6/3/2024: Modern Day Banking Failures are Complicated
Imagine you signed up for a shiny new fintech app (aka a neobank account) that promised better interest rates, FDIC insured deposits, and rewards on your spending. Everything went very well and you feel good about yourself being cutting edge and financially savvy. Until one day you wake up and find your account is suddenly frozen. You are not able to access your life savings and FDIC said there is nothing they can do as there’s no bank failure. The neobank blamed its banking partners and software providers but couldn’t provide a solution. You are completely stuck.
Well, I am not making things up. This just happened to customers of Yotta Savings. 85,000 Yotta customers with a combined $112 million in savings have been locked out of their accounts for three weeks. What happened is really crazy. Yotta Savings’s BaaS (Banking as a Service) partner, Synapse Financial Technologies, filed for bankruptcy in April. Synapse’s primary banking partner was Evolve Bank & Trust . Yotta Savings, along with over 100 FinTech apps, used Synapse’s BaaS software and Evolve’s actual banking infrastructure to serve their customers. It all sounded fine except that the Synapse’s ledger and Evolve Bank’s ledger are not in sync and apparently some money is missing. My understanding of this situation is that Synapse’s ledger said there were X dollars total of customer deposits while Evolve said there were Y dollars and X is a much bigger number than Y. Allegedly this problem has been known since 2022 but no solution has been provided to reconcile between the two sets of ledgers. It’s mind boggling a BaaS provider didn’t reconcile its ledgers and could continue to operate for years and years. Sure, it was a hard thing to do but that’s one of the main reasons why people use their services instead of integrating with the bank directly.
Last October, Mercury, a prominent startup banking app, decided to move off Synapse and worked with Evolve directly, taking $3B+ of deposits with it and claiming Synapse owing them $30M+. Fast forward to April, Synapse was running out of money. They filed for Chapter 11 Bankruptcy and found TabaPay to take over the client assets. But TabaPay walked away from the deal. Apparently, there’s a huge discrepancy between the Evolve bank ledger and the Synapse ledger and TabaPay didn’t want to deal with the complications. Finally in May, all the assets on Synapse/Evolve are frozen when people realized that there's not enough deposits to pay back all the customers. Some of the fintech apps are forced to shutdown. It appears that Yotta accounts for ~75% of the deposits on Synapse and there’s currently a $50M shortfall. A back-of-the-envelope calculation indicates ~$150M total assets on Synapse and ~$100M on Evolve. They had to freeze the withdrawals to avoid a bank run and God knows how long it will take for them to reconcile the differences and give customers (part of ) their money back.
I feel so bad for the Yotta Savings users. Many of them are young GenZers who are just starting out to build up their savings. I had a Yotta account for a while. If they had kept the interest rate high, I would have kept my money there longer. But I would have never suspected that the money could be locked like this. Yotta is backed by top tier investors like Y Combinator and Slow Ventures. Yotta CEO basically blames this fully on Synapse, which is backed by another top tier VC a16z. I checked with my FinTech guru friend. He told me Synapse was always known for terrible software and he didn’t know why anyone would use them. Supposedly Yotta management should have done better. But as a customer, I don’t really know how to DD on the BaaS provider for a fintech app. I think from now on I will be extra careful depositing money into a new shiny fintech app. Even if these apps are backed by top tier investors with reputable founders, they could be using terrible software or banking partners that end up losing depositors’ money. This is bonkers.