The Synapse-Evolve Disaster: One Year Later
MoneyLion, DailyPay Committing Criminal Usury, NY AG Says
Hey all, Jason here.
Happy Easter (and one-year anniversary of Synapse’s bankruptcy) to those who celebrate! This week’s email ended up quite longer than I had intended, so if your email client clips this due to length, you can find the full newsletter on the web here.
If you enjoy reading this newsletter each Sunday and find value in it, please consider supporting me (and finhealth non-profits!) by signing up for a paid subscription. It wouldn’t be possible to do what I do without the support of readers like you!The Synapse-Evolve Disaster: One Year Later
It has been a year since Synapse filed for Chapter 11 bankruptcy protection, and we still don’t have answers about what caused a shortfall of as much as $95 million in depositor funds.
At the time, the filing went largely unnoticed, apart from a relatively niche slice of fintech and banking world.
Originally, the bankruptcy filing was intended as a legal maneuver to facilitate the sale of Synapse’s assets to an acquirer: TabaPay.
It wasn’t until that deal collapsed, on May 8th, 2024, when Evolve Bank & Trust refused to cover the shortfall in end user funds that, at the time, Synapse and TabaPay believed existed, that the story garnered the attention of mainstream media.
In its decision to back out of its part of the deal, Evolve claimed — we now know erroneously — that Synapse-related accounts at Evolve were fully funded and that there were “no end user issues whatsoever.”
Three days later, Evolve, allegedly in response to Synapse temporarily cutting off its access to a key system over the weekend, would freeze the funds it held and cease processing payments, effectively freezing funds held at Synapse’s other partner banks as well.
To this day, an unknown number of end users remain out of pocket an unknown sum of money. But how did we get here? And could regulators have prevented it?
Setting the Stage: 2022’s Stablecoin Collapse and “Crypto Winter”
To really understand the Synapse-Evolve collapse — and how many obvious warning signs there were — you need to go back to 2022.
The start of that year was something of a high watermark for the crypto industry, with numerous firms, including now-defunct FTX, running pricey Super Bowl commercials.
But by May 2022, a crisis was brewing. TerraUSD, a so-called “algorithmic” stablecoin, collapsed, touching off a number of high-profile crypto bankruptcies, including Three Arrows Capital, Voyager, and Celsius.
By late 2022, FTX filed for bankruptcy, with the crypto exchange and its affiliated crypto hedge fund, Alameda Research, ultimately revealed to have conducted what amounted to an elaborate fraud and to have misused customer funds.
Numerous other crypto firms, including BlockFi, would ultimately fail due to their exposure to FTX and Alameda.
What does the crypto crisis have to do with Synapse and Evolve?
Evolve began issuing debit cards for FTX less than a year before the exchange collapsed.
In a situation that foreshadowed what would happen to Synapse end users about 18 months later, FTX users’ funds at Evolve were frozen, with the bank saying at the time, (emphasis added) “Please know your funds are safe and secure. By law, Evolve is holding onto these balances until the court overseeing the FTX bankruptcy allows us to release these funds.”
Evolve urged FTX users to contact it directly, saying the bank would “work with each individual accountholder to ensure accuracy and timely return of the account balances.”
Evolve also had exposure to BlockFi, as the bank issued the crypto exchange’s popular credit card.
While Evolve didn’t hold the credit risk, with BlockFi’s bankruptcy, in order to keep the program live, it would’ve needed a new company to manage the program. But, sources told Fintech Business Weekly at the time, Evolve blocked any potential acquisition of the card portfolio, instead insisting that it be wound down.
BlockFi credit card holders — who just had their crypto holdings frozen in the exchange’s bankruptcy and, users believed at the time, possibly lost forever — had their cards frozen, but were told they still needed to repay any outstanding balances. Users were, understandably, not happy.
As rumors about Evolve’s potential exposure to crypto spread, some venture capital investors advised their portfolio companies to pull funds from Evolve-linked fintechs.
