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When Adam Moelis co-founder a fintech startup called Yott in 2019, he wanted to give Americans a fresh way to save money to assist ease the ups and downs of life.
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 occurred between two banking partners of Yotta – an intermediary from the fintech industry Synapse and based in Tennessee Evolve Bank and Trust Fund – led to the blocking of accounts at Yotta and at least twenty other startups. Synapse declared bankruptcy earlier this year after several key clients left the company over disagreements over the tracking of client funds.
Moelis told CNBC that over the past three weeks, 85,000 Yotta customers with a total of $112 million in savings have had their accounts blocked. The disruptions turned lives upside down, forced users to borrow money for food and cast doubt on upcoming events such as surgeries and weddings, he said.
“These stories are heartbreaking,” Moelis said. “We never imagined something like this could happen. We have worked with FDIC member banks. We never imagined that such a scenario could come true and that no regulatory authority would step in and assist.”
Boom and bust
The ongoing mess has exposed risks in the fintech industry, which rose to prominence during the venture investing boom – and will likely reverberate for years as regulators step up scrutiny of the space.
The so-called “banking-as-a-service” model allowed consumer fintech companies to quickly launch savings accounts and debit services, with companies like Synapse acting as a bridge between the startups and the FDIC-backed banks that ultimately held the deposits.
At the heart of the dispute between Synapse and Evolve Bank is the core function of finance: keeping precise records of transactions and balances. Synapse and Evolve disagree over how much of Yotta’s funds are held at Evolve and how much at other banks Synapse has worked with.
Synapse did not respond to requests for comment, nor did Evolve accused Synapse to failure.
The Synapse bankruptcy largely ensnared lesser-known consumer fintech companies, especially after larger fintech players, including Mercury AND Dave escaped from the Synapse platform last year.
This made Yotta, which encouraged users to save money with free weekly lotteries, one of the biggest companies affected. Crypto company accounts Juno and at Copperthat offered savings accounts for families and teenagers were also frozen.
Non-systemic breakdown
Moelis, who has been in contact with other fintech executives affected by the Synapse outage, estimates that a total of at least 200,000 customer accounts with balances are frozen. Although Synapse claimed in the lawsuit that it had 10 million end users, it is likely that dynamic accounts are much smaller, Moelis said.
Adam Moelis, co-founder of Yotta Savings.
Courtesy: Yotta
The fintech co-founder said he believed the relatively confined scope of the problem and the fact that most of the people affected were not wealthy gave regulators the go-ahead to leave the situation as is. He noted that regulators intervened quickly last year in a regional banking crisis that threatened uninsured deposits by startups and wealthy families.
“In my opinion, if this was happening on a larger scale, I think regulators would have done something by now,” he said. “We have real, everyday Americans who are not necessarily wealthy or have no lobbying skills who are impacted by this.”
The Federal Reserve and the Federal Deposit Insurance Corporation declined to comment on the matter. Agency representatives indicated efforts have done 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 collapse give Moelis hope that at least some relief will come – perhaps a partial release of funds.
Last week, former FDIC Chair Jelena McWilliams was appointed trustee over Synapse. Her task is to develop a maintenance plan for Synapse’s systems and develop a solution “that will enable the funds to be returned to the end users, the rightful owners of those funds, as quickly as possible,” said Judge Martin Barash.
For his part, Moelis said he’s not siding with Evolve or Synapse in their dispute — he just wants the situation resolved.
“I don’t know who’s right and who’s wrong,” he said. “We know how much money has gone into the system and we are sure it is the right number. Money doesn’t just disappear; They have to be somewhere.”
