What happens when the technology behind a Fintech app breaks down? We found out last week, when unfortunately millions of users lost access to their funds (and still haven’t gotten it back as far as I can tell, as of this writing 5pm ET 5/20/14). Spoiler alert: My understanding is it was really the relationships between humans arguing about money that broke down.
A little background. When you open an account with a Fintech App (financial technology company), you are often presented with some fine print: “*[Fintech App] is not a bank. Banking services provided by [Real Bank], Member FDIC.” What does that mean? It means that the Fintech is charge of managing the customer-facing interactions, and the bank provides access to FDIC insurance and the banking transaction infrastructure. The bank usually opens up an “FBO account” for the fintech. Here is a definition from Coda:
An FBO account, or a For Benefit Of account, is a type of custodial account that allows a company to manage funds on behalf of, or “for the benefit of,” one or more of their users without assuming legal ownership of that account. Two key potential benefits of an FBO are sub-accounts with FDIC insurance and regulatory cover. […]
An FBO account is an umbrella account that holds the aggregate deposit balances for multiple client accounts. Those funds are held at the bank for the benefit of a company’s clients. No money movement in or out of that account should occur unless it is instructed by or because of an end customer’s actions. These accounts are owned and controlled by the customer; the enterprise does not have any access to its customers’ funds and does not technically take possession of funds at any point.
An FBO account is a fiduciary account opened on a bank’s core. A dedicated FBO account means the BaaS provider has opened a discrete FBO account just for that fintech at the bank. The dedicated FBO account is only for a single fintech’s end customers and is not shared among multiple fintechs in a bank’s portfolio.
In some cases, the bank itself provides and markets this service to external fintechs. In other cases, there are specific “Banking as a Service” (BaaS) companies that are essentially the middlemen between fintechs and banks. This was the case with Juno, Yotta, and Copper. (I would not open an account with any of these places right now. Read on for the drama.)
I’m not an expert on these matters, but this is my best understanding of what happened:
- Synapse, a BaaS provider, had a dispute over millions in unpaid fees and misappropriated user funds with another fintech, Mercury, and the same Evolve Trust & Bank. (Mercury later went to partner directly with Evolve.) Synapse filed for bankruptcy in 2023. Another company, Tabapay, was in talks to acquire Synapse, but that was announced as cancelled on May 9th, 2024. Synapse blamed Evolve Bank & Trust for not resolving existing issues so that the acquisition could move forward.
- On May 11th, 2024, Synapse blocked Evolve from accessing to their “Dashboard” which had the transaction ledger data of every fintech user from Juno, Yotta, and Copper. Since this meant that Evolve Bank & Trust couldn’t verify the reason for money coming in and out of the FBO accounts held at their bank, they completely froze access to those FBO accounts.1 This meant that ACH transfers in and out no longer worked, and debit card transactions also failed.
- Synapse says that they restored this Dashboard access on May 13, 2024.2 Evolve disputes this and says that they have not received adequate settlement and ledger reports.3 Evolve and Synapse continue to argue inside a US bankruptcy court. Meanwhile, more than entire week has passed and the fintech users still haven’t been able to access their funds.
- Jason Mikula (Fintech Business Weekly, @mikulaja) has been provided some of the most direct and timely insight on this situation.
- Right now, things are still a poo show. The FDIC apparently is not getting involved because this is not a bank failure. The bankruptcy judge is basically looking down at two fighting children and yelling “You two sort it out!” End users still do not have access to their own money as this writing 5pm ET 5/20/14.
1 From TechCrunch:
An Evolve spokesperson confirmed to TechCrunch that on May 11, “Evolve Bank & Trust faced an unexpected challenge when Synapse abruptly and without prior notice disabled our access to an account and transaction information dashboard controlled by Synapse and needed by Evolve. This sudden disruption significantly impacted our ability to maintain the visibility and transparency that Evolve needs to have into accounts and transactions. In response to this situation, Evolve took swift and decisive action to safeguard the security of end user funds and ensure compliance with applicable laws. As a precautionary measure, we made the difficult decision to freeze payment and card activity until we could successfully re-establish access to the dashboard as well as receive necessary account and transaction data and reports. While we understand the inconvenience this may have caused, this step was taken with the utmost consideration for the security and integrity of end user accounts. Evolve continues to work diligently to obtain necessary information from Synapse.”
2 From Medium:
The continuation of the account freeze by Evolve, despite the restoration of Dashboard access on Monday, May 13, 2024, is unsupportable. Freezing the funds has been unnecessary and punitive, causing significant harm to depositors who rely on access to their funds for essential needs.
3 From Forbes:
The hearing brought no end to the dispute that led Evolve to block customer access to funds, after, it says, Synapse cut off its access to a dashboard necessary for the bank to run compliance screens and determine how much money each individual fintech customer actually has in pooled accounts maintained for their benefit. Synapse says that access was restored this past Monday, but Evolve insists it still doesn’t have what it needs.
Barash did what he could to force a resolution. He ordered Synapse to provide settlement and ledger reports that Evolve Chief Technology Officer Christopher Staab testified the bank had not received. He also ordered executive and technical team members from Evolve and Synapse to meet and confer by Monday to discuss how to restore consumers’ access to their funds.
The takeaway? Fintechs are still a new form of banking that isn’t well-regulated and lacks solid consumer protections. I would never make any fintech my primary day-to-day checking account. Now, I’d bet that I am in the top 0.1% of people with the most fintech accounts open. I still plan to open new accounts, try out new features, and earn sign-up bonuses and perks. But I always do my due diligence and know that many don’t really care about customers, despite their public pronouncements. Never put all your eggs in one basket.
I expect all customer funds to be released eventually, but I know that the lack of liquidity can be very painful for people and that is very unfortunate. You know that neither CEO of either company hasn’t been able to access their primary funds for a week. Here is a link to file a CFPB complaint.
I don’t plan to do any future business with any of the parties involved. Even the fintechs themselves seem to have stuck with a bankrupt BaaS provider for several months because they had no other better options. With the public anger growing, Yotta completely deleted their X/Twitter account. Nice.
