“We never imagined a scenario like this” – NBC New York

• For three weeks, 85,000 Yotta customers with combined savings of $112 million were locked out of their accounts, CEO and co-founder Adam Moelis told CNBC.
• The outage, caused by a dispute between fintech intermediary Synapse and Tennessee-based Evolve Bank & Trust, was life-altering, Moelis said.
• “We never imagined that a scenario like this could happen and that no regulator would step in and help,” he said.

When Adam Moelis co-founded a fintech startup called Yotta in 2019, wanted to offer Americans a new way to save money to help them cushion life’s ups and downs.

Instead, his company was inadvertently a source of deep pain for thousands of customers who relied on Yotta accounts to receive paychecks, pay bills and save for emergencies.

The crisis began on May 11, when a dispute between two of Yotta’s banking partners: fintech intermediary Synapses and based in Tennessee Evolve Bank and Trust – led to the freezing of the accounts of Yotta and at least two dozen other startups. Synapse declared failure earlier this year, after several key clients left the company due to disagreements over tracking client funds.

Over the past three weeks, 85,000 Yotta customers with combined savings of $112 million have been locked out of their accounts, Moelis told CNBC. The outage has upended lives, forced users to borrow money for food and cast doubt on upcoming events such as surgeries or weddings, she said.

“The stories are heartbreaking,” Moelis said. “We never imagined that something like this could happen. We have been working with banks that are members of the FDIC. We never imagined that a scenario like this could happen and that no regulator would step in to help us.”

Boom and bust

The ongoing chaos has highlighted risks in a fintech sector that has become increasingly important during a boom in venture capital investing – and will likely reverberate for years as regulators increase scrutiny of the industry.

The so-called “banking as a service” model has 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 hold the deposits .

The heart of the dispute between Synapse and Evolve Bank concerns a fundamental function of finance: keeping accurate records of transactions and balances. Synapse and Evolve disagree about how much Yotta funds are held at Evolve and how much are held at other banks Synapse has worked with.

Synapse did not respond to requests for comment, while Evolve did blamed Synapse breaking.

Synapse’s failure has mostly ensnared lesser-known consumer fintech companies, especially after larger fintech players, including Mercury AND Dave has fled the Synapse platform over the past year.

This made Yotta, which encouraged users to save money with free weekly lottery-style sweepstakes, one of the largest companies to be affected. Accounts at a cryptocurrency company Juno it’s at Copperthat offered savings accounts for families and teenagers were frozen.

Non-systemic collapse

Moelis, who has been in contact with other fintech executives affected by Synapse’s failure, estimates that at least 200,000 total customer accounts with balances are frozen. Although Synapse said in court filings that it has 10 million end users, active accounts are likely to be much smaller, Moelis said.

Courtesy: Yotta

Adam Moelis, co-founder of Yotta Savings.

The fintech co-founder said he believed the relatively limited scope of the problem and the fact that most of those affected are not wealthy gave regulators permission to let the situation play out. Last year, regulators intervened promptly in the regional banking crisis that threatened the uninsured deposits of startups and wealthy families, he noted.

“In my opinion, if this were happening on a larger scale, I think the regulators would have done something by now,” he said. “We have real, everyday Americans who aren’t necessarily wealthy and don’t have the ability to lobby and who are being affected.”

The Federal Reserve and the Federal Deposit Insurance Corp. declined to comment on the matter. Agency representatives pointed out efforts they have done to encourage banks to manage the risks of using fintech partners.

“Money doesn’t just disappear”

But developments in the California bankruptcy court overseeing Synapse’s bankruptcy give Moelis hope that at least some relief – a partial release of funds, perhaps – may be coming.

Last week, former FDIC Chair Jelena McWilliams was appointed trustee on Sinapsi. His job is to develop a plan to maintain the Synapse systems and create a solution “that allows the funds to be returned to the end users, to the rightful owners of those funds, as soon as humanly possible,” Judge Martin Barash said.

For his part, Moelis said he doesn’t side with either Evolve or Synapse in their dispute — he just wants the situation resolved.

“I don’t know who’s right or who’s wrong,” he said. “We know how much money came into the system and we are confident that it is the correct amount. The money doesn’t just disappear; it has to be somewhere.”

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