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When Adam Moelis co-founded a fintech startup called Yotta in 2019, he wanted to give Americans a new way to save money to help them smooth out life's ups and downs.
Instead, his company was unwittingly a source of deep pain for thousands of customers who relied on Utah accounts to receive checks, pay bills and save for emergencies.
The crisis began on May 11, when a dispute between two of Yotta's banking partners — fintech broker Synapse and Tennessee-based Evolve Bank & Trust — led to the closure of accounts at Yotta and at least two dozen other startups. Synapse declared bankruptcy earlier this year after several major clients abandoned the company amid disputes over tracking client funds.
Over the past three weeks, 85,000 Yotta customers have had their accounts closed for a total savings of $112 million, Moelis told CNBC. He said the disruption had turned people's lives upside down, forced users to borrow money to buy food and cast doubt on upcoming events such as surgeries or weddings.
“The stories are heartbreaking,” Moelis said. “We never imagined that something like this could happen. We worked with FDIC member banks. We never imagined that a scenario like this could happen and that no regulator would step in and help.”
Bust boom
The ongoing chaos has exposed risks in a corner of fintech that has grown in prominence during the venture capital boom — and is likely to reverberate for years as regulators increase scrutiny of the area.
The so-called “banking as a service” model allowed consumer fintech companies to quickly launch savings accounts and debit services, with companies like Synapse acting as a bridge between startups and the FDIC-backed banks that ultimately held the deposits.
The crux of the dispute between Synapse and Evolve Bank involves a core function of finance: keeping accurate books of transactions and balances. Synapse and Evolve disagreed over how much of Yotta's money was held at Evolve, and how much was held at other banks Synapse worked with.
Synapse did not respond to requests for comment, and Evolve blamed Synapse for the collapse.
The Synapse bankruptcy mostly led to lesser-known consumer fintech companies falling behind, especially after larger fintech companies including Mercury and Dave He fled the Synapse platform last year.
This made Yotta, which encouraged users to save money through free weekly sweepstakes, one of the largest companies affected. Accounts at cryptocurrency company Juno and Copper, which offers savings accounts for families and teens, were also frozen.
Irregular collapse
Moelis, who has been in contact with other fintech executives affected by the Synapse failure, estimates that at least 200,000 total customer accounts have closed balances. While Synapse has said in court filings that it has 10 million end users, the active accounts are likely much smaller, Moelis said.
Adam Moelis, co-founder of Yotta Savings.
Courtesy: Utah
The fintech co-founder said he believes the relatively limited scope of the problem, and the fact that most of those affected are not wealthy, has given regulators permission to let the situation move forward. He noted that regulators intervened quickly last year in the regional banking crisis that threatened the uninsured deposits of startups and wealthy households.
“For me, if this was happening on a larger scale, I think organizers would have done something by now,” he said. “We have real ordinary Americans who are not necessarily wealthy and do not have the leverage that they are being influenced by.”
The Federal Reserve and the Federal Deposit Insurance Corporation declined to comment on the issue. Agency representatives noted their efforts to encourage banks to manage the risks of using fintech partners.
“Money doesn't just disappear”
But developments in the California bankruptcy court overseeing Synaps' failure have given Moelis hope that at least some relief — perhaps a partial release of funds — may be coming.
Last week, Jelena McWilliams, former head of the Federal Deposit Insurance Corporation (FDIC), was appointed trustee of Synapse. Judge Martin Barash said her job was to develop a plan for maintaining Synapse's systems and formulate a solution that “allows the funds to be returned to the end users, to their rightful owners, as soon as humanly possible.”
For his part, Moelis said he doesn't side with Evolve or Synapse in their dispute — he just wants the situation resolved.
He added: “I don't know who is right and who is wrong.” “We know how much money has entered the system, and we are certain that this is the correct number. The money is not just disappearing, it has to be somewhere.”
