Customers say they don’t have access to money

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

Since last year, Synapseone backed by Andreessen Horowitz to start which serves as an intermediary between customer-facing fintech brands and FDIC-backed banks, has had disagreements with some of its partners over how much customer balances it owed.

The situation worsened in April after Synapse went bankrupt following the exodus of several key partners. On May 11, Synapse cut off access to a technology system that, among other things, enabled lenders Evolve Bank & Trustto process transactions and account information, according to the documents.

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

One customer, a Maryland teacher named Chris Buckler, said in a May 21 filing that his money was with the crypto app Juno were closed due to Synapse’s bankruptcy.

“I am becoming more and more desperate and don’t know where to turn,” Buckler wrote. “I have almost $38,000 tied up as a result of the transaction processing freeze. It has taken years to save this money.”

Until recently, Synapse, which calls itself the largest banking as a service provider, helped much of the U.S. fintech universe offer services such as checking accounts and debit cards. Ex-partners included Mercury, Daaf and Juno, well-known fintech companies that targeted segments such as startups, gig workers and crypto users.

Synapse had contracts with 20 banks and 100 fintech companies, resulting in approximately 10 million end users, according to an April filing by its founder and CEO Sankaet Pathak.

Pathak did not immediately respond to an email from CNBC seeking comment. A spokesperson for Evolve Bank & Trust declined to comment, instead pointing to a rack the bank’s website stated in part: “Synapse’s abrupt shutdown of essential systems without prior notice and failure to provide necessary data needlessly endangered end users by hindering our ability to verify transactions, confirm end user balances and comply with applicable law.”

It is unclear why Synapse disabled the system and an explanation could not be found in the files.

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

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

The freezing of customer funds exposes vulnerabilities in the banking as a service or BAAS partnership model and a potential blind spot for regulatory scrutiny.

The BAAS model, primarily used by pre-IPO fintech company Chime, allows Silicon Valley-style startups to leverage the capabilities of small FDIC-backed banks. Together, the ecosystem helped these companies compete against the giants of American banking.

Customers mistakenly believed that because the money is ultimately held in real banks, it was as safe and available as any other FDIC-insured accounts, said Jason Mikulaan advisor and newsletter writer who has followed this case closely.

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

Regulators have yet to play a role in the dispute, in part because the underlying banks involved have not failed, the point at which the FDIC would usually intervene to make customers whole, Mikula added.

The FDIC and Federal Reserve did not immediately respond to CNBC’s calls for comment.

In a plea before the judge in this case, Martin BarasTo help affected customers, Buckler noted in his testimony that while he had other resources besides the locked account, others are not so lucky.

“So far, the federal government has been unwilling to help us,” Buckler wrote. “As you have heard, millions have been affected and are in much worse circumstances.”

Reached by phone Wednesday, Buckler said he had one message for Americans: “I want to make people aware that your money may be safe in the bank, but it’s not safe if the fintech or the processor fails,” he said. . “If this is another FTX and they do strange things with my money, what then?”