At its peak, Evolve Bank managed around $10 billion for fintech companies including Stripe and Affirm. It targets fintechs that offer technologically tailored savings accounts for ordinary people, with sweeteners such as high interest rates. Most fintechs do not hold their customers’ funds and instead use banks like Evolve in the background.
The bank’s problems came to light when a software company called Synapse filed for bankruptcy in April. Synapse connected fintechs with banks like Evolve to store their own customers’ funds. Synapse’s job was to make sure everyone’s funds were accounted for, while Evolve opened accounts and issued debit cards to customers. The funds of more than 100,000 fintech customers were held in large commingled accounts under Synapse management at Evolve, its main banking partner for years.
After Synapse filed for bankruptcy, thousands of customers were suddenly unable to use their debit cards or withdraw money from their accounts at Evolve.
Evolve stopped processing payments and said it needed to figure out how to distribute funds to customers. A month later, a court-appointed mediator revealed that up to $96 million in fintech customer funds could be missing from the accounts of Evolve and other banks. Now, Evolve is facing lawsuits over the missing funds, and some customers are starting to withdraw from the bank.
Evolve and Synapse blame each other for misplaced funds.
“Synapse failed to accomplish the most critical task it was supposed to do: keep accurate records to track individual end-user funds,” Evolve said in a statement. The company said it was working with other banks to find the funds.
Synapse founder Sankaet Pathak said in a statement that Evolve’s inability to pay its customers casts doubt on the “safety and security” of the financial system.
The bank, which is privately held, remains well capitalized and has sufficient funds, Lenoir said last month.
The missing funds show how Silicon Valley’s efforts to revolutionize consumer credit have fallen short of its lofty expectations. While fintechs present themselves as new banking products, many are not real banks and instead rely on old-fashioned lenders, like Evolve. Even though Evolve is FDIC insured, it wasn’t the bank that failed, so deposit insurance doesn’t apply.
Lorena Baculima signed up with Juno, a Synapse client, who offered to pay her 5% interest on her cash deposits. She deposited approximately $130,000 into an account with a routing number belonging to Evolve Bank.
When she tried to use those funds in May to put a down payment on a house, she couldn’t access the money. In late November, Evolve told Baculima she only had $1,182 to her name.
“I thought my funds would be safe because they were in an FDIC-insured account,” Baculima said. “No one defended us. In my opinion, everyone involved is responsible.”
Boom times on Beale Street
Lenoir and a small group of investors purchased what became Evolve Bank in 2005. For about a decade, it grew by catering to businesses and consumers in the Memphis area. In 2017, he associated the bank’s fortunes with Silicon Valley and Synapse.
Pathak felt that the U.S. banking industry was still stuck in the analog era when he left India. He launched Synapse from his apartment in 2014, moved to San Francisco, and began working with startups that were looking to offer software-based savings products.
Pathak needed to find a bank to work with and contacted Lenoir, whom he had met through an acquaintance while attending the University of Memphis.
Within days in Memphis, the two men reached a deal. Synapse funneled about $10 million in deposits to the bank in 2017. By 2020, it was sending Evolve billions of dollars in fintech deposits.
Slow-down
Around 2022, Lenoir began to question whether Synapse was a necessary intermediary for amassing deposits from fintechs. Mercury, a financial technology company that helps early-stage startups manage their finances, has begun negotiating with Evolve to work directly with the bank. Robert Gonzalez, Mercury’s general counsel, said in a statement that Synapse “was not a reliable or trustworthy partner” and that led them to leave Synapse “to protect our customers.”
On September 25, 2023, Mercury announced that it planned to move approximately $3 billion in deposits from the Synapse account to its own account at Evolve, according to correspondence between Synapse and Evolve viewed by The Wall Street Journal.
The same day, Evolve sent Synapse a breach of contract notice, terminating its relationship with the intermediary, claiming funds were missing from the accounts in which Synapse held fintech customers’ savings.
It is unclear where the funds went. But there were discrepancies in the accounts holding client funds due to several transfers over the years. During the summer of 2022, Synapse transferred approximately $60 million in customer funds and placed them in a new account for its own use with Lineage Bank, a small bank in Tennessee.
During this time, Evolve charged fees directly to Synapse customer accounts to pay itself and cover card fees, according to bank statements. These fees totaled approximately $26 million between 2019 and 2023.
Pathak told Lenoir that the lack of customer funds was Evolve’s fault, citing charges he said were unauthorized, according to the September correspondence.
Evolve disputed that the fees charged were unauthorized and said they were not related to the current missing funds. Lenoir also said there is no shortage of funds at Evolve.
Lineage said it has returned 95% of the Synapse funds it holds to customers.
Evolve and Synapse staff spent months in 2023 and 2024 trying to determine the size of the deficit, people familiar with the matter said. But they did not alert customers and allowed withdrawals to continue. During this period, some fintech clients ended their relationship with Synapse and withdrew all their funds, including Nomad, a Brazilian banking fintech, the sources said.
Synapse tried to sell itself and struck a deal with TabaPay, a payments technology company, but TabaPay backed out due to concerns about the potential size of the deficit, people familiar with the matter said.
Synapse ran out of money and filed for bankruptcy in spring 2024.
In the aftermath, the Federal Reserve convened Evolve’s board of directors to present a plan to resolve the problems, people familiar with the matter said.
Silicon Valley is leaving
Evolve’s fintech business, its growth engine for many years, is struggling. The number of fintech-related deposits at the bank has declined by billions of dollars over the past three years, according to people familiar with the bank’s finances.
Evolve was also hit by a ransomware attack that resulted in the data of seven million customers being leaked. In June, it received an order from the Fed to repair faulty systems and controls for fintech customers. Evolve said it was strengthening its policies and procedures.
Stripe has started moving some customer accounts to Fifth Third Bank and banking app Dave is about to start working with a new bank, people familiar with them said. Both intend to continue working with Evolve, the sources said.
In September, savings app Yotta sued Evolve, accusing it of misplacing thousands of its customers’ funds. The lawsuit is ongoing and Evolve is seeking to dismiss it. Founder and CEO Adam Moelis said Yotta was initially concerned that the freeze on his accounts at Evolve could last two days.
“It’s been seven months now,” he said.
Angel Au-Yeung and Peter Santilli contributed to this article.