Fintech meltdown results in 85,000 locked savings app accounts, CEO says: "We never anticipated such a situation."

• Adam Moelis, CEO and co-founder of Yotta, informed CNBC that for three weeks, 85,000 of their customers have been unable to access their accounts, totaling $112 million in savings.
• The dispute between Synapse and Evolve Bank & Trust has caused a disruption, upending the lives of those affected, according to Moelis.
• No regulator would step in to help, and we never imagined a scenario like this could play out, he said.

In 2019, Adam Moelis founded Yotta, a fintech startup aimed at providing Americans with a new method of saving money to better manage the uncertainties of life.

Thousands of customers have experienced deep pain due to his company's inadvertent failure to provide paychecks, bill payments, and emergency savings through Yotta accounts.

On May 11, a dispute between Yotta's banking partners, Synapse and Evolve Bank & Trust, resulted in the lockup of accounts at Yotta and other startups. Synapse filed for bankruptcy earlier this year after several clients left the firm due to disagreements over fund tracking.

Over the past three weeks, 85,000 Yotta customers with a combined $112 million in savings have been unable to access their accounts, causing significant disruption and uncertainty in their lives, according to Moelis.

"Moelis stated that the stories were heartbreaking, and they never imagined something like this could occur. They collaborated with banks that are part of the FDIC, but they never anticipated a situation like this would unfold, and no regulator would intervene to help."

Boom & bust

The recent scandal has brought to light the dangers in a fintech sector that gained popularity due to increased venture capital funding, and it is expected that regulators will intensify their examination of this area as a result.

FDIC-backed banks provided savings and debit services to consumer fintech companies through the "banking as a service" model, with Synapse acting as an intermediary.

The fundamental issue in the disagreement between Synapse and Evolve Bank is the accuracy of ledgers regarding Yotta's transactions and balances. Synapse and Evolve have different opinions on the amount of funds held at Evolve and other banks where Synapse worked.

Synapse has not responded to requests for comment, and Evolve has accused Synapse of causing the breakdown.

After larger fintech companies like Mercury and fled the Synapse platform, the bankruptcy of Synapse has mostly affected smaller consumer fintech firms.

The crypto firms Juno and Copper, which offered savings accounts for families and teens, have had their accounts frozen, leaving Yotta, which encouraged users to save money with free weekly lottery-style sweepstakes, as one of the largest companies affected.

Non-systemic meltdown

Moelis, who has spoken with other fintech leaders affected by the Synapse outage, predicts that at least 200,000 customer accounts with balances are locked. Although Synapse has stated in court filings that it has 10 million end-users, it's likely that active accounts are significantly smaller, Moelis said.

The fintech co-founder stated that the limited scope of the issue and the fact that most affected individuals are not wealthy have allowed regulators to take a hands-off approach to the situation. In contrast, last year, regulators acted quickly to address the regional banking crisis that put uninsured deposits of startups and wealthy families at risk.

"If this issue were affecting a larger group, I believe regulators would have taken action by now, as it is affecting everyday Americans who lack the resources to lobby."

The Federal Reserve and the Federal Deposit Insurance Corp. have declined to comment on the issue, but representatives of the agencies have highlighted their efforts to encourage banks to manage the risks of using fintech partners.

'Money doesn't just disappear'

The Synapse failure bankruptcy court in California may provide some relief, such as a partial release of funds, according to Moelis' hope.

Jelena McWilliams, the former FDIC Chair, was appointed trustee of Synapse last week. Her task is to devise a plan to preserve Synapse's systems and create a solution that enables funds to be returned to their rightful owners as quickly as possible, according to Judge Martin Barash.

Moelis stated that he does not support either Evolve or Synapse in their conflict and only desires a resolution to the issue.

""We are certain that the money that came into the system is the correct amount, and it doesn't just disappear; it has to be somewhere," he said."