Here’s an update on the Yotta/Juno/Synapse/Evolve Bank situation that I wrote about back in June. Unfortunately, nothing really new has happened to help the consumers affected, but perhaps because of that plus the fact that nearly $100 million is missing, there has been some additional coverage in the major financial media outlets about this problem. I’m glad there is finally more attention to this matter.
From the NY Times article What Happens When Your Bank Isn’t Really a Bank and Your Money Disappears? (gift link)
For close to a century, putting your savings into a federally insured bank has been a sure thing: If the institution fails, up to $250,000 of your money will be protected.
What if it isn’t anymore?
The promise of bank insurance — a tenet of U.S. consumer protection since the Great Depression — is now being tested by a crisis swirling around online-only lenders with hundreds of millions of dollars of deposits between them. Customer accounts have been frozen, preventing people from cashing out their life savings. Most depositors have little clue where their money has gone, and whether they will get any of it back.
The turmoil was set off this spring with the bankruptcy of Synapse Financial Technologies, the kind of company you’ve probably never heard of unless you suffered through all the fine print of your account statements. It operated banking software for fast-growing online lenders with names like Juno, Yieldstreet and Yotta.
Backed by some of Silicon Valley’s bigger venture capitalists, the start-ups offer accounts that charge lower fees and pay far higher interest rates than traditional brick-and-mortar banks. Their slick websites advertise insurance from the Federal Deposit Insurance Corporation, the U.S. agency that pledges to pay back lost funds.
[…] The bankruptcy court judge has said that he suspects that tens of millions of dollars will never be found, but is powerless to compel regulators to get involved. “This is a very, very unusual situation,” Judge Martin R. Barash said at a hearing last week.
From the WSJ article Why the Synapse Bankruptcy Has the Fintech World on Edge (archive)
For months now, thousands of consumers have been unable to access money they thought was safely deposited at banks.
They are victims of the bankruptcy of a little-known venture-backed startup called Synapse Financial Technologies, whose shutdown is harming not only consumers but also fintech startups that worked with it, as well as the broader fintech sector. […]
Starting in May, banks including Evolve Bank & Trust and Lineage Bank froze access to accounts associated with Synapse, citing discrepancies in ledgers kept by Synapse. […]
The banks said they don’t know who is owed what. There is a dispute between the banks and Sankaet Pathak, founder and former chief executive of Synapse, about who is responsible for ledger irregularities.
Accounting reconciliation is continuing in the Synapse case, according to a trustee managing the Synapse estate. However, more than $100 million hasn’t been distributed, as of early July, according to the trustee’s reports. Most of that is in pooled accounts held by Evolve and Lineage, where figuring out how much capital is owed to whom appears to be especially difficult.There is also a shortfall of up to $96 million between cash held at partner bank accounts and Synapse’s ledger balance, according to the trustee.
From Bloomberg article A Fintech’s Collapse Raises Questions About a Hot Business Model (gift link):
Over the past decade, dozens of financial-technology companies have linked up with small and midsize banks across the country. The idea: The fintechs would create slick smartphone apps and offer useful new services to lure customers, and banks would hold on to the deposits, generating lucrative fees from transactions. Importantly, the arrangement allowed the fintechs to tout protection from the Federal Deposit Insurance Corp.
But now, as millions of dollars’ worth of deposits remain frozen months after the collapse of a company called Synapse Financial Technologies, that supposed FDIC protection has come into clearer focus. And those partnerships are facing tough questions.
The reason customer deposits are in limbo is because Synapse was bad at recordkeeping. The firm acted as an intermediary between fintech apps including Yotta and Juno and their banking partners. When Synapse went bankrupt in April, it left behind a tangled mess: The trustee put in charge of Synapse said it was difficult to make sense of its ledgers, as the trustee was trying to resolve a shortfall of as much as $96 million in its accounts.
There is also Techcrunch, this CNBC TV report and follow-up CNBC article.
This was a known hole in the bank regulatory system, but nobody was incentivized to close it. These fintechs have been using “FDIC-insured” in their marketing for years. The FDIC never stopped them. Meanwhile, the banks made money holding the funds. The fintech and BaaS founders made money and were showered with venture capital. Nobody complained while the music kept going. All they had to do was keep a clean ledger of transactions. But somehow they didn’t, whether by accident or on purpose. (Anyone remember the movie Office Space? Missing fractions of pennies can add up…)
As time drags on, Synapse is just trying to walk away quietly without anyone making a fuss out of tens of millions of dollars in missing money. “We’re bankrupt! Nobody’s home! Sorry! Definitely don’t bother the CEO Sankaet Pathak about those missing millions!” Yotta and Juno just appear helpless and incompetent. “We had no idea! Update: We still have no idea! Update 2: We still have no idea!” Evolve has polished up their version of the story, even though they don’t exactly have a spotless reputation either (inadequate compliance practices, huge data breach). Disruption brings about change, so here we are.