In a sort of mini-run on the bank that gave a hint of what would come in the spring 2023 “regional” banking crisis, more than $200 million left Evolve, Mercury’s CEO confirmed at the time.
Amid the turmoil, Evolve put out a statement, in an effort to reassure its customers, which read in part (emphasis in the original):
Since the bankruptcy filings of FTX and BlockFi, inaccurate rumors about these companies’ previous indirect relationships with Evolve Bank & Trust have surfaced. Evolve is dedicated to transparency regarding all our business. We believe our current and future customers deserve the facts. Evolve is not in any way materially affected by the bankruptcy of either company. Evolve is a well-capitalized, FDIC-insured institution that adheres strictly to federal regulations.
Evolve’s crypto exposure wasn’t the only major red flag at the bank.
By 2022, Evolve had already had a string of questionable fintech programs facing legal and regulatory scrutiny, including Dave, SoLo Funds, and Earnin’.
Even after the turmoil in the crypto industry that year, Evolve supported highly dubious programs that it either failed to properly oversee or didn’t even know existed, including Dogecard and the “anonymous” “Bank of the Metaverse,” Zelf.
2022’s crypto turmoil and public reporting on Evolve’s questionable fintech programs took place against a backdrop of rising regulatory scrutiny of bank-fintech partnerships and banking as a service.
By mid-2022, rumors were swirling about a regulatory crackdown on banking as a service, and, by fall of that year, the first of what would turn out to be many enforcement actions became public, with Blue Ridge Bank entering into a formal agreement with the OCC.
Crypto Risks Come Home to Roost: The “Regional” Banking Crisis
2022’s crypto winter, arguably, set the stage for the 2023 regional banking crisis.
In early March, Silvergate, which was heavily exposed to the crypto industry, with about 90% of its deposits coming from crypto-linked firms, announced it would voluntarily liquidate after a significant flight of deposits from the bank.
Perhaps it was just a matter of bad timing that Silicon Valley Bank announced the same day that it would need to raise capital, owing to significant unrealized losses in its securities portfolio.
The combination of Silvergate’s failure and SVB’s need to raise capital spooked depositors, leading to an unprecedented $42 billion of withdrawals on March 9th and regulators shutting the bank before the start of business on Friday, March 10th, 2023.
Venture capitalists, who had disproportionate exposure to SVB as individuals, as funds, and through their portfolio companies, aggressively lobbied for what some might call a “bailout” — backing all deposits at SVB, regardless of insured status.
Ultimately, the Biden administration did invoke the systemic risk exception, making whole all depositors at SVB and Signature, which was also heavily exposed to crypto and failed.
As panic spread about the meltdown of SVB, impacted companies, including many startups, were looking for somewhere safe to move their money.
While many logically chose too big to fail institutions, specifically JPMorgan Chase, not all companies and their ultimate beneficial owners would meet mega banks’ onboarding criteria, with many choosing instead to open accounts through Mercury and Synapse — at Evolve Bank & Trust, as well as Mercury’s other bank partner, Choice.
According to reporting at the time, Mercury said it took in more than $2 billion in deposits in first few days after SVB’s collapse and onboarded nearly 8,700 new business accounts that March.
How Mercury was able to conduct legally required know your business (KYB) checks and customer due diligence / enhanced due diligence, as necessary, on such a large volume of accounts in such a short timeframe is unclear.
Typically, such incredibly fast growth in number of accounts and deposit volume is a red flag inviting a closer look from bank partners and regulators, though, admittedly, the collapse of SVB was an unprecedented situation.
Amid the turmoil of the SVB collapse, Evolve released a statement, which read in part (emphasis in the original):
In light of the recent volatility in the banking industry, we wanted to reach out with some important information about Evolve and the strength and stability of our platform.
First and foremost, we want to assure you that we take an extremely conservative and thoughtful approach to investing our customers’ deposits — and as such, we remain a well-performing, liquid and diversified community bank with no material exposure to the events of the past few days.
We conducted no business with and have no exposure to Silicon Valley Bank or Silvergate Bank. Additionally, we have no exposure to Signature Bank. Our due diligence and risk mitigation processes are exhaustive and have positioned us to weather the current market environment
While Evolve actually benefited from the 2023 banking crisis, with its deposit volume jumping, the risks of its “Open Banking Division” (banking as a service), in general, and its partnership with Synapse, specifically, were becoming more clear.
In June 2023, a Synapse and Evolve program, Money Ave, was hit with a cease and desist letter for potentially deceptive FDIC claims and misusing the FDIC logo. Money Ave responded to an initial inquiry from the FDIC by pushing back, arguing it was a fintech company on another entity’s platform. The FDIC responded by saying the company’s argument was “wholly unresponsive and insufficient.”
And in August 2023, a Fintech Business Weekly deep dive on another Synapse partner bank, Lineage, revealed that “Synapse used its control over a significant portion of Lineage’s deposits to exert pressure on the bank to continue growing its relationship with Synapse and to approve increasing numbers of Synapse’s questionable client programs.”
At the time, this newsletter pointed out the risks of Synapse’s so-called “modular” banking model, which disaggregates banking functionality and effectively forms a barrier to interaction between fintechs and bank partners:
In this modular approach, a single fintech client of Synapse’s may have various banking capabilities — payments processing, DDA/FBO accounts, card issuing, and so forth — spread across multiple bank partners. Synapse currently directly partners with Lineage, AMG, and American Bank.
Synapse has an added layer of complexity, in that the company possess its own broker-dealer license…
If anything, by adding another layer and disaggregating a single fintech’s activities across Synapse and multiple partner banks, the complexity of monitoring risk and implementing controls only increases.
That August 2023 newsletter warned that the kinds of risks posed by Synapse were exactly what regulators were (or should have been) paying attention to and flagged that “Synapse, its fintech clients, and its partner banks lack the sophistication, technology, and staffing to adequately manage the outsized risks” in the model.
The Synapse Situation Begins to Unravel
By late 2023, Synapse was beginning to unravel.
On September 15th, 2023, Synapse cofounder and CEO Sankaet Pathak spoke with Evolve Chairman Scot Lenoir, with Pathak informing the bank that he believed some $27 million had been inappropriately debited from end user (depositor) funds.
Ten days later, on September 25th, 2023, Evolve sent Synapse a letter alleging Synapse had breached its master services agreement with the bank.
The letter demanded that Synapse fund a $50 million reserve account, and Evolve withheld all payments the bank owed to Synapse, about $43 million (this became the “reserve” discussed in the bankruptcy.)
That same day, September 25th, Mercury — Synapse’s largest and most important client — informed Synapse it would not renew its contract with the company.
Two days later, on September 27th, Mercury and Evolve moved more than $3 billion of what they said were Mercury end user deposits from Synapse FBOs at Evolve to separate accounts.
Evolve and Mercury’s apparently coordinated actions to terminate their relationships with Synapse, to move the deposits from Synapse FBOs to other accounts at Evolve, and Evolve’s move to withhold $43 million in payments it owed to Synapse, surely contributed to Synapse’s ultimate demise, if not causing it outright.
While what was unfolding between Synapse, Mercury, and Evolve wasn’t known at the time, the severity of the problems began to leak out into the public, with this newsletter reporting on October 8th, 2023, that there was a disagreement over who was responsible for covering what was believed at the time to be a $13 million shortfall in end user funds.
The challenges of reconciling Synapse’s records and Evolve’s were known publicly by October 2023, including that the two had struggled for years with the problem.
A particularly shocking example being a November 2022 email from Evolve’s open banking controller, Chris Vendetti, to Synapse’s director of finance and accounting, which read in part (emphasis added):
“The balances tend to differ a couple hundred million on the daily. I am comparing the Synapse data to the FBO for consumer and business users