Thousands of Americans lose their savings due to Synapse fintech crisis.

• Many Americans will receive minimal or no funds from their savings accounts that were frozen due to the failure of fintech company Synapse.
• The U.S. government guaranteed the authenticity of the customer accounts.
• A dozen customers who lost sums ranging from $7,000 to over $200,000 were interviewed by CNBC.
• At fintech Yotta, 13,725 customers claim they were promised a combined $11.8 million in return for depositing $64.9 million.

For 15 years, Kayla Morris, a former Texas schoolteacher, saved every dollar she could to purchase a home for her expanding family.

Last year, when she and her husband sold their house, they hid their $282,153.87 earnings in a Yotta account at a bank.

Morris, like many other customers, was caught up in the failure of a fintech company called Synapse and has been unable to access her account for six months as of November. Despite holding onto hope that her funds were still safe, she was shocked to discover how much Evolve Bank & Trust was willing to return to her.

"During a court hearing last week, Morris stated that she was informed last Monday that Evolve would only pay her $500 out of the $280,000 owed. She expressed her disappointment, saying, "It's just devastating.""

In May, a conflict between Synapse and Evolve Bank over customer balances escalated, causing Synapse to shut down access to a crucial system used to process transactions. Synapse, a fintech middleman, assisted fintech startups such as Yotta and Juno in providing checking accounts and debit cards to customers who are not banks by connecting them with small lenders like Evolve.

After Synapse's bankruptcy, which occurred following the departure of its fintech clients, a court-appointed trustee discovered that up to $96 million of customer funds were missing.

Despite six months of court-mediated efforts between the four banks involved, the mystery of where those funds are remains unsolved. This is mainly due to the fact that the estate of Andreessen Horowitz-backed Synapse does not have the funds to hire an outside firm to perform a full reconciliation of its ledgers, according to Jelena McWilliams, the bankruptcy trustee.

The shortfall is being borne by regular Americans like Morris, who will receive little or nothing from savings accounts they believed were backed by the full faith and credit of the U.S. government.

The losses highlight the dangers of a system where customers did not have direct relationships with banks, but instead relied on startups to manage their funds, which in turn transferred that responsibility to intermediaries like Synapse.

'Reverse bank robbery'

13,725 Yotta customers claim to have been shortchanged despite depositing $64.9 million, according to figures shared by Yotta co-founder and CEO Adam Moelis.

A dozen customers, owed sums ranging from $7,000 to over $200,000, were interviewed by CNBC about their predicament.

Many individuals, including FedEx drivers, small business owners, teachers, and dentists, have experienced the loss of years of savings after turning to fintechs like Yotta for higher interest rates, innovative features, or due to being turned away from traditional banks.

On Nov. 4, Zach Jacobs, a Yotta customer, discovered that he was only getting back $128.68 of the $94,468.92 he had deposited on Evolve's website. Feeling frustrated, he decided to take action.

A 37-year-old business owner from Tampa, Florida started an online group called Fight For Our Funds with other victims, and formed a board of volunteers with the aim of attracting media coverage and political attention.

A total of $30.4 million has been lost by 3,454 individuals who have signed up.

""This is the first reverse bank robbery in American history, and when people hear about it, they're like, 'No way this could have happened,'" said Jacobs."

An unexpected PayPal remittance of $5 from Evolve was received by Andrew Meloan, a chemical engineer from Chicago, who had hoped to see the return of $200,000 he'd deposited with Yotta.

"Meloan stated that when they signed up, they were given an Evolve routing and account number. However, now they are being told that only $5 of their money has been found, and the rest is missing. This has left Meloan feeling conned."

Cracks in the system

Unlike meme stocks or crypto bets, customers generally viewed funds held in Federal Deposit Insurance Corp.-backed accounts as the safest place to keep their money. People relied on accounts powered by Synapse for everyday expenses like buying groceries and paying rent, or for saving for major life events like home purchases or surgeries.

Interviews with several people revealed that signing up with Yotta and other fintechs seemed like a wise choice due to their advertising of FDIC-insured deposits through Evolve.

"During last week's hearing, Morris stated that we were assured this was a savings account and that we are not risk-takers or gamblers."

With U.S. regulators declining to act, these companies are left with limited options to recover their funds.

The FDIC clarified in June that its insurance fund does not cover the failure of nonbanks like Synapse, and there is no guarantee of recovering funds through legal action in the event of such a firm's collapse.

The FDIC proposed a new rule three months later that required banks to maintain detailed records of customers using fintech apps, enhancing their chances of qualifying for coverage in case of a future crisis and reducing the risk of funds disappearing.

Last week, former FDIC chair McWilliams expressed her disappointment to the California judge handling the Synapse bankruptcy case, stating that all financial regulators have chosen not to assist.

Neither the FDIC nor the Federal Reserve provided a comment, and McWilliams failed to reply to emails.

Winners and losers

Early in the proceedings, McWilliams proposed to Judge Martin Barash that customers be given a partial payment, thereby distributing the suffering among all parties involved.

Coordination between Evolve and other lenders holding customer funds was not as coordinated as it could have been.

While the hearings continued, the other three institutions, AMG National Trust, Lineage Bank, and American Bank, promptly distributed their funds, but Evolve took an extended period to conduct a thorough reconciliation.

In October, Evolve stated that it could only determine the funds it held, not the whereabouts of the missing funds. This was partly due to "very large bulk transfers" of funds without identification of the money's owner, as testified by Evolve's lawyer last week.

As a result, the bankruptcy process has minted relative winners and losers.

While some recent end users received all their funds back, others, like Indiana FedEx driver Natasha Craft, did not receive any, she told CNBC.

On or before Nov. 12, the four banks released over 85% of their earlier year's holdings, amounting to $193 million.

The Nov. 13 hearing was the only opportunity for victims to express their anguish publicly; over 30 individuals waited in line to share their experiences of receiving a minuscule portion of what they were entitled to. The proceedings lasted for more than three hours.

"Andreatte Caliguire, who is owed $22,000, said, "I couldn't believe the panic when I found out I was getting only 81 cents. I'm broke, I don't know what to do next, and I feel like I have nothing.""

'Nothing optimistic'

According to an Evolve spokesman, Synapse directed the transfer of "the vast majority" of funds held for Yotta and other customers to other banks in October and November of 2023.

Unfortunately, the spokesman stated that Evolve does not have the necessary data to answer the question of where the end user funds went after the event.

Evolve has not disclosed how it determined payouts to fintech firms and the trustee, despite acknowledging in court that a shortfall existed prior to October 2023, according to a spokesman for the startup. Several executives have recently left the bank. "We hope regulators take notice and act," the spokesman said.

Evolve claimed that other banks declined to join its initiative to establish a centralized ledger, while AMG and Lineage accused Evolve of making false accusations about their possession of the missing funds in a statement released prior to the upcoming hearing.

Last week, Barash stated that as lawsuits accumulate, including pending class-action efforts, the opportunity for cooperation among banks and other parties is rapidly diminishing.

"If the banks involved do not resolve this issue voluntarily, it may not be resolved," Barash stated. "There is no optimism in my assessment."