is rapidly closing, Barash said last week.

“As time goes on, my impression is that unless the banks involved can voluntarily fix this, it may not get fixed,” Barash said. “There is nothing optimistic in what I am telling you.”