The hidden world behind your new "banking" app
21:12 Share

Support for this NPR podcast and the following message come from the UPS Store. Open this Wednesday. Come into your local store today. Most locations are independently owned. Products, services, pricing, and hours of operation may vary. See center for details. The UPS Store. Be unstoppable. This is Planet Money from NPR. Odds are that you've seen ads for these online banking services that seem to offer all this great stuff.

accounts that don't have monthly fees, that seem to pay high interest rates, and offer all these fun things that your boring old bank may not offer.

This is the story of what can happen when you sign up for one of those services. We're going to start with Sharinda and Jordan Gonzalez, this couple in Castroville, Texas. They met 11 years ago. He thought I was married at first. Oh, I did, yeah. Because I gave some kind of vibe. She wasn't, and they got married. Jordan is super into NASCAR, and Sharinda, she loves basketball.

books, specifically mysteries, thrillers. I recently read The Intern. That was one of my favorites. And then another one titled When I'm Dead. I can go on, girl. Ha ha.

Sharinda is a social worker at a middle school, and Jordan's a software tester. For a long time, they were living paycheck to paycheck. They'd occasionally buy a lottery ticket, never won. But in the last couple of years, they had started to really get their budget under control, paying off like $5,000 of credit card debt, saving up for emergencies. And then one day, Jordan came across this ad. This is what you're doing every time you buy a ticket for the lottery.

The ad shows a bunch of cash being flushed down the toilet. But here's something wonderful you might not know. You can win the jackpot without ever buying a lottery ticket. Meet Yotta, a banking app that has a weekly drawing just like the lottery, except it's free.

This ads for an app called Yotta, like Yotta, Yotta, Yotta. And the basic idea is you keep your savings in Yotta. Once a week, the app would randomly draw customers and they'd win prizes. Most of the prizes were just a few dollars, but people could win thousands. They could even win a Tesla.

To Sharinda and Jordan, this was so appealing. Basically, they were talking about gamifying their savings into a lottery type thing. But at the same time, you're not spending money. You get more tickets by saving. So it's like, hey, it's a neat little deal. There's a name for this idea. It's called prize-length savings accounts. Governments around the world have used this concept to help motivate people to save money. Jordan and Sharinda, they looked at the app.

Scrolled through, read some reviews, and to them, Vyana looked great. They could get debit cards, monitor their balance, and even directly deposit their paychecks.

Basically, Viata seems like a bank. It even seemed to have the banking gold stamp of approval, FDIC insurance. Absolutely. The bank we partner with is FDIC insured, just like Chase, Bank of America, Wells Fargo, and every other bank you can drive to. Then what's the catch? Did someone say catch? There isn't one. Sharinda and Jordan heard FDIC insured, and to them, that said something. It said, this app is legit.

So they signed up. They started by depositing $200 a month. They won a couple of cash prizes, even a few free coffees. Sharinda buys about three or four books per month. And one month, she got a notification that Yara had randomly covered all of her book purchases. After about a year, Jordan and Sharinda started depositing their entire paychecks.

It was easy. All they needed was their phones. Even, I don't know, maybe a middle schooler can use the app. Yeah, it was really good. Yeah. Did it feel like the bank of the future?

It really did. Yeah, it definitely felt like something that, like, why are the old banks, why aren't they doing stuff like this? This bank of the future was helping them save money. They managed to put away $6,000. But then one day in mid-May, Sharinda is where else? At a bookstore. And she goes to pay using her Yotta debit card.

And so at first they're like, oh, well, you know, it's been declined. Weird. I go get whatever, you know, there's glitches that go on. So I tried it again and still it was declined. She knew she had thousands of dollars in her account. I was just frustrated, you know, a little embarrassed too. And then people are behind you, waiting for you to go in and pay next. Like, why is it my car working? The problem wasn't just with shutting this account. It wasn't even just a problem with all Yotta accounts.

It was way bigger than that. Thousands of people could not get access to their money. And since that day, Sharinda has felt like a character in one of those mysteries she loves so much. It's kind of like, wow, like I feel like I'm in a book where... It's surreal. Yeah, it was surreal. Like maybe you were dreaming, hoping you were dreaming, but it wasn't actually a dream. It was actually real life. ♪

Hello and welcome to Planet Money. I'm Erika Barris. And I'm Sally Helm. That was more than three months ago. Sharinda and Jordan still haven't been able to access their money. Not because they got scammed. This is a much more complicated story about what a bank is and what it is not. Today on the show, how the banks of the future may not be living up to their promise. We've got unreachable accounts, finger pointing and a regulatory scramble.

And a big question for all of us. Are you banking with a real bank? Because it turns out that matters quite a bit.

