How a bank disclaimer played a role in massive deposit losses

In May 2024, Jay Newbern tried to pay for his sushi dinner at a restaurant in Hawaii when the waiter returned and notified him that his debit card had been declined.

He asked if they could run it again and was told they had tried three times.

At first, Newbern wasn't concerned. After all, the 34-year-old senior sales engineer had almost $160,000 in the account and assumed it was an issue with the card. So, after paying with another card, he tested it at a convenience store, only to have it declined again.

A quick Google search found that accounts from Juno Finance, the app he used, had been frozen due to the bankruptcy of a partner fintech firm.

"I spent the next three nights not on the beach," Newbern said. "I spent them in my hotel room, suddenly becoming an expert on banking, regulations, financial technology, and reading news stories from financial publications I'd never heard of before."

He hadn't planned to use the Juno account for large sums, but after he received a notice that they offered a 5% APY in 2023, he transferred $135,000 from another account. He also increased his direct deposit through his company's payroll portal so that a portion of his paycheck would go there, too. By May, he had a balance of nearly $159,000, according to transaction statements viewed by Business Insider.

Newbern was under the impression that his deposit was safe with Juno's so-called FDIC-insured partner, Evolve Bank and Trust.

Over the following weeks, he received notifications that auto payments for his phone bill, utilities, and car insurance were bouncing. When he called Juno to determine when this might be resolved, they told him they weren't the bank. So, he contacted Evolve Bank and was told they did not have his funds.

He was puzzled. Despite using Juno, the account routing number Newbern used belonged to Evolve Bank. Evolve also issued his debit card.

Juno wasn't the only savings app that seemingly lost customer funds. The banking-as-a-service provider Synapse, which linked fintech companies like Juno to banks through a ledger, filed for bankruptcy in April. Synapse had service contracts with over 20 partner financial institutions directly or indirectly, 100 fintechs, and approximately 10 million end users through its technology platform as of January 2024, a filing showed.

David Schulzinger was using an app called Yotta, a savings account with a sweepstakes component that awarded users one entry for every $25 they deposited, with prizes ranging from 10 cents to a $10 million jackpot. He, too, assumed his deposit was safe because the website's homepage said their accounts were held by FDIC member Evolve. The account information posted to Yotta, where his money was transferred, also showed routing numbers belonging to Evolve. He told Business Insider the bank could only reimburse him with about 23% of his initial deposit.

According to a statement from Evolve, before Synapse collapsed, it had migrated some customer funds out of Evolve bank accounts. But Newbern wasn't aware his money could be moved from the bank he transferred to. However, the bank argues that a disclaimer provided to end users by Synapse noted that third parties like Synapse and Juno could instruct the bank to take action on deposits. Attorneys Business Insider spoke to say that's not an excuse to lose track of the money.

Disclaimers and terms of services

In an email to Business Insider, Eric Helvie, Evolve Bank and Trust's SVP of marketing and communications, said that end users signed an agreement with Synapse on behalf of the bank that included the following language in bold caps:

"YOU UNDERSTAND THAT BY OPENING AN ACCOUNT THROUGH THE PLATFORM WEBSITE, YOU AUTHORIZE BANK TO ACCEPT ALL INSTRUCTIONS PROVIDED TO BANK BY PLATFORM OR SYNAPSE ON YOUR BEHALF."

The spokesperson said that the provision authorizes the bank to accept instructions received from Synapse, including the transfer of depositor funds out of Evovle. The spokesperson clarified that opening an account directly with Evolve versus through a fintech is "a very different situation." In the former, depositors are direct customers and control the movement of their money typically, without a third party, unless authorized.

The spokesperson also said that most of the funds in the Synapse ecosystem were in a few "For the Benefit Of" accounts, which included the funds of multiple customers. And Synapse was responsible for controlling and tracking the money it had moved.

James Stevens, a corporate banking and fintech lawyer, emphasized that due to that disclaimer, a customer would have a hard time arguing that they didn't understand the involvement of multiple parties.

