Clients say they can't access the funds

A dispute between a fintech startup and its banking partners has ensnared millions of Americans, leaving them without access to their money for nearly two weeks, according to recent court documents.

Since last year, Synapse, an Andreessen Horowitz-backed startup that acts as an intermediary between customer-facing fintech brands and FDIC-backed banks, has had disputes with several of its partners over the amount of customer balances it owes.

The situation worsened in April after Synapse declared bankruptcy following the departure of several key partners. On May 11, Synapse cut off access to a technology system that enables lenders, including Evolve Bank & Trust, to process transactions and account information, according to filings.

This has left users of many fintech services stranded without access to their funds, according to testimony filed this week in California bankruptcy court.

One client, a teacher from Maryland named Chris Buckler, said in a May 21 filing that his funds in cryptocurrency app Juno were closed due to Synapse's bankruptcy.

“I am increasingly desperate and don't know where to turn,” Buckler wrote. “I have approximately $38,000 tied up as a result of transaction processing stops. It has taken years to save that money.”

Until recently, Synapse, which bills itself as the largest provider of banking-as-a-service, helped a wide swath of the U.S. fintech world deliver services like checking accounts and debit cards. Previous partners include Mercury, Dave and Juno, well-known fintech companies that cater to segments including startups, gig workers and cryptocurrency users.

Synapse had contracts with 20 banks and 100 fintech companies, resulting in about 10 million end users, according to an April report from founder and CEO Sanket Pathak.

Pathak did not immediately respond to an email from CNBC seeking comment. A spokesperson for Evolve Bank & Trust declined to comment, pointing instead to a statement on the bank's website that said in part: “Synapse's sudden shutdown of core systems without warning and failure to provide necessary records unnecessarily put end users at risk by impeding our ability to verify of transactions, confirming end-user balances, and complying with applicable law.”

It is not clear why Synapse shut down the system, and no explanation was found in the files.

Another client, Joseph Dominguez of Sacramento, California, told the bankruptcy court on May 20 that he had more than $20,000 locked up in his Yotta fintech account.

“We are afraid of losing money if Synapse cannot provide the books and documents to Evolve or Yotta to prove that we are the rightful owners,” Dominguez wrote. “We don't know where our direct deposits went, and we don't know where our pending withdrawals are currently being kept.”

Freezing customer funds exposes weaknesses in the banking-as-a-service, or BAAS, partnership model, and a potential blind spot for regulatory oversight.

The BAAS model, most notably used by fintech company Chime before its IPO, allows Silicon Valley-style startups to leverage the capabilities of small FDIC-backed banks. Together, the ecosystem has helped these companies compete against the giants of US banking.

Jason Mikula, a consultant and newsletter writer who has followed the case closely, said customers mistakenly believed that because the money was ultimately held in real banks, it was as safe and available as any other FDIC-insured accounts. .

“There are more than 10 million people who cannot pay their mortgages, cannot buy groceries,” Mikula said. “This is another disaster.”

Mikula added that regulators have not yet played a role in the dispute, in part because the underlying banks involved have not failed, the point at which the FDIC usually steps in to insure customers.

The FDIC and the Federal Reserve did not immediately respond to CNBC's calls seeking comment.

In pleading with the judge in that case, Martin Barash, to help affected customers, Buckler noted in his testimony that while he had other resources besides the locked account, others were not so lucky.

“So far the federal government is not willing to help us,” Buckler wrote. “As you have heard, there are millions of affected people who are in much worse shape.”

Reached by phone Wednesday, Buckler said he had one message for Americans: “I want to make people realize, yes, your money may be safe in the bank, but it's not safe if the fintech or processor goes down.” . “If this is another FTX, if they are doing funny business with my money, then what?”