Support for this NPR podcast and the following message come from the UPS Store. They know being a small business owner means holiday time is often still go time, still get those orders shipped time, and still re-up on stamps and supplies time. That's why this Wednesday, while others close up shop, the UPS Store will be open and happy to help you keep being unstoppable. Come into your local store today. Most locations are independently owned.

Products, services, pricing, and hours of operation may vary. See center for details. The UPS Store. Be unstoppable. Support comes from our 2024 lead sponsor of Planet Money, Amazon Business. Everyone could use more time. Amazon Business offers smart business buying solutions so you can spend more time growing your business and less time doing the admin. You'll see why they call it smart. Learn more about smart business buying at amazonbusiness.com.

Yara had tens of thousands of customers.

In total, people had deposited over $100 million. And suddenly, all that money was frozen. And to figure out what exactly happened here, we called up Hillary Allen, a law professor at American University. And I am also the author of the book, Driverless Finance, FinTech's Impact on Financial Stability. Driverless finance, like a driverless car? Yeah.

Yep, there are cars crashing on the front cover. Hillary's book is about fintech. See, Yotta is what's known as a fintech, a financial technology company, like a tech company that does something with money. Think Venmo or Square.

Fintech started to take off in the late 2000s because of smartphones and also because of the 2008 financial crisis. People lost their homes and their savings, and they also lost some trust in the big banks. Unsurprisingly, there was a lot of distrust of traditional banks and other financial institutions, and that sort of created a market to provide equivalent services but not be the traditional financial institutions.

So in the years since, a whole industry, hundreds of fintech companies have popped up. Fintechs can do a bunch of different things. This episode is about the ones that do the banking-like services. So companies where you can keep money in an account or use to pay for things. Right. And look.

There can be benefits to these fintechs. There are lots of people that can't afford to use banks. For the unbanked or the underbanked, fintechs like Yotta can help give people a place to put their money and save money. And Yotta promised to be better, faster, easier to use. It seemed like a bank of the future.

But we should make it clear, Yotta is not a bank. Erica, no, it is not a. Yotta is not a bank. And that is a key part of this story. But to customers, it might not have been totally obvious. It's the, like, if it walks like a duck argument, you know, it seems to do all the things that a bank does. Why wouldn't it be a bank? Yeah.

You know, often these will market themselves with the word bank in their marketing, you know, and there might be an asterisk after the bank. Sure.

But, you know, and then in tiny print, we're not actually a bank. Because what is an actual bank? A bank does three main things. It holds deposits, makes loans, and allows customers to make payments. And to become a bank, there is a whole arduous process. Banks have to meet a bunch of regulations. They got to have reserves. They need to apply for a charter. And these bank-like fintechs have not done any of that.

But in their marketing materials, they often make that less than obvious. I was looking at one the other day. Hillary pulls up the page for a popular fintech company called Cash App. So it says, do more with your money, send and spend, comma, bank, asterisk. And it's not entirely clear where the asterisk links to. Oh, here it goes. In tiny print, it then says, cash.

Cash App is a financial services platform, not a bank. But that's in small print. It's got bank in bigger print asterisk and then in tiny print, Cash App is not a bank. Hillary says if you have questions about the company you're using, just look at the fine print. Does it literally say it is a bank? If it doesn't, it probably is not a bank.

But remember, it might look like a bank and even quack like a bank. And in order to market themselves as bank-like and to do all these bank-like things, these fintechs need a whole financial ecosystem behind them. And this ecosystem is key to understanding what happened to Sharinda and Jordan's money. Bit of a wild ride, so stay with me here. Yara would take deposits from customers, but they...

They were not legally allowed to hold the deposits. So Yara would send the customer money to a real bank. But they did not send the money directly to the bank. They used a middle company. And the whole problem, the reason Sharinda and Jordan couldn't access their money, it has to do with this middle company. That company is called Synapse. Okay, like essentially the company that is like the connective tissue. Yeah.

And I think that's how they came up with the name. That makes a lot of sense, doesn't it? Right. Because synapses are nerve connectors. What is actually a synapse? It's like what connects all the neurons and helps them talk to each other. And synapses sell to Yada was, you just give us the money. And this is important. We will deposit the money for you at a real bank. Synapse promised to deposit the money at a bank called Evolve Bank & Trust.

Evolve's been around for about 100 years, and in the last decade or so, they've worked with a bunch of different fintech companies. And when Synapse sent the money to Evolve, the money got crucial protection that banks provide. This is where the money is FDIC-insured. The FDIC usually insures individual accounts of up to $250,000. So if the bank fails, customers will get up to that amount back.

So when customers put money in Yotta, it would go from Yotta to Synapse to Evolve. That is how it was supposed to work.

