How thousands of Americans got caught in fintech’s false promise and lost access to bank accounts

🌈 Abstract

The article discusses the impact of the collapse of Synapse, a fintech middleman, on customers of various fintech apps like Yotta, Curacubby, and Juno. It highlights how the failure of Synapse has revealed the risks and limitations of the "banking-as-a-service" model, where fintech startups rely on partner banks and intermediaries to provide banking services. The article explores the challenges faced by affected customers, the regulatory implications, and the broader questions raised about the safety and reliability of fintech services.

🙋 Q&A

[01] Natasha Craft's Experience

1. What happened to Natasha Craft's Yotta banking account?

• Natasha Craft, a 25-year-old FedEx driver from Mishawaka, Indiana, has been locked out of her Yotta banking account since May 11, 2023.
• Her entire life savings of $7,006 is currently locked up in a complicated dispute playing out in bankruptcy court, online forums, and regulatory channels.

2. How did Natasha Craft use her Yotta account?

• Natasha Craft had her wages deposited directly into her Yotta account and used the startup's debit card to pay for all her expenses.
• The Yotta app occasionally covered some of her transactions, with Craft stating that there were times when she would go buy something and get that purchase for free.

3. What is Natasha Craft's current situation?

• Natasha Craft's entire life savings is locked up in the dispute, and she has had to borrow money from her mother and grandmother to cover her expenses.
• She is worried about how she will pay for the catering at her upcoming wedding.

[02] The Collapse of Synapse

1. What is Synapse, and what role did it play in the fintech industry?

• Synapse was a "banking-as-a-service" company that helped customer-facing fintech startups like Yotta quickly access the regulated banking industry.
• Synapse had contracts with 100 fintech companies and 10 million end users, acting as a crucial middleman between fintech apps and the partner banks that provided the banking services.

2. What happened when Synapse filed for bankruptcy?

• In May 2023, Synapse, in the throes of bankruptcy, turned off a critical system that Yotta's bank used to process transactions.
• This action threw thousands of Americans into financial limbo and caused turmoil in the fintech industry.

3. What are the implications of the Synapse collapse?

• The Synapse failure has revealed the risks and limitations of the "banking-as-a-service" model, where fintech startups rely on partner banks and intermediaries to provide banking services.
• Regulators have already started to punish the banks that provide services to fintechs, and this trend is expected to continue.
• The FDIC has made it clear that the failure of non-banks will not automatically trigger FDIC insurance, and customers may not have their deposits covered even when fintechs partner with banks.

[03] Affected Customers' Experiences

1. How did affected customers view the safety of their fintech accounts?

• Many customers, like the Oakland preschool owner and Rick Davies, were comforted by the presence of the FDIC logo on the fintech apps' websites, believing their funds were as safe as money in a bank.
• They were unaware of the nuances of FDIC protection and the differences between direct bank relationships and fintech partnerships.

2. What are the challenges faced by affected customers?

• Customers have had their funds frozen for weeks, with some facing the prospect of never seeing a full payout due to the shortfall of up to $96 million in funds owed to customers.
• The situation has caused significant financial hardship, with customers having to take out loans, tap credit lines, and borrow money from family members to cover their expenses.

3. How have regulators responded to the Synapse collapse?

• Regulators have not moved to help the impacted users, as none of the banks linked with Synapse have failed, unlike the swift action taken during the Silicon Valley Bank collapse.
• The court-appointed bankruptcy trustee has stated that finding all the customer money may be impossible due to Synapse's shoddy ledgers and the way it pooled users' money across multiple banks.