However, what the agreements do not make clear are the roles of the non-banks in the record-keeping process related to the deposit accounts, Stevens said. And herein lies the problem: the FDIC regulations require accurate record maintenance for deposit insurance to be provided, he said.

Where's the money?

"The answer is unsatisfactory as it is. We don't know," said Stevens, who said that it appears that there were problems with the ledger.

While some depositors were able to retrieve portions of their funds, others are still waiting for an answer. Specifically, there's an ongoing attempt to trace deposits Evolve claims are not within its ecosystem through outreach to other banks where transaction data could be analyzed to determine where funds may have ended up, according to a November 27 update from Evovle.

It's the case that whatever users saw on their app was told to them by the intermediary that was charged with account ledgering, and that money did not actually exist at that particular bank at that time, said Stevens, who co-authored an analysis that noted there were significant discrepancies in Synapse's account ledgers that were "materially inaccurate."

Stevens noted that user interface platforms partnering with an FDIC-insured bank is a common and successfully used model. However, in this case, the operation was poorly executed. The bank outsourced the account ledger process to Synapse, a third party. And upon its demise, it was difficult to determine who was owed what. In these types of setups, the bank should have overseen the efforts of their intermediaries and fintech customers, he added.

In July, Newbern received an email from Evolve's founder and former chairman, Scot Lenoir, notifying him that until October 11, 2023, his account showed a balance of $153,679.14. But by October 12, his balance was zero.

Lenoir said the reason was that "Juno, through Synapse, migrated its program away from Evolve to Synapse Brokerage, an SEC-registered broker-dealer, member of FINRA and SIPC…"

Through Evolve, Newbern also obtained an October Synapse Brokerage statement, previously unavailable to him, showing his money was moved to Synapse Brokerage on October 18. This transaction was not visible on Newbern's end-user statement from Juno.

A later Synapse Brokerage statement from February showed most of his balance was then transferred back to Evolve. However, Lenoir's response was that Synapse Brokerage generated the transaction, and they did not receive the funds.

What we should have seen was a corresponding exchange of cash between Synapse Brokerage and Evolve. We did not receive funds from Synapse Brokerage when these transactions were made. Scot Lenoir, founder and former chairman Evolve Bank

Synapse's founder, Sankaet Pathak, was contacted but refused to comment without guarantee that this story would only place blame on Evolve.

The bank should have had a record-keeping system for the money, said Adam Gana, a securities attorney.

"You can't just throw your hands up and say, 'well, my middleman fintech company is down and therefore nobody can get their deposits'," Gana said. "That's not how this works."

In 2023, the Federal Reserve had found that Evolve had insufficient risk management policies. And in June it ordered the bank to strengthen those programs in relation to its fintech partnerships, according to Reuters.

Newbern claimed that he was unaware these transactions were taking place on his account and continued to view his balance on Juno, make deposits, and use his debit card from October 2023 to May.

In a June email to him, Juno said they notified users of the migration in October 2023 through a notice of the changes to its terms of service via email, push notification, and banners. The email also said that email communications sent after October 17 had disclosures mentioning the changes in the footer.

The email added that end users agreed to Juno's and Synapse's terms of service during the onboarding and that it was within Synapse's right to update their terms of service. It also stated that Juno had no obligation to inform users, even though they did.

It is the craziest execution of 'we reserve the rights to update terms and conditions of this website.' Newbern

Footers viewed by Insider from Juno balance statements and emails of deposit notices after October still said, "Banking services provided by Evolve Bank & Trust, Member FDIC."

A follow-up letter from Juno stated that even after the migration, Evolve Bank continued facilitating certain payment transactions, even though it didn't hold the full funds.

It's hard to pinpoint who will ultimately be held responsible for this and whether depositors will be able to trace their funds because the complexity is so great, Gana said. For now, it's clear that fintechs providing financial services require greater government oversight. Until that's in place, depositors must be very careful with using apps that are not direct banks, he added.