What happens when the technology behind a Fintech app breaks? We found this out last week, when unfortunately millions of users lost access to their funds (and, as far as I know, still haven’t gotten them back, as of this writing 5pm ET on 5/20 /14). Spoiler alert: From what I understand, it was relationships between humans arguing about money that broke down.

A little background. When you open an account with a Fintech (financial technology company) app, you’re often presented with some fine print: “*[Fintech App] it’s not a bank. Banking services provided by [Real Bank]Member FDIC.” What does this mean? This means that the Fintech is in charge of managing customer-facing interactions and the bank provides access to FDIC insurance and banking transaction infrastructure. The bank usually opens a “ FBO account” for fintech Here is a definition from Tail:

An FBO account, or 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 its users without taking legal ownership of that account. Two major potential benefits of an FBO are subaccounts with FDIC insurance and regulatory coverage. […]

An FBO account is an umbrella account that contains aggregate deposit balances for multiple customer accounts. These funds are held at the bank for the benefit of a company’s customers. No movement of money into or out of such an account should occur unless directed by or due to the actions of the end customer. These accounts are owned and controlled by the client; the firm has no access to its clients’ funds and technically never takes possession of the funds.

An FBO account is a trust account opened at the core of a bank. A dedicated FBO account means that the BaaS provider has opened a separate FBO account just for that fintech at the bank. The dedicated FBO account is only intended for end-customers of a single fintech and is not shared across 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 intermediaries between fintechs and banks. This was the case of Juno, YottaAND Copper. (I wouldn’t open an account with any of these places right now. Read on for the drama.)

I’m no expert in these topics, but this is my best understanding of what happened:

• Synapse, a BaaS provider, has been in a dispute over millions in unpaid fees and embezzled user funds with another fintech, Mercury, and Evolve Trust & Bank itself. (Mercury later began working directly with Evolve.) Synapse filed for bankruptcy in 2023. Another company, Tabapay, was in talks to acquire Synapse, but the acquisition was announced as canceled on May 9, 2024. Synapse blamed Evolve Bank & Trust for failing to resolve existing issues so the acquisition could move forward.
• On May 11, 2024, Synapse blocked Evolve from accessing its “Dashboard” which contained transaction log data of every fintech user of Juno, Yotta, and Copper. Because this meant that Evolve Bank & Trust could not verify the reason for money coming in and out of FBO accounts held at its bank, it completely blocked access to those FBO accounts.1 This meant that incoming and outgoing ACH transfers outbound no longer worked and debit card transactions also failed.
• Synapse says it restored access to Dashboard on May 13, 2024.2 Evolve disputes this and says it has not received adequate reports of settlement agreements and records.3 Evolve and Synapse continue to argue in U.S. bankruptcy court. Meanwhile, more than a full week has passed and fintech users have still not been able to access their funds.
• Jason Mikula (Fintech Business Weekly, @mikulaja) provided some of the most direct and timely insights into this situation.
• Right now, things are still a shit show.  Apparently the FDIC is not involved because it is not a bank failure. The bankruptcy judge is basically looking down on two arguing kids and yelling “You two fix this!” End users still do not have access to their money as I write this at 5pm ET on 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 suddenly and without warning disabled our access to a Synapse-controlled and necessary account and transaction information dashboard. to Evolve. This sudden outage has had a significant impact on our ability to maintain the visibility and transparency that Evolve requires in accounts and transactions. In response to this situation, Evolve has taken swift and decisive action to safeguard the security of end-user funds and ensuring compliance with applicable laws, we made the difficult decision to freeze payment and card activity until we could successfully re-establish access to the dashboard and receive. necessary account and transaction data and reporting. While we understand the inconvenience this may have caused, this step has been undertaken with the utmost consideration for the security and integrity of end user accounts. Evolve continues to work diligently to obtain the necessary information from Synapse.”

2 From medium:

Evolve’s continued account freezing, despite restoring access to the Dashboard on Monday, May 13, 2024, is untenable. The freezing of funds was unnecessary and punitive, causing significant harm to depositors who rely on access to their funds for essential needs.

3 From Forbes:

The hearing did not end the controversy that led Evolve to block customers’ access to the funds, after Synapse reportedly cut off their access to a dashboard needed for the bank to run compliance checks and determine how many money actually has every single fintech customer in pooled accounts maintained for their benefit. Synapse says access was restored last 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 Christopher Staab, Evolve’s chief technology officer, testified the bank had not received. He also directed 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.

Takeaway food? Fintechs are still a new form of banking, not well regulated and lacking strong consumer protections. I would never make fintech my main daily checking account. Now, I bet I’m in the 0.1% of people with the most fintech accounts open. I still plan to open new accounts, try new features, and earn bonuses and sign-up benefits. But I always do my due diligence and know that many don’t truly care about customers, despite their public statements. Never put all your eggs in one basket.

I expect that all client funds will be released sooner or later, but I know that lack of liquidity can be very painful for people and this is a real shame. You know that neither CEO of either company has been able to access their primary funds for a week. Here is a link to the file a CFPB complaint.

I have no intention of doing future business with any of the parties involved. Fintechs themselves also seem to have been left with a bankrupt BaaS provider for several months because they had no other better options. With growing public anger, Yotta obliterated them completely X/Twitter Account. Cute.

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