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A dispute between a fintech startup and its banking partners has ensnared potentially thousands and thousands of Americans, leaving them without access to their money for nearly two weeks, based on recent court documents.
Since last 12 months, Synapse, an Andreessen Horowitz-backed startup that serves as a middle man between customer-facing fintech brands and FDIC-backed banks, has had disagreements with several of its partners about how much in customer balances it owed.
The situation deteriorated in April after Synapse declared bankruptcy following the exodus of several key partners. On May 11, Synapse cut off access to a technology system that enabled lenders, including Evolve Bank & Trust, to process transactions and account information, based on the filings.
That has left users of several fintech services stranded with no access to their funds, based on testimonials 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 at crypto app Juno were locked due to the Synapse bankruptcy.
“I’m increasingly desperate and do not know where to show,” Buckler wrote. “I even have nearly $38,000 tied up consequently of the halting of transaction processing. This money took years to save lots of up.”
10 million ‘end users’
Until recently, Synapse, which calls itself the largest “banking as a service” provider, helped a large swath of the U.S. fintech universe provide services comparable to checking accounts and debit cards. Former partners included Mercury, Dave and Juno, well-known fintech firms that catered to segments including startups, gig employees and crypto users.
Synapse had contracts with 20 banks and 100 fintech firms, leading to about 10 million end users, based on an April filing from founder and CEO Sankaet Pathak.
Pathak didn’t immediately reply to an email from CNBC searching for comment. A spokesman for Evolve Bank & Trust declined to comment, as a substitute pointing to a statement on the bank’s website that read, partly: “Synapse’s abrupt shutdown of essential systems without warning and failure to supply essential records needlessly jeopardized end users by hindering our ability to confirm transactions, confirm end user balances, and comply with applicable law.”
It’s unclear why Synapse switched the system off, and an evidence couldn’t be present in filings.
‘We’re scared’
One other customer, Joseph Dominguez of Sacramento, California, told the bankruptcy court on May 20 that he had greater than $20,000 held up in his Yotta fintech account.
“We’re scared that cash will probably be lost if Synapse can’t provide ledgers and documents to Evolve or Yotta to prove we’re the legitimate owners,” Dominguez wrote. “We do not know where our direct deposit has gone, we do not know where our pending withdrawals are currently held.”
The freeze-up of customer funds exposes the vulnerabilities within the banking as a service, or BAAS, partnership model and a possible blind spot for regulatory oversight.
The BAAS model, used most notably by the pre-IPO fintech firm Chime, allows Silicon Valley-style startups to tap the talents of small FDIC-backed banks. Together, the ecosystem helped these firms compete against the giants of American banking.
Regulators stay away
Customers mistakenly believed that because funds are ultimately held at real banks, they were as secure and available as another FDIC-insured accounts, said Jason Mikula, a consultant and newsletter author who has tracked this case closely.
“That is 10 million-plus individuals who cannot pay their mortgages, cannot buy their groceries. … That is one other order of disaster,” Mikula said.
Regulators have yet to take a job within the dispute, partly since the underlying banks involved haven’t failed, the purpose at which the FDIC would normally intervene to make customers whole, Mikula added.
The FDIC and Federal Reserve didn’t immediately reply to CNBC’s calls searching for comment.
A warning
In pleading with the judge on this case, Martin Barash, to assist the affected customers, Buckler noted in his testimonial that while he had other resources besides the locked account, others are usually not as lucky.
“To this point the federal government shouldn’t be willing to assist us,” Buckler wrote. “As you heard, there are thousands and thousands affected who’re in far worse straits.”
Reached by phone on Wednesday, Buckler said he had one message for Americans: “I need to make people aware, yeah, your money is likely to be secure on the bank, but it surely shouldn’t be secure if the fintech or the processor fails,” he said. “If that is one other FTX, in the event that they were doing funny business with my money, then what?”