But a few months ago, Synapse failed. It filed for bankruptcy. And this revealed an accounting nightmare. Yara had thought Synapse was keeping track of their customers' deposits and how much money people earned through rewards and bonuses. But no, according to some of the bankruptcy documents, Synapse wasn't keeping good records.

And also, Synapse had dropped much of the money into one big account at Evolve. Which is wild. All this Yotta customer money was going into one single huge account. That ended up making it almost impossible to know how much money should go to which customers. Also, Synapse had moved some of the money to other banks too. So it was really a whole big mess. Yeah.

And this is why Yotta customers, like book-loving Sharinda and her husband Jordan, couldn't access their accounts. And actually, the problem is much bigger than just Yotta. Synapse worked with about 100 different fintechs and four different banks. In total, customers couldn't access about $265 million. And up to about $100 million of that is missing. And look.

It's still not clear if Synapse did anything illegal. But Hillary says, in general, fintechs can be very good at skirting regulation. Yeah, so, I mean, not all of this is illegal because they have absolutely hewed to the letter of the law, getting as close to the line as they possibly can. And they have violated absolutely the goals and the spirit of the law, but they have not violated the letter of the law most of the time. ♪

After the break, we go to the regulators to find out what this cautionary tale tells us about what kind of new rules we might need going forward. This message comes from NPR sponsor Merrill. Whatever your financial goals are, you want a straightforward path there. But the real world doesn't usually work that way. Merrill understands that.

That's why, with a dedicated Merrill advisor, you get a personalized plan and a clear path forward. Go to ml.com slash bullish to learn more. Merrill, a Bank of America company. What would you like the power to do? Investing involves risk. Merrill Lynch, Pierce, Fenner & Smith Incorporated, registered broker-dealer, registered investment advisor, member SIPC.

This message comes from EasyCater, a business tool making it easy for organizations to order and manage food from their team's favorite restaurants and simplify the payment and receipt process, all on a single platform. Learn more at EasyCater.com.

This message comes from NPR sponsor Rosetta Stone, an expert in language learning for 30 years. Right now, NPR listeners can get Rosetta Stone's lifetime membership to 25 different languages for 50% off. Learn more at rosettastone.com slash NPR.

This message comes from Capital One. Banking with Capital One helps you keep more money in your wallet with no fees or minimums on checking accounts. What's in your wallet? Terms apply. See CapitalOne.com slash bank for details. Capital One N.A. Member FDIC. In reporting out the story, we have reached out to so many angry, frustrated, and confused Yotta users. And

They have a lot of questions. And the overwhelming sense is they don't know where to find answers. I've messaged every single entity, like House representatives, senators. The White House, the FDIC, the SIPC.

the NFCP, the Fed, the Federal Bank of St. Louis. What's that Spider-Man meme where he's just pointing at himself, pointing at himself, pointing at himself? That's what it feels like. Rachel Vecchio, David Schulzinger, and Candace Russell all just want to know how this was allowed to happen.

To answer that question, we went to a longtime regulator named Mike Hsu. How often do you have to explain to all of your, like, normie friends, like, how exactly this whole system works? It depends on how nerdy they are. So...

We asked Mike to go full-on nerd. He says banks in the U.S. are regulated by three different entities. The Federal Reserve regulates some banks, the FDIC regulates others, and the Office of the Comptroller of the Currency, the OCC, regulates the rest. Mike has done stints at the Fed, the Treasury. He's now at the OCC. He's been there for a few years. His job is to oversee the banking regulators. There are about 2,000 people who examine the banks.

And he's been thinking about fintechs like Yotta and Synapse because they're everywhere. You know, my kids are teenagers. When they got jobs, they wanted to just have a fintech app. I said, no, you need a banking account. And here's why. Mike basically tells his teens, if the app is not FDIC-insured and something goes wrong, you could lose your money. If you keep your money in a bank, it'll be protected. And

And afterwards, they're like, yeah, that's a good idea. Were they like, dad? Yes. I mean, but they're like that with me on everything. And look, if you're a teen whose entire life is on their phone, you can totally see why fintech is appealing. It is easy to swipe or click. It can even be fun. And Erica, I...

Yeah, I am not even a teen. And I also understand this. Like adults also want their banking to be simple and digital. And Mike says, look, there are ways that fintech and banks can work well together. Like the app makes a nice streamlined experience. And then the bank actually takes care of the deposits. And they're both clear about who is responsible for what.

But that actually gets to the heart of the problem for these Yotta users. Everyone in the system was depending on Synapse.

