Is depositing money in an advertised FDIC-insured, high-yield savings account a risky move? For thousands of digital banking customers, it’s proven riskier than burying money in an unmarked ditch.
The promise of seamless digital banking took a sharp turn in April 2024 with the bankruptcy of Synapse Financial Technologies Inc., a critical intermediary linking fintech companies to traditional banks, resulting in $265 million in frozen end-user funds.
Fintech, or financial technology, is a catch-all term for “new technology that seeks to improve and automate the delivery and use of financial services.”
Synapse, a banking-as-a-service (BaaS) platform, partnered with many FDIC-insured banks and roughly 100 fintech companies, such as Yotta, Juno, Dave and Relay. These fintechs function as neobanks, which are online banks with no physical locations that, with lower overhead costs, can offer competitive rates on loans, low fees and high interest rates on deposit accounts. Synapse connected these neobanks with traditional, brick-and-mortar, FDIC-insured banks to actually store customer funds.
FDIC-insured banks
But first, what does it really mean for a bank to be FDIC-insured? According to the Federal Deposit Insurance Corporation (FDIC), account-holder funds in FDIC-insured banks are protected “in the event of a bank failure … [and] automatically insured to at least $250,000 at each FDIC-insured bank.”
And, the FDIC defines a bank failure as “the closing of a bank by a federal or state banking regulatory agency … when it is unable to meet its obligations to depositors and others.”
Between 64% to 75% of the frozen funds have been made accessible to the respective customers. However, in the months since Synapse’s collapse, Jelena McWilliams, the court-assigned trustee, has identified a $65 to $95 million shortfall between Synapse, bank, and fintech ledgers, impacting hundreds of thousands of fintech customers, including this article’s author.
Impacted customers have received pennies on the dollar, leaving them without their life savings, without their checking accounts for groceries and rent, and with a shattered faith in the United States banking system.
“The hundred-million-dollar question is where did the money go? And is it money that Evolve [Bank & Trust] should be accountable for or one of the other banks or somebody else?” said Judge Martin Barash in the most recent hearing of Synapse’s Chapter 11 bankruptcy case on Jan. 8, 2025.
What’s the holdup?
Fintechs impacted by Synapse’s demise, like Yotta and Juno, had assured customers that their funds were FDIC-insured. In January 2021, the headline on Yotta’s homepage – a service offering high-yield savings and checking accounts with a gamified experience – read: “Win up to $10 million by saving in an FDIC insured account.”
But, is that accurate? Yes and no. These fintechs partner with banks that are FDIC-insured to store end-users’ money. However, the fintechs themselves are not FDIC-insured and neither was Synapse, the party that was responsible for actually managing and transferring the money to the banks. So, if the fintech or the intermediary messes up, customers’ money held in FDIC-insured accounts is not actually protected.
The partner banks involved are Evolve Bank & Trust, Lineage Bank, AMG National Trust, and American Bank, all of which are FDIC-insured. The banks hold customer funds in “for the benefit of” (FBO) accounts (a type of custodial account) where the bank manages the overall account, while the fintech – or an intermediary like Synapse – handles the individual customer sub-accounts.
The situation is further complicated by the fact that Synapse’s business model involved shuffling funds between its partner banks, a service they marketed as “modular banking.” This strategy, intended to enhance reliability, ironically has made reconciliation – matching individual users to their correct funds – a nightmare.
The cost of the complex reconciliation process is another roadblock. According to trustee McWilliams, a third-party company her team consulted with wanted two to three million dollars to analyze Synapse’s ledgers and decipher where the missing money went. So far, neither the fintechs nor the banks are willing to cover that cost.
Joshua Nelson, an impacted Yotta end-user who frequently joins Synapse bankruptcy case hearings to raise customer questions and concerns, expressed frustration over this lack of accountability during January’s hearing: “Adam Moelis is on this call. He’s the CEO of Yotta. He’s the one that structured this whole business plan. His father is worth billions of dollars. Is he willing to take some small profits from his casino operation and pay for the reconciliation?”
Adam Moelis followed his attorney’s counsel and declined to comment.
Surely, there are regulations in place for this … right?
The missing funds highlight a massive regulatory gap in the quickly-evolving fintech space. Current regulation doesn’t require FDIC-insured banks to keep individual user records for custodial deposit accounts, leaving the weighty responsibility of tracking individuals’ money to the fintech companies and any intermediary they hire to manage the process.
With Synapse’s modular banking model, customer funds were transferred across partner banks at Synapse’s discretion. Since the banks weren’t required to keep track of the money, only Synapse was aware of whose money was where. And a Yotta end-user, for example, would only see Evolve Bank & Trust listed on their Yotta account, even if their funds were actually spread across multiple of Synapse’s partner banks.
Synapse rolled out its modular banking through its subsidiary, Synapse Brokerage LLC (previously MVP Financial LLC) which it purchased and renamed in 2020. By becoming the only party that knew how people’s money was spread across its partner banks, Synapse positioned itself as an indispensable middleman in the fintech space. Without Synapse, who would know where exactly end users’ money was stored? As became clear in the face of Synapse’s collapse: no one. And, while this move did make the BaaS company vital in its fintech and bank partnerships, Synapse evidently did not have the infrastructure to support such a complex and responsibility-ridden business model.
The FDIC has not deemed the banks to have failed and, in fact, has taken a rather hands-off approach to hundreds of thousands of people losing their savings which they believed were insured by the American government.
Trustee McWilliams, who was the FDIC Chairman from 2018 to 2022, shared her thoughts on the agency’s response in January’s court hearing: “I would have loved to have had the agency … put this as a priority, provide more than the 1-888 or 1-800 number for the consumers to call, where you get a claim number, never hear from anybody. I would have frankly preferred to have seen individual outreach from and statements from the agencies with more help and more direction.”
Examinations conducted in 2023 by the Federal Reserve Board found that Evolve Bank & Trust and Lineage Bank had insufficient risk management frameworks for their fintech partnerships and lacked adequate controls for anti-money laundering and consumer protection compliance. Both banks received a consent order/cease and desist order, essentially a slap on the wrist from regulators.
Evolve’s cease and desist order was issued in June 2024, after Synapse filed for bankruptcy, and Lineage’s consent order in January 2024.
Potential rule changes and certifications
The FDIC, however, is aware of the issue. In October 2024, it proposed a new “Recordkeeping for Custodial Accounts” rule that would require banks partnering with fintechs to keep detailed ledgers of customers’ funds. The proposal was meant to facilitate the FDIC to “pay deposit insurance claims ‘as soon as possible’ in the event of the failure of an IDI [Insured Depository Institution] holding custodial accounts.”
In other words, the rule would help prevent future account discrepancies and shortfalls between fintechs and FDIC-member banks by holding the banks to a higher standard of recordkeeping. While fintechs themselves would still not be FDIC-insured, the checks and balances in these fintech-bank partnerships would be stronger with the hope of avoiding a future Synapse-esque fiasco.
But the proposed rule was put on an indefinite hold when President Trump started his second presidential term and ordered all federal agencies not to “propose or issue any rule in any manner” until a new department head was appointed by President Trump that can review it.
In January, Trump appointed FDIC Vice Chair Travis Hill as acting FDIC chairman, but Hill has yet to clear the proposal on recordkeeping.
In Hill’s first statement as acting chairman, he said that the agency should “adopt a more open-minded approach to innovation and technology adoption, including (1) a more transparent approach to fintech partnerships and to digital assets and tokenization, and (2) engagement to address growing technology costs for community banks.”
Hill also suggested the possibility of a public-private standard-setting organization to streamline due diligence between fintechs and partner banks, potentially offering a voluntary certification process, which has been proposed previously in 2020.
The effectiveness of voluntary certifications to keep businesses accountable has been questioned for some time. Labor abuses, for example, have gone under the radar in the production of sugar in India, despite the product being certified as humanely sourced by Bonsucro, a non-governmental group that sets the sugar industry’s production standards.
What’s next?
The next court hearing in Synapse’s bankruptcy case takes place on February 7th. The trustee will provide an update on the shortfall and any new communication from the FDIC while the banks will update the court on their reconciliation processes.
As for impacted customers who have been without their savings and checking account funds since May 2024, Judge Barash stated in January’s hearing: “I don’t know that [who is at fault for the shortfall] is going to get sorted out here. It’s probably going to get sorted out in litigation.”
For tips on how to conduct investigative business reporting on bankruptcy filings and the ever-evolving banking sector, check out “Chapter 6: Technology,” “Chapter 17: Banking” and “Chapter 18: 8-K Filings” of The Reynolds Center’s Business Beat Basics: A Guide to Covering All Things Business.
