WASHINGTON — Imene Haddad, at this point, feels like she has tried everything.
Her account with the fintech app Juno — holding roughly $26,000, her entire life savings — froze last month. She, along with tens of thousands of others
Haddad, the 39-year-old single mother from West Palm Beach, Florida, had a mortgage payment due, and the bank that she understood held her funds — Evolve — couldn't allow her to access them.
She contacted the Consumer Financial Protection Bureau, thinking that, surely, a consumer protection agency would be able to help her regain access. The CFPB referred her to the Federal Reserve (which regulates Evolve). The Fed sent her back to the court handling the Synapse bankruptcy case.
She's tried her lawmakers — Sen. Marco Rubio, R-Fla., in particular. Haddad said she hasn't heard back from his office. (Rubio's office did not respond to American Banker's request for comment.)
"I'm running out of ideas on who to reach out to," she said. "I'm terrified, because that's all I worked for all my life."
Haddad's savings are caught up in the increasingly messy bankruptcy case of Synapse, which served as an intermediary between customer-facing fintech apps and FDIC-insured banks.
The case, needless to say, has been difficult.
Just last week, Evolve
McWilliams on Thursday took the
Until these discrepancies are ironed out, people like Haddad are stuck waiting.
"I did not expect this to happen in this country because I thought that we are protected from something like this," Haddad said. "It has shaken my faith. I'm left with nothing."
Who you gonna call?
Patty Newman, who asked to use her maiden name, created an account via Yotta in 2022, attracted by the interest rate offered on her savings versus what she could get with a traditional savings account.
"My funds that are frozen are my emergency fund — the money for me to utilize when things break or something goes wrong in life," she said. "It took about two years of saving to put together that small emergency fund. It is not much, certainly not what an emergency fund should be, yet it is a good start and important to have."
Newman liked that Yotta encouraged her to save. She also liked that Yotta told her that her money was FDIC insured.
"I feel I did my due diligence — researched Yotta, made sure it was FDIC insured, which they advertised, and read reviews and articles about it," she said.
But, as Newman, a retired teacher, and many others would learn, FDIC insurance only kicks in when a bank fails — not a third-party fintech.
"I made the best decision with the information I had at the time," she said. "Yet now, I've learned a new vocabulary: fintech, neobank, third party pass-through, BaaS. All things I had no knowledge of before."
Often, these kinds of arrangements — where a fintech company takes a deposit from a consumer and has a relationship with a banking-as-a-service institution — operate through a "For Benefit Of," or FBO account. The fintech firm is supposed to take the consumer's deposit and open a bank account in their name.
In the case of the bank's failure, that consumer would receive FDIC insurance up to $250,000.
But sometimes the relationship between deposit insurance, the fintech firm and the bank isn't clear to the consumer. And just as often, the arrangement includes middlemen like Synapse that make the flow of deposits even more complicated.
"People take for granted that when they deposit their money with some kind of financial institution or financial-like company that has the valence of the bank, that their money is safe," said Chris Odinet, a professor at Texas A&M University School of Law. "Of course the reality is there's a very different set of rules and protections with what you're doing with a bank and what you're doing with anyone else."
All that has left Newman's money in a regulatory no-man's-land.
The FDIC — which is adept at stabilizing customer accounts when a bank fails — can't swoop in because no bank has failed. The CFPB has limited authority in cases where the bank is under $10 billion in assets, and the Fed, which
The FDIC has tried to crack down on how nonbanks advertise deposit insurance in these kinds of pass-through or FBO arrangements. The agency
"Consumers don't have — nor should they be expected to have — this technical knowledge about banks and nonbanks," Odinet said. "So instead, it undermines trust generally in the banking system. And that, from a public policy perspective, is really a problem."
But as it stands, it's up to consumers to read the "very fine print" about how fintech-bank arrangements work, and to understand the extent to which they're protected in the event of a bankruptcy, said Carla Sanchez-Adams, a senior attorney at the National Consumer Law Center.
"The way that these products are marketed and the way that people understand them, in consumers' minds they associate them with a bank account," she said. "The challenge with all of these is that the more removed you are, the more opportunities exist for failure and for the funds to be missing from somewhere."
In the last month, Newman said that the FDIC has told her that they are monitoring the situation in bankruptcy court, the CFPB has referred her to the Fed, the Fed board has forwarded her to the St. Louis Fed, and the OCC has acknowledged and closed her complaint. She's reached out to the White House, the Senate Banking and House Financial Services Committee and other individual lawmakers, as well as FINRA and even the Better Business Bureau.
Every morning, she scans social media for news, and checks the bankruptcy court docket. Every Thursday at 6 p.m., she checks for McWilliams' trustee status report, and on Friday she listens to the court proceedings.
"I've turned this into a full-time job it seems," she said.
You can't get there from here
It's still possible that any of the players in the Synapse bankruptcy, particularly its partner banks,
And while the regulatory cogs of Washington often move too slowly for the people caught in the middle, the Synapse bankruptcy could be a watershed moment for banking-as-a-service regulation.
"I think this is a moment that underscores the urgency of resolving banking-as-a-service," said Adam Rust, director of financial services at the Consumer Federation of America. "An event like this may not have been expected, but now here we are, and the question is how do we protect depositors?"
Although now-trustee McWilliams and other Trump-era regulators
Bank regulators have several levers to pull, Rust said. The FDIC could publish further guidance requiring those who claim FDIC insurance for their products to more explicitly and prominently call out the terms of those arrangements, and all the prudential regulators could hold banks more accountable for the actions of their fintech partners.
The Senate Banking Committee is communicating with regulators about a response to the bankruptcy, according to a person familiar with the workings of the committee, and wants to press investors in the fintech company and its partner banks to restore customers' access to their money.
The House Financial Services Committee did not respond to American Banker's request for comment.
Sanchez-Adams said that the CFPB could eventually use its authority under the Electronic Fund Transfer Act or over unfair, deceptive, or abusive acts or practices to pursue one or multiple actors in the Synapse case.
"But that's not something that can happen overnight," she said.
Action from Congress that closed the regulatory gaps that have left consumers in the lurch this time would be ideal, Odinet said. There's currently no legislation that's expected to be considered before the end of the year that addresses bank-fintech partnerships, but Odinet says until such a measure is taken up, these problems will persist.
"This isn't going to be the last time this happens," he said.
