Yotta’s CEO says 85,000 bank accounts have been frozen

Then 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 deal with life’s ups and downs.

Instead, his company has inadvertently been a source of deep pain for thousands of customers who relied on Yotta accounts to receive paychecks, pay bills and save for emergencies.

The crisis began on May 11, when a dispute arose between two of Yotta’s banking partners – a fintech intermediary Synapse and based in Tennessee Evolve Bank & Trust – led to the blocking of accounts at Yotta and at least twenty other startups. Synapse explained bankruptcy earlier this year after several key customers left the company over disagreements over the tracking of customer funds.

Over the past three weeks, 85,000 Yotta customers with a combined savings amount of $112 million have been locked out of their accounts, Moelis told CNBC. The disruption had upended lives, forcing users to borrow money for food and throwing upcoming events such as surgeries or weddings into doubt, he said.

“The stories are heartbreaking,” Moelis said. “We never thought something like this could happen. We’ve worked with FDIC member banks. We never thought a scenario like this could happen and no regulator would step in and help.”

The ongoing mess has exposed risks in a corner of fintech that has become increasingly important during a venture investment boom – and will likely reverberate for years to come as regulators increase scrutiny of the sector.

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 the startups and FDIC-backed banks that ultimately held deposits.

At the heart of the dispute between Synapse and Evolve Bank concerns a fundamental function of finance: maintaining accurate ledgers of transactions and balances. Synapse and Evolve disagree over how much of Yotta’s money is kept at Evolve, and how much is held at other banks Synapse has worked with.

Synapse did not respond to requests for comment, while Evolve did accused Synapse for the failure.

Synapse’s bankruptcy has mainly ensnared lesser-known consumer fintech companies, especially after larger fintech players, among others Mercury And Daaf fled the Synapse platform over the past year.

This makes Yotta, which encouraged users to save money with free weekly lottery-style sweepstakes, one of the biggest companies affected. Accounts at crypto firm Juno and with Buyerthat offered savings accounts for families and teenagers have also been frozen.

Moelis, who has been in contact with other fintech clients affected by the Synapse failure, estimates that a total of at least 200,000 customer accounts with balances have been frozen. Although Synapse has said in court filings that it has 10 million end users, it’s likely that active accounts are much smaller, Moelis said.

The fintech co-founder said he believes the relatively narrow scope of the problem, and the fact that most of those affected are not wealthy, has given regulators permission to let the situation happen. Last year, regulators quickly intervened in the regional banking crisis that threatened uninsured deposits of startups and wealthy families, he noted.

“If this were happening on a larger scale, I think the regulators would have done something by now,” he said. “We have real, everyday Americans who are not necessarily wealthy and incapable of lobbying, but who are influenced.”

The Federal Reserve and the Federal Deposit Insurance Corp. have declined to comment on the matter. Representatives of the agencies have pointed out attempts they have done to encourage banks to manage the risks of using fintech partners.

But developments in the California bankruptcy court overseeing Synapse’s failure give Moelis hope that at least some relief — a partial release of funds, perhaps — will come.

Last week, former FDIC Chair Jelena McWilliams said was appointed curator above Synapse. Her job is to develop a plan to maintain the Synapse systems and come up with a solution “that gets the money back to the end users, to the rightful owners of that money, as quickly as humanly possible,” she said. Judge Martin Barash.

For his part, Moelis said he’s not siding with Evolve or Synapse in their dispute – he just wants the situation resolved.

“I don’t know who’s right or who’s wrong,” he said. “We know how much money has come into the system, and we are confident it is the right number. The money doesn’t just disappear; it has to be somewhere.”