Customers say they can’t access funds

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

That left users of several fintech services stranded without access to their funds, according to testimony filed this week in a California bankruptcy court.

One client, a Maryland teacher named Chris Buckler, said in a May 21 filing that his funds on the crypto app Juno were blocked due to Synapse’s bankruptcy.

“I am becoming more and more desperate and don’t know where to turn,” Bucker wrote. “I have almost $38,000 tied up due to transaction processing stopping. It took years to save that money.”

Until recently, Synapse, which bills itself as the largest provider of “banking as a service,” helped a large portion of the U.S. fintech space provide services like checking accounts and debit cards. Past partners have included Mercury, Dave and Juno, well-known financial technology companies that catered to segments such as startups, gig workers and crypto users.

Synapse had contracts with 20 banks and 100 fintechs, representing about 10 million end users, according to an April filing by founder and CEO Sankaet Pathak.

Pathak did not immediately return an email seeking comment. An Evolve spokesperson declined to comment, instead pointing to a statement on the bank’s website that said, in part:

“Synapse’s abrupt shutdown of essential systems without notice and failure to provide necessary records needlessly put end users at risk by hindering our ability to verify transactions, confirm end user balances, and comply with the law applicable,” the bank said.

It is unclear why Synapse shut down the system, and no explanation could be found in the filings.

Another customer, Joseph Dominguez of Sacramento, California, wrote on May 20 that he had more than $20,000 withheld from his Yotta fintech account.

“We are afraid that money will be lost if Synapse cannot provide records and documents to Evolve or Yotta to prove that we are the rightful owners,” Dominguez wrote. “We don’t know where our direct deposit went, we don’t know where our pending withdrawals are currently being held.”

Freezing customer funds exposes the vulnerabilities of the banking partnership as a service, or BAAS, model and a possible blind spot for regulatory oversight.

The BAAS model, used notably by financial technology company Chime before its IPO, allows Silicon Valley-style startups to leverage the capabilities of smaller FDIC-backed banks. Together, the ecosystem has helped these companies compete with the giants of U.S. banking.

Customers wrongly believed that because the funds were ultimately held in real banks, they were as safe and available as any other FDIC-insured account, said Jason Mikula, a consultant and newsletter editor who has followed the case. close.

“That’s over 10 million people who can’t pay their mortgage, can’t go shopping… It’s another disaster,” Mikula said.

Regulators have not yet played a role in the dispute, in part because the underlying banks involved have not gone bankrupt, at which point the FDIC would usually step in to restore peace with customers, Mikula added .

The FDIC and Federal Reserve did not immediately respond to calls seeking comment.

In pleading with the judge in the 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 unwilling to help us,” Buckler wrote. “As you have heard, millions of people are affected and are in a much worse situation.”

Reached by phone Wednesday, Buckler said he had a message for Americans:

“I want to make people aware: Yes, your money may be safe in the bank, but it’s not safe if the financial technology or the processor fails,” he said. “If it’s another FTX, if they were doing funny business with my money, then what?”