For fifteen years, Kayla Morris, a former Texas schoolteacher, diligently saved every spare penny towards a family home. Last year, upon selling the property, she and her husband deposited the proceeds â £216,000 â into what they believed was a secure savings account with Yotta, a savings startup. This account, they understood, was held with a real bank.
However, Morris, along with thousands of other customers, found herself caught in the devastating collapse of Synapse, a behind-the-scenes fintech firm. Since May, she has been locked out of her account. Initially hopeful, her optimism shattered last week when Evolve Bank & Trust, the lender where her funds were supposedly held, revealed its intention to return only £385 of her substantial savings.
"We were told last Monday that Evolve would only pay us £385 out of £216,000," Morris stated during a court hearing, her voice trembling. "It's simply devastating."
The crisis began in May with a dispute between Synapse and Evolve Bank regarding customer balances. The ensuing conflict resulted in Synapse, acting as a fintech intermediary, cutting off access to a crucial transaction processing system. Synapse facilitated checking accounts and debit cards for fintech startups like Yotta and Juno â companies that aren't banks themselves â by connecting them with smaller lenders such as Evolve.
Following Synapse's bankruptcy â precipitated by an exodus of its fintech clients â a court-appointed trustee discovered that up to £74 million of customer funds were missing. The whereabouts of these funds remain a mystery, despite six months of court-mediated efforts involving four banks. This is largely due to the bankrupt Synapse estate's inability to afford an independent firm to conduct a full reconciliation of its accounts, according to Jelena McWilliams, the bankruptcy trustee.
The stark reality is that ordinary individuals like Morris are bearing the brunt of this shortfall, receiving little to nothing from savings accounts they believed were backed by the full faith and credit of the US government. This situation highlights the risks inherent in a system where customers lack direct banking relationships, relying instead on startups to manage their funds, which in turn delegate this responsibility to intermediaries such as Synapse.
Thousands share Morris's plight. While a precise figure remains elusive, Yotta alone reports 13,725 customers collectively offered £9 million, despite having deposited £49.7 million, according to figures released by Yotta's CEO, Adam Moelis. This represents a significant shortfall.
Numerous affected individuals, ranging from delivery drivers and small business owners to teachers and dentists, describe the loss of years of savings accumulated through fintechs offering higher interest rates, innovative features, or as an alternative to traditional banks that had rejected their applications.
Zach Jacobs, a 37-year-old business owner from Tampa, Florida, lost over £72,000 and subsequently formed "Fight For Our Funds," a support group for victims. This group, currently boasting 3,454 members with combined losses exceeding £23 million, seeks media and political attention to highlight the injustice.
Other affected individuals, including a chemical engineer who deposited £153,000 and received a mere £4 in compensation, express feelings of betrayal and deception. They believed their FDIC-insured accounts provided the safest possible protection, a misconception further amplified by marketing materials.
The FDIC has clarified that its insurance fund does not cover the failure of non-banks like Synapse, and court-based recovery is not guaranteed. Despite this, the Federal Reserve continues to monitor Evolve's efforts to return customer funds. The FDIC has since proposed new regulations to improve record-keeping and reduce the risk of similar future crises.
However, the situation remains unresolved, leaving thousands of individuals with significant financial losses and limited recourse. The ongoing legal battles and lack of swift regulatory action underscore a significant failure in protecting consumers within the increasingly complex landscape of financial technology.