But Synapse maybe wasn't doing what it was supposed to be doing. Again, not clear if they did anything illegal, but at the very least, they weren't keeping good records. And no one was really watching them. I think we on the regulatory side really need to start thinking about this through this lens of supply chain. We regulate the banks, but if you've got a long supply chain, we can't reach all the way through. Yeah, supply chains have all of these individual moving parts working together.

And when things are going well, the individual parts can become kind of invisible. But when one of them breaks, suddenly the whole thing falls apart.

In the case of Yotta and Synapse, it just wasn't clear which agency would be responsible. We reached out to the Consumer Financial Protection Bureau, the CFPB. They said, nope, not us. We have authority over a bunch of different types of financial products. But right now, this type of fintech is not one of them. And the bank regulators are like, well, not us either. This is not actually a bank.

But we can try to do something by regulating the entities that we do have authority over, namely the real actual banks. Like the bank that Yotta and Synapse worked with, Evolve. Last month, Jerome Powell, the head of the Fed, actually testified about all of this in a Senate hearing. We do supervise the bank. We don't supervise Synapse or let alone the fintechs that feed into Synapse. And we're strongly encouraging Evolve to...

to do whatever it can to help make money available to those depositors. The FDIC has also been doing what it can. And it can tell fintechs, look, you are not a bank. You cannot say you are a bank. You cannot use some of the specific language that banks use. Like, if you look really carefully at Yotta's marketing materials, you'll see they don't say they pay a high interest rate. They call it a, quote, savings reward.

The FDIC even reviewed the language Yotta used back when they launched in 2020 and suggested changes to try and make it clearer that Yotta wasn't a bank and couldn't protect your money like a bank. So you can see these regulators trying to use the tools that they have to protect fintech customers. But that is not really what these tools were made for. I think the synapse bankruptcy and the turmoil around it has really highlighted

Okay, this is what happens if we don't get this right. Was this a regulatory failure? So it depends on how you define regulatory failure. Industry is very enterprising slash creative slash innovative. And on the one hand, that's a good thing. That's how we get improvement and progress and all that. However...

They'll always find a weak spot in the regulatory regime to do something to push the boundaries. Mike says it's hard for regulators to keep up. He thinks it's actually a job for Congress to pass legislation and give some federal agency the authority to regulate these types of fintechs. We did reach out to spokespeople for Synapse, Yotta, and Evolve. They didn't respond or declined an interview. All the customers at Yotta that we've spoken to have not gotten their money back.

It is not clear if or when they will get access to their money.

including that couple in Texas, Jordan and Sharinda Gonzalez, who wanted to save money and win prizes. Jordan and Sharinda are fighting back. Jordan's filed a lawsuit against Evolve Bank. But even despite all this, he's not out on fintechs. I'm for trying new things. I really am. We probably do need to read those documents a little bit better. But I'm not against fintechs. I might take a pause from it. But if Yoda and his glory days, I'd quickly go back.

Sharinda, not so much. I was like, you know what? This is why people put their money under their mattresses. Like, you know, this is why people don't trust in banks. I was just, you know, going off on that. What are you guys doing now? I am curious. Like, are you keeping your money under your mattress or do you have it like at a good old fashioned brick and mortar bank?

Brick and mortar, because my trust in the financial system itself really hasn't changed. Their regular bank doesn't pay out savings rewards, comp their book purchases, or give away any Teslas. But these days, it's where they're keeping their money.

Today's show was produced by Sam Yellowhorse-Kessler and Sophia Shukina with help from James Sneed. It was edited by Jess Jang. Engineering by Valentina Rodriguez-Sanchez with help from James Willits. Fact-checking by Kevin Volkl. Alex Goldmark is our executive producer. Thank you to Catherine Judge, Sejal Patel, and to Jason Mikula, whose Substack FinTech Business Weekly has been chronicling the ins and outs of this saga. Check it out.

Also, thank you to the other Yotta users who shared their stories with us. Krish Naibley, Elisa Weiss, and Andrea Calagiri. I'm Erika Barris. And I'm Sally Helm. This is NPR. Thanks for listening. This message comes from NPR sponsor Merrill. Whatever your financial goals are, you want a straightforward path there. But the real world doesn't usually work that way. Merrill understands that.

That's why, with a dedicated Merrill advisor, you get a personalized plan and a clear path forward. Go to ml.com slash bullish to learn more. Merrill, a Bank of America company. What would you like the power to do? Investing involves risk. Merrill Lynch, Pierce, Fenner & Smith Incorporated, registered broker-dealer, registered investment advisor, member SIPC.

Thank you.

One subscription gets you everything. One site for all the kids in your home, pre-K to 12th grade. Make an impact on your child's learning. Get IXL now. And NPR listeners can get an exclusive 20% off IXL membership when they sign up today at ixl.com slash NPR.