Thousands of Americans are seeing their savings disappear

For 15 years, Kayla Morris, a former Texas teacher, put every dollar she could save into a home for her growing family.

When she and her husband sold the house last year, they stored the proceeds, $282,153.87, in what they thought was a safe place — an account at the Utah savings startup in a real bank.

Morris, like thousands of other clients, was caught up in the collapse of a behind-the-scenes fintech company called Synapse and had her account closed for six months from November. She hoped that her money was still safe. Then she learned how willing Evolve Bank & Trust, the lender where she was supposed to keep her money, was going to come back to her.

“We were informed last Monday that Evolve would only pay us $500 of the $280,000,” Morris said during a court hearing last week, her voice trembling. “It's just devastating.”

The crisis began in May when a dispute between Synapse and Evolve Bank over customer balances escalated and the fintech broker shut down access to the main system used to process transactions. Synapse has helped fintech startups like Yotta and Juno, which are not banks, offer checking accounts and debit cards by connecting them with microlenders like Evolve.

In the immediate aftermath of Synapse's bankruptcy, which occurred after an exodus of fintech customers, a court-appointed trustee found up to $96 million in customer funds missing.

The mystery of the whereabouts of these funds has not been solved, despite six months of judicial mediation efforts between the four banks involved. That's mostly because Andreessen Horowitz-backed Synapse doesn't have the funds to hire an outside firm to do a full reconciliation of its books, according to Jelena McWilliams, a bankruptcy trustee.

But what is clear now is that ordinary Americans like Morris are bearing the brunt of these deficits and will receive little or nothing from savings accounts that they believe are backed by the full faith and credit of the US government.

The losses illustrate the risks of a system in which customers had no direct relationships with banks and instead relied on startups to track their money, and who offloaded that responsibility onto intermediaries like Synapse.

There are thousands of others like Maurice. While there's still no full count of those left short, at the Utah company alone, 13,725 customers say they were shorted a total of $11.8 million despite putting in $64.9 million in deposits, according to numbers shared by the co-founder and CEO For Utah, Adam Moelis.

CNBC spoke to dozens of customers caught in this predicament, people with amounts owed ranging from $7,000 to more than $200,000.

From FedEx drivers to small business owners, teachers to dentists, they described losing years of savings after turning to fintech companies like Utah because of the higher interest rates on offer, because of innovative features, or because they were turned away from traditional banks.

One Yotta client, Zach Jacobs, logged onto Evolve's website on November 4 to find that he had received just $128.68 of the $94,468.92 he had deposited — and decided to act.

The 37-year-old business owner, based in Tampa, Florida, began organizing with other victims online, creating a council of volunteers for a group called Fight For Our Funds. He hopes to attract the attention of the press and politicians.

So far, 3,454 people have logged in, saying they lost a combined $30.4 million.

“When you tell people about this, it's like there's no way this could happen,” Jacobs said. “We just robbed a bank. This is the first reverse bank robbery in American history.”

Andrew Melwan, a chemical engineer from Chicago, said he was hoping to get back the $200,000 he deposited with Utah. Earlier this month, he received an unexpected PayPal transfer from Evolve for $5.

“When I signed up, they gave me an Evolve routing number and account,” Melwan said. “Now they say they only have $5 of my money, and the rest is somewhere else. I feel like I was scammed.”

Unlike meme stocks or cryptocurrency bets, in which the user naturally bears some risk, most customers looked to funds held in accounts backed by the Federal Deposit Insurance Corp. As the safest place to keep their money. People relied on accounts powered by Synapse to cover everyday expenses like buying groceries and paying rent, or to save for major life events like home purchases or surgeries.

Several people interviewed by CNBC said the filing seems like a good bet since Yotta and other fintech companies announced that deposits are FDIC insured through Evolve.

“We were assured that this was just a savings account,” Morris said during the hearing last week. “We're not risk takers, we're not gamblers.”

The Synapse contract that customers received after signing up for checking accounts stipulates that a user's funds are FDIC insured for up to $250,000, according to a copy seen by CNBC.

“According to the FDIC, no depositor has ever lost a penny of FDIC-insured funds,” the 26-page contract states.

Abandoned by US regulators who have so far refused to act, they are left with few clear options to recover their money.

In June, the FDIC clarified that its insurance fund does not cover the failure of nonbanks like Synapse, and that if such a company fails, recovery of funds through the courts is not guaranteed.

The following month, the Federal Reserve said that as Evolve's primary federal regulator, it would monitor the bank's progress “in returning all customer funds” to users.

“We have a responsibility to work to ensure that the Bank operates in a safe and sound manner and complies with applicable laws, including laws that protect consumers,” Fed General Counsel Mark E. van der Wede said in a letter.

In September, the Federal Deposit Insurance Corporation (FDIC) proposed a new rule that would force banks to keep detailed records of fintech app customers, improving their chances of qualifying for coverage in a future disaster and reducing the risk of money disappearing.

McWilliams, who was herself a former head of the Federal Deposit Insurance Corporation (FDIC) during Trump's first presidency, told the California judge handling Synapse's bankruptcy case last week that she was “disappointed” that every financial regulatory agency had decided not to help.

The FDIC and the Federal Reserve declined to comment for this story, and McWilliams did not respond to emails.

Things didn't always look so bad. Early in the proceedings, McWilliams suggested to Judge Martin Barash that the agents should receive a partial payment, essentially spreading the pain among everyone.

But that would have required more coordination between Evolve and other lenders that held customer funds than it ultimately did.

As the hearings continued, the other three institutions, AMG National Trust, Lineage Bank and American Bank, began distributing the funds they had, while Evolve took months to implement what it initially said was comprehensive reconciliation.

While Evolve completed its efforts in October, it said it could only know which user funds it held, not the location of the missing funds. This is at least partly due to “very large transfers” of funds without identifying who owns the money, Evolve's attorney testified last week.

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

Some end users recently got all of their money back, while others, like Indiana FedEx driver Natasha Kraft, received no money, she told CNBC.

As of November 12, the four banks had released $193 million to clients, or more than 85% of what they held earlier in the year.

The November 13 session provided the only public place for victims to record their ordeal; Dozens of victims lined up hoping to testify about getting a small portion of what they were owed. The event took more than three hours.

“You can't imagine my panic when I was told I was going to get 81 cents,” said Andriat Caliguer, who said she was owed $22,000. “I have no money, I have no way forward, I have nothing.”

Evolve says the “vast majority” of funds held for Yotta and other clients were moved to other banks in October and November of 2023 at the direction of Synapse, according to an Evolve spokesperson.

“Where end-user funds went next is an important question, but unfortunately no one Evolve can answer with the data they currently have,” the spokesperson said.

Yotta says Evolve did not give the fintech companies and the trustee any information about how it determined the payments, “despite admitting in court that there was a shortfall at Evolve before October 2023,” according to a spokesperson for the startup, who noted that several executives have recently left the bank. . “We hope organizers will take notice and act.”

In statements released before the hearing this month, Evolve said other banks had refused to participate in its efforts to create a master ledger, while AMG and Lineage said the suggestion made by Evolve that they had the missing funds was “irresponsible and deceptive.”

With banks and other parties recriminating and lawsuits piling up, including pending class action efforts, the window for cooperation is quickly closing, Barash said last week.

“Over time, my impression is that unless the participating banks can resolve this issue voluntarily, it may not be resolved,” Barash said. – There is no reason for optimism in what I am telling you.