Evolve Bank at its peak managed around $10 billion for financial technology firms, including Stripe and Affirm. It caters to fintechs that offer technologically friendly savings accounts for everyday people with sweeteners like high interest rates. Most fintechs don’t hold their customers’ funds and instead use banks like Evolve in the background.
Problems at the bank spilled into the open when a software company called Synapse went bankrupt in April. Synapse connected fintechs to banks like Evolve to store their own customers’ funds. Synapse’s job was to ensure that everyone’s funds were accounted for, while Evolve would open accounts and issue debit cards to the customers. The funds of over 100,000 fintech customers were kept in large, commingled accounts under Synapse’s management at Evolve, its primary bank partner for years.
After Synapse filed for bankruptcy, thousands of customers suddenly couldn’t use their debit cards or move money out of their accounts at Evolve.
Evolve stopped processing payments and said it needed to determine how to distribute funds to customers. A month later, a court-appointed mediator disclosed that as much as $96 million in fintech customer funds might be missing from accounts at Evolve and other banks. Now, Evolve is facing lawsuits over the missing funds, and some clients are starting to back away from the bank.
Both Evolve and Synapse blame each other for the misplaced funds.
“Synapse failed to do the one most critical job they were supposed to do—keep accurate ledgers to track individual end user funds,” Evolve said in a statement. It said it is working with other banks to find the funds.
Synapse founder Sankaet Pathak said in a statement that Evolve’s inability to pay customers casts doubt on the “safety and security” of the financial system.
The bank, which is privately owned, remains well-capitalized and has ample funds, Lenoir said last month.
The missing funds show how Silicon Valley’s push to revolutionize consumer finance hasn’t quite lived up to its lofty expectations. While fintechs proclaim themselves as new banking products, many aren’t actual banks and rely instead on old-fashioned lenders, like Evolve. Even though Evolve is FDIC-insured, the bank isn’t the one that failed, so deposit insurance doesn’t apply.
Lorena Baculima signed up with Juno, a Synapse customer, which offered to pay her 5% interest on her cash deposits. She put approximately $130,000 into an account with a routing number belonging to Evolve Bank.
When she tried to use those funds in May to make a down payment on a house, she couldn’t access the money. In late November, Evolve told Baculima it only had $1,182 in her name.
“I thought my funds would be safe because they were in an FDIC-insured account,” Baculima said. “Nobody has been standing up for us. In my opinion, everyone involved is responsible.”
Boom times on Beale Street
Lenoir and a small group of investors bought what became Evolve Bank in 2005. For around a decade, it grew by catering to businesses and consumers in the Memphis region. In 2017, he hitched the bank’s fortunes to Silicon Valley and Synapse.
Pathak felt banking in America was still stuck in the analog era when he moved from India. He started Synapse from his apartment in 2014, moved to San Francisco and began working with startups that were looking to offer software-enabled savings products.
Pathak needed to find a bank to work with him and reached out to Lenoir, whom he had met through an acquaintance while attending the University of Memphis.
Over a few days in Memphis, the pair hammered out an agreement. Synapse channeled around $10 million of deposits into the bank in 2017. By 2020, it was sending Evolve billions of dollars in fintech deposits.
Downturn
Around 2022, Lenoir began questioning if Synapse was a necessary middleman to amass deposits from fintechs. Mercury, a fintech company that helps early-stage startups manage their finances, started negotiating with Evolve about working 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 Sept. 25, 2023, Mercury said that it planned to move around $3 billion of deposits from the Synapse account to its own account at Evolve, according to correspondence between Synapse and Evolve seen by The Wall Street Journal.
The same day, Evolve sent Synapse a breach of contract notice, ending its relationship with the middleman, claiming there were funds missing from the accounts where Synapse kept fintech customers’ savings.
It isn’t clear where the funds went. But there were discrepancies in the accounts holding customer funds because of several transfers over the years. In the summer of 2022, Synapse moved approximately $60 million of customer funds and placed them in a new account for its own use at Lineage Bank, a small bank in Tennessee.
Meanwhile, Evolve had been charging fees directly from the Synapse customer accounts to pay itself and to cover card fees, according to bank statements. Those fees totaled about $26 million between 2019 and 2023.
Pathak told Lenoir the shortfall of customer funds was Evolve’s fault, citing the fee charges that he said were unauthorized, according to the September correspondence.
Evolve has disputed that the fee charges were unauthorized and said they are unrelated to the current missing funds. Lenoir has also said there is no shortfall of funds at Evolve.
Lineage said it has restored to customers 95% of the Synapse funds it holds.
Staff at Evolve and Synapse spent months in 2023 and 2024 trying to figure out how large the deficit was, people familiar with the matter said. But they didn’t alert customers and allowed withdrawals to continue. During that time, some fintech customers ended their relationship with Synapse and withdrew all of their funds, including Nomad, a Brazilian banking fintech, the people said.
Synapse tried to sell itself and neared a deal with TabaPay, a payments technology company, but TabaPay walked away over concerns about the potential size of the shortfall, people familiar with the matter said.
Synapse ran out of money and filed for bankruptcy in the spring of 2024.
In the aftermath, the Federal Reserve summoned Evolve’s board of directors to present a plan to resolve the problems, people familiar with the matter said.
Silicon Valley leaves
Evolve’s fintech business, its engine of growth for many years, is struggling. The number of fintech-linked deposits at the bank has declined by several billion dollars over the past three years, according to people familiar with its financials.
Evolve was also hit by a ransomware attack that leaked seven million customers’ data. In June, it received a Fed order to fix faulty systems and controls for fintech customers. Evolve said it is 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 keep working with Evolve, the people said.
In September, savings app Yotta sued Evolve, accusing it of misplacing thousands of its customers’ funds. The suit is pending, and Evolve is seeking to dismiss it. Founder and CEO Adam Moelis said Yotta at first worried the freeze on its accounts at Evolve could last two days.
“It’s now been seven months,” he said.
Angel Au-Yeung and Peter Santilli contributed to this article.