Fintech nightmare: “I have almost $38,000 tied up” after Synapse bankruptcy

Recent court documents show that a dispute between a fintech startup and its banking partners has potentially embroiled millions of Americans, depriving them of access to their money for almost two weeks.

Since last year, Synapsesupported by Andreessen Horowitz activation which serves as an intermediary between customer-focused fintech brands and FDIC-backed banks, has clashed with several of its partners over how much customers owe.

The situation worsened in April, after Synapse announced its bankruptcy following the exodus of several key partners. On May 11, Synapse cut off access to the technological system that allowed lenders, among others, to: Evolve Bank and Trust Fundto process transactions and account information as reported.

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

One customer, Maryland teacher Chris Buckler, stated in a May 21 filing that his funds in the crypto app Juno were closed due to Synapse bankruptcy.

“I’m getting more and more desperate and don’t know where to turn,” Buckler wrote. “I have almost $38,000 tied up due to transaction processing being suspended. It took years to save that money.”

Until recently, Synapse, which calls itself the largest “banking-as-a-service” provider, helped much of the U.S. fintech world provide services such as checking accounts and debit cards. Former partners included Mercury, Dave and Juno, well-known fintech companies that served segments including startups, gig workers and cryptocurrency users.

Synapse had deals with 20 banks and 100 fintech companies, accounting for about 10 million end users, according to an April filing by its founder and CEO. Sanket Pathak.

Pathak did not immediately respond to an email from CNBC seeking comment. A spokesman for Evolve Bank & Trust declined to comment, instead pointing to: statement on the bank’s website, which read in part: “Synapse’s abrupt shutdown of key systems without notice and failure to provide necessary records needlessly exposed end-users to harm, hindering our ability to verify transactions, confirm end-user balances and comply with applicable law.”

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

Another customer, Joseph Dominguez of Sacramento, California, he said in bankruptcy court on May 20 that he had over $20,000 in his wallet Yott fintech account.

“We fear that money will be lost if Synapse is unable to provide Evolve or Yotta’s books and records to prove that we are the rightful owners,” Dominguez wrote. “We don’t know where our direct deposit went, we don’t know where our pending payments are currently.”

Freezing customer funds exposes weaknesses in the banking-as-a-service (BAAS) partnership model and possible weaknesses in regulatory oversight.

The BAAS model, used primarily by pre-IPO fintech company Chime, allows Silicon Valley-style startups to leverage the capabilities of diminutive FDIC-backed banks. Together, the ecosystem helped these companies compete with US banking giants.

Customers wrongly believed that because the funds were ultimately held in real banks, they were as sheltered and accessible as any other FDIC-insured account, he said Jason Mikulaconsultant and newsletter writer who has been following this case closely.

“That’s over 10 million people who can’t pay their mortgages, can’t buy groceries.[…]This is another row of disaster,” Mikula said.

Regulators have not yet played a role in the dispute, in part because the banks involved have not failed — which is where the FDIC has typically intervened to keep customers on track, Mikula added.

The FDIC and Federal Reserve did not immediately respond to CNBC’s calls seeking comment.

Addressing the judge in this case, Marcin Baraszto facilitate affected customers, Buckler noted in his opinion that while he had other resources besides a blocked account, others were not so lucky.

“So far, the federal government has been unwilling to facilitate us,” Buckler wrote. “As you have heard, the millions affected are in a much worse situation.”

Reached by phone Wednesday, Buckler said he had one message for Americans: “I want to make people aware that yes, your money may be sheltered in the bank, but it’s not sheltered if the fintech or processor fails,” he said. . “If this is another FTX, if they were doing ridiculous deals with my money, then what?”