Millions of fintech app users have lost access to their cash. In this episode, we explain why this happened and show you how to protect yourself when placing cash with traditional banks, neobanks, and fintech platforms.
Topics covered include:
- The mass chaos in the fintech space spawned by the bankruptcy of Synapse Financial Technologies
- What are FBO accounts, and why they are so troublesome
- What is the difference between a traditional bank, a neo bank, and a non-bank
- What to look for and protect yourself when investing your cash savings
Show Notes
Fintech platform Synapse raises $33M to build ‘the AWS of banking’ by TechCrunch—Synapse
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Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 483. It’s titled “Smart Cash Management. Navigating Banks, Neobanks and Fintech Platforms.”
The Synapse Collapse
A week ago, I received an email from the crowdfunding platform Yieldstreet. The title of the email was “Update on progress to return wallet funds.” I was surprised about this email. I haven’t invested with Yieldstreet since 2018. I didn’t think I had any money there, so I signed into my account, and apparently, I have two cents in a Yieldstreet wallet.
The email said “Giving you access to your wallet deposits is our top priority. We are working with the banks to return them to you directly as quickly as possible.” That’s a little disconcerting if you get that email from a provider and say you can’t get access to your funds. Now, in my case, it was two cents, but apparently, it just wasn’t Yieldstreet There were other FinTech platforms that users were unable to access their cash.
Here’s a Yotta user. Yotta is a savings app. The user wrote “I have over $60,000 tied up in my account with absolutely no access to it. If I’m not able to get my hands on my money, then I’m going to start having huge issues next month when my mortgage property tax, and bills begin to pile up”.
Another app is Juno. That user says, “I have nearly $40,000 tied up in this, which includes my emergency funds, savings from my house and car, and one of my children’s savings. The funds were there due to an accident on my part. They were supposed to be in Treasury bills, but I forgot to reinvest, and they were paid out, and now they’re being held in this Juno app. Now I’m stuck. I feel powerless and unable to do anything. I’m so upset”.
And the users reached out to FINRA, the FDIC, the Federal Reserve, the congressman, a senator, and the user says “People are just passing things around. I’m disgusted. I’ve written off the money but will be thrilled by some miracle if I get it back.”
I did some research, and it turns out there wasn’t a bank failure or the apps themselves haven’t failed. What failed was Synapse Financial Technology. This is a middleware company that was connecting these FinTech apps with commercial banks. Synapse Financial Technologies went bankrupt on April 22nd, 2024.
In looking at the Chapter 11 trustee’s initial status report dated June 7th, 2024, we can see what happened. The trustee is Jelena McWilliams. She’s the former Chair of the Board of Directors of the Federal Deposit Insurance Corporation. She’s in charge of figuring out what happened, where’s the money, how do we get it back.
Synapse was a San Francisco-based startup. Began in 2014, in the banking as a service space to help tech companies provide banking services. Synapse served as the middleman. They raised $33 million dollars in funding from Andreessen Horowitz (also goes by a16z), Trinity Ventures, and others.
They started in 2014, and in 2020 they developed a cash management program in connection with the subsidiary, Synapse Brokerage LLC, and began offering cash management accounts. Their primary banking partner was Evolve Bank and Trust. The bankruptcy filing was on April 22nd, 2024, and as part of that bankruptcy filing, Synapse agreed to sell its assets for just under 10 million to TabaPay Holdings LLC. TabaPay eventually pulled out because of the big fiasco we’re gonna see in figuring out where all the money is.
Evolve Bank and Trust filed a motion with the bankruptcy court, asking for access to Synapse’s dashboard system, the system that stood in between Evolve, the bank, and the FinTech apps and their users. There’s up to potentially 10 million users impacted by the failure of Synapse. Over 100 different FinTech platforms. Some of the leading platforms include Juno, Yotta, both of which had over a million dollars in customer assets with Synapse, or at least tracked by Synapse.
As part of the trustee reports, Jelena McWilliams, in looking at Synapse, found that the company used multiple partner banks, and would use different banks for the same client, for different services. So withdrawals might happen with one bank, deposits with another. They also used what are known as FBO funds, so For Benefit Funds. Synapse had two types. They had DDAs or demand deposit accounts, and those are fairly simple because they were in the name of the user of the app. And most of those funds have been returned.
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