The sudden failure of a little-known company in the fintech industry has ensnared more than $100 million in retail customer money on apps including Yotta, locking up nest eggs for down payments, funds for hospitals bills and cash for college tuition.
It all started after Synapse Financial filed for Chapter 11 in April, setting off a cascade of problems for fintech firms that used the bankrupt company as a middleman to transfer funds to banks. More than 100,000 customers using Yotta and dozens of other apps for saving and investing have been locked out of their accounts for months.
Yotta, run by Adam Moelis, son of billionaire investment banker Ken Moelis, gained popularity during the pandemic by offering lottery-like prizes and a higher savings yield, at a time when low rates made earning returns on cash difficult. One user told a bankruptcy judge earlier this month that she could be forced to sell her house to cover mounting bills, while another indicated she might have to delay her college education without access to her money.
For Sean Grisan, a 32-year-old who works in real estate accounting in Detroit, the $10,000 trapped in his Yotta account was for medical costs after his wife gave birth to their son in January.
“That was most of our savings,” he said. “We’re now living paycheck to paycheck.”
Synapse Collapse
Fintech apps have attracted a flood of retail cash in recent years, with young people in particular preferring colorful user interfaces and flashy offers to more traditional bank accounts. But for these apps, the question of who’s actually responsible for customer funds—and whether or not they’re insured by the Federal Deposit Insurance Corp.—is a complicated matter at the heart of the Synapse bankruptcy, prompting regulators to take a closer look at the industry.
Nate Kahaialii, a 32-year-old teacher on the Hawaiian Island of Maui, currently has about $20,000 stuck in his Yotta account. He’s been combing through a Reddit page dedicated to users with trapped cash, but can’t figure out what’s going on. He lost his home during the Maui wildfires last year, and has been saving up to buy a car and move out of his parents’ house.
“I’m trying to move forward, but it’s a hard pill to swallow knowing I may never see that money again,” he said.
After Synapse filed for Chapter 11, the U.S. Justice Department and a judge brought in Jelena McWilliams, a former chair of the FDIC, to take charge of the company—an extraordinary step taken only in the most disastrous bankruptcies. Evolve Bank & Trust, a federally insured bank and one of Synapse’s partners, has said it was forced to freeze customer transactions because it lost access to Synapse's online platform. But Synapse claimed the decision to freeze customer funds was made by Evolve and has accused the bank of disrupting its business.
Evolve said earlier this month that ledgers provided by Synapse “revealed numerous material irregularities and inconsistencies" and said its priority is to work with McWilliams to distribute customer funds.
A representative for Synapse declined to comment.
“It's unacceptable,” Yotta’s Moelis said. “We're in contact with and exploring all possible avenues to work with regulators and the banks.”
More than $225 million in fintech user funds were ensnared by Synapse's failure. Nearly half of those funds have been returned by Synapse's partner banks to more than 88,000 users of multiple apps, according to a report released Tuesday by McWilliams.
But roughly $116 million remains to be distributed, the report said.
Fintech customers cut-off from their funds shared their frustration with Judge Martin Barash, who is overseeing the bankruptcy, during a court hearing Wednesday. One user said she was recently laid-off and was forced to cash her 401(k) to cover expenses.
For his part, Barash said he's frustrated because his judicial power is more limited than other bankruptcies because Synapse doesn't control customer funds that reside in outside banks that aren't in Chapter 11.
“This situation is a mess, and it is unacceptable,” Barash said.
The task of returning customer funds, and figuring out what each is owed, has been complicated by how Synapse operated its business, according to McWilliams, who is now a court-appointed trustee of Synapse. She said in court papers that in some instances, user funds were deposited in one bank while withdrawals were processed from a different account at a different bank.
Banks and advisors have also said there are alleged inconsistencies in Synapse's ledgers and an estimated shortfall of $65 million to $96 million—a discrepancy between money held at lenders and Synapse's internal records. McWilliams said Tuesday that “further reconciliation efforts must be completed to determine the extent to which these funds belong to end users.”
McWilliams said during Wednesday's hearing that she's been disappointed by a relative lack of response from government authorities as well as with how slow it's taken to rectify the problem for customers.
“I've been personally surprised by the lack of speed,” McWilliams said. “I'm not a patient person.”
FDIC Confusion
When Candice Russell, 40, first signed up to use Yotta in 2021, she thought it was safe because she said she saw “FDIC insured” labeling on the company’s website.
Russell is not alone in misunderstanding whether or not money on fintech apps is FDIC insured. Banks offer insurance on deposits, but Synapse doesn’t, raising questions about how fintech apps protect customer funds.
The Seattle resident, who manages a homeless services program, needed to save up for an expensive dental surgery, and has spent the past three years socking away every spare dollar. She finally has about $10,000 saved and scheduled the surgery—but now her money is trapped.
“I worked my butt off for three years to make sure I didn't have to go into debt for this,” she said. “It’s been really frustrating because there’s not a lot of transparency around what is going on.”
This article was provided by Bloomberg News.