For nearly a century, putting your savings in a federally insured bank has been a safe bet: If the institution fails, up to $250,000 of your money will be protected.
What if that’s not the case anymore?
The promise of bank insurance, a staple of American consumer protection since the Great Depression, is now being tested by a crisis that is rocking online lenders, which have hundreds of millions of dollars in deposits between them. Customer accounts have been frozen, preventing people from withdrawing their savings. Most depositors have no idea where their money has gone or whether they can get it back.
The turmoil was triggered this spring with the bankruptcy of Synapse Technology, the kind of company you’ve probably never heard of unless you’ve had to deal with the fine print on your bank statements, ran banking software for fast-growing online lenders with names like Juno, Yieldstreet and Yotta.
Backed by some of Silicon Valley’s biggest venture capitalists, the startups offer accounts that charge lower fees and pay much higher interest rates than traditional banks. Their slick websites advertise insurance from the Federal Deposit Insurance Corporation, the U.S. agency that promises to reimburse lost funds.
Unlike traditional institutions, this group proposes to make banking a real entertainment. “Play games. Win big,” says Yotta, who proposes a lottery-type system that increases the profits of some lucky customers.
This model is increasingly popular — especially among 20- and 30-year-olds — and legal.
The problem is that while these startups may look like banks, they aren’t. They simply collect money from customers and funnel it through fintechs like Synapse to traditional banks that may have only one physical branch and a minimal online presence. The banks, including Evolve Bank & Trust of West Memphis, Arkansas, are the ones actually handling depositors’ money, according to the filings.
If a link breaks in this sequence, it can become extremely complicated for people to access their funds.
When it filed for bankruptcy in the spring, Synapse said it had just $2 million in cash on hand and owed several times that amount.
Soon after, account holders at Juno, Yotta and elsewhere, with nearly $300 million in cumulative deposits and no direct relationship with Synapse, could no longer access their money.
The only bank in the aforementioned team that is actually a chartered bank, and thus covered by FDIC insurance, is Evolve. And since Evolve itself did not go bankrupt, customers of the online lenders were not eligible for automatic federal bank insurance.
“This is really unprecedented,” said Jason Mikula, a former product manager at Goldman Sachs who now writes a financial newsletter. “The FDIC or any other agency has no direct legal authority to intervene.”
The companies involved are pointing fingers at each other. Yotta, which has repeatedly advertised its products as “FDIC insured,” told customers it was powerless to help them because it didn’t hold the money itself. Synapse founder Sankaet Pathak blamed Evolve, writing in a Medium post that it was “unnecessary and punitive” for the bank to freeze the funds. Neither Mr. Pathak nor representatives for Juno and Yieldstreet responded to requests for comment.
Yotta founder Adam Moelis, son of famed investment banker Ken Moelis, said he took responsibility for They were trying to resolve the situation but not to cause it: “The responsibility of the banks and Synapse was to store and move the money and to exercise appropriate supervision.”
He added: “These are basic things. While we are sorry for the impact this has had on our customers, the fact that these parties are unable to account for and reconcile tens of millions of dollars is not our fault.”
Even for experts, what happens next remains unclear. Although some of the $300 million frozen in bank accounts has been returned to customers, according to documents filed in Synapse’s bankruptcy case, the company’s trustee told the court there was a “shortfall” of up to $95 million in funds Synapse managed for lenders.
Thomas Holmes, a spokesman for Evolve, said that pending court orders, the bank was holding $46 million of the funds because it had discovered “numerous material discrepancies” in Synapse’s documents.
The bankruptcy court judge said he suspected tens of millions of dollars would never be found, but was powerless to force regulators to intervene. “This is a very, very unusual situation,” Judge Martin R. Barash said at a hearing last week.
In this Möbius strip, customers are at the center of the controversy. These credit startups call them “end users.” To have any chance of getting their money back, they must first figure out who owns it.
Many of them were told at one point that they had debit cards and accounts with Evolve, but have now learned that another, unnamed bank was holding their money. Evolve’s Holmes said the bank “transferred all end-user funds” to other banks at Synapse’s request, but declined to identify them. “It’s complicated,” he wrote in an email Friday, declining to elaborate.
In the interviews, Customers were shocked to learn they were not eligible for immediate federal insurance.
“It all seemed like a normal bank to me,” said Erick Baum, 45, an information technology professional in Sacramento who transferred about $30,000 of his savings from JPMorgan Chase to Yotta after hearing about it on a popular financial advice channel on YouTube.
Mark Hingle, a paramedic in Gretna, Louisiana, was angered that regulators weren’t getting involved even though they were so quick to act last year. This year, troubled banks like Silicon Valley Bank and First Republic were able to bail out struggling depositors who catered to wealthy clients. In those cases, depositors were able to access their accounts within days of regulators holding auctions of the failed banks and deploying federal insurance funds.
“I didn’t gamble with that money,” said Mr. Hingle, 33, who has $60,000 tied up and says he can’t afford back surgery without access to his savings. “I thought it was an FDIC-insured bank.”
Representatives for the FDIC and the Federal Reserve, the main banking regulator, declined to comment. An FDIC spokesman pointed to a letter the regulator sent to the bankruptcy trustee, in which it said Synapse’s collapse was “deeply troubling” and that it had responded to more than 1,000 complaints and inquiries from people unable to access their funds.
On Tuesday, Fed Chairman Jerome H. Powell told a Senate committee that the central bank “strongly encourages” Evolve to make money available to depositors, but said it has no power over Synapse or online lenders.
At Synapse’s bankruptcy hearing last week, one filer, who said she was about to sell her home to pay her bills, noted that she had filed dozens of The agency’s only response, she said, was a copy of answers to “frequently asked questions.”
Another filer said, “The FDIC has shifted the responsibility onto the consumer.” A third had earlier told the court he was considering self-harm.
Judge Barash said he had no answer. He suggested that the applicants hire their own lawyers to sue those involved.