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The implosion of the banking-as-a-service pioneer Synapse financial technologies is casting a harsh and unflattering light on a key link that has enabled the growth of digital banking in recent years.

During an emergency hearing Tuesday, U.S. Bankruptcy Court Judge Martin R. Barash of the Central District of California framed the situation starkly. “What we’re really seeing with the collapse of this company (Synapse), and it’s breaking up – there was a purchase that didn’t go through, it’s almost out of cash – is a situation where tens of millions of people don’t have access to potentially hundreds of millions of dollars of their deposits,” Barash suggested it was time to get federal banking regulators involved.

In late April, San Francisco-based Synapse filed for debtor-in-possession Chapter 11 bankruptcy. At the same time, the payment processor TabaPay announced had agreed to acquire the failing company’s operating assets and retain many of its approximately 100 employees. But that $9.7 million purchase fell through last week, for whatever reasons still in dispute– and now Synapse is headed for Chapter 7 liquidation. Synapse works as a middleman by connecting fintechs, which don’t have bank cards, to traditional banks, so startups can offer banking products, including checking and savings accounts FDIC insured and credit and debit cards.

Last weekend, one of Synapse’s four current banking partners, Arkansas-based Evolve Bank & Trust, froze consumer deposits belonging to customers of fintech companies served by Synapse, including Yotta Technologies, leaving tens of thousands of individual customers without access to their funds. An attorney for Yotta, Michael Gottfried of Elkins Kalt Weintraub Reuben Gartside in Los Angeles, estimated the frozen amount at $114 million. Gottfried described the complaints from Yotta customers as “heartbreaking,” saying he has seen comments from customers about not having money to buy groceries and not having access to their directly deposited paychecks.

One hard-hit customer interviewed by Forbes is Mark Egidi, a 39-year-old from Phoenix who opened his account at Yotta three years ago, attracted by the gamified savings rewards and comforted by the advertised FDIC insurance. “My money would have stayed in the bank anyway, I might as well not get bored,” he says of his decision to open an account. Last June, he transferred direct deposit of his pay as a mechanic at a local garage from a traditional checking account with Wells Fargo to Yotta. “Right now, it’s absolutely every penny I have,” Egidi says. “I’m in Arizona with an 11 month old in a house where the air conditioning broke and I just had hand surgery yesterday, so I won’t be working for a while, and literally every penny I spend I have it’s stuck in a bank account that I can’t access.

Evolve claims it was forced to take drastic action because its employees had lost access to a Synapse dashboard needed for the bank to run compliance checks and determine how much money each individual fintech customer actually has in pooled accounts maintained for their benefit . “We cannot release funds to people that we do not know belong to or have not ensured have been fully vetted to ensure compliance with sanctions laws and anti-money laundering requirements,” said Evolve lawyer Caroline Stapleton, financial regulatory partner of Orrick. , Herrington & Sutcliffe Washington, DC Office.

Synapse general counsel Tracey Guerin, for her part, insisted that Evolve had full access to the dashboard as of Monday and that its employees had not responded to numerous attempts to contact them, until 15 minutes before the hearing.

But Barash on Tuesday seemed less interested in the back-and-forth than in figuring out how to liquidate Synapse without putting at risk what he estimated were 10 to 20 million customers. Synapse said it plans to file a motion this week to convert its Chapter 11 bankruptcy (which leaves the company in the hands of management) to a Chapter 7 liquidation, meaning its dissolution will be administered by the states United Trustees, an arm of the Department of Justice.

During the hearing, Barash implored representatives from the trustee’s office to ask financial regulators for help in coming up with a plan so that Synapse’s banking partners can still use the software needed to provide fintech clients and their end customers with l access to their accounts. The judge noted that the fintech sector is new and largely unregulated, but that its customers are “ordinary people” who deserve protection.

“This is a potential disaster,” he said. “At least 10 million or 20 million end users, you should consider them as depositors.”

Synapse’s failure comes at a time when some in the Treasury and Consumer Finance Protection Bureau are already pushing for greater oversight of the fintech sector. Over the past two years, traditional banks, including Blue Ridge Bank, Cross River Bank, Sutton Bank and Piermont Bank, have all been subject to regulatory enforcement actions accusing them of poor oversight of their fintech partnerships.

But the business of connecting fintechs and banks – known as banking-as-a-service – is still an interesting business. Last week FIS, a 56-year-old publicly traded financial technology company with a market capitalization of $46 billion, has launched a new platform called Atelio to help its regional banking customers offer modernized financial products such as deposit accounts and online invoicing to other businesses.

Synapse, for its part, has had a long slide. Founded in 2014, it raised a total of $51 million from venture capital investors and was valued at $180 million in 2019, according to Pitchbook. But in early 2020, Forbes reported that CEO and co-founder Sankaet Pathak had management problems so severe that his future was in jeopardy. More recently, he has had other disabling problems, including a crumbling relationship with banking partner Evolve.

Much of Tuesday’s hearing was devoted to discussing how dire Synapse’s current cash position is now that the TabaPay deal has fallen through. The company is short of cash to pay expenses, including payroll. “It wouldn’t make sense to stay in Chapter 11 unless we had a purchase offer or a viable financing option because the estate has no money,” said Synapse bankruptcy attorney Ron Bender, of Levene, Neale, Bender, Yoo & Golubchik in Los Angeles. “We have more expenses budgeted for Friday than cash.” In fact, a lawyer from the trustee’s office said Tuesday that if Synapse doesn’t file for conversion by Friday, the trustee himself will file a motion to force an involuntary liquidation.

During the hearing, two of Synapse’s lenders with a claim on the remaining cash agreed to allow it to use the money to pay employees this week, including payments to furloughed workers for unused time off. “We’re trying to be good Samaritans here,” said Darren Azman, of McDermott, Will and Emery, who represents lender TriplePoint Capital. “In a perfect world, we probably would not agree to the use of additional cash collateral in these circumstances, at least without the entry of a final order granting us the protection that lenders typically require in these circumstances, but the company does not has that time.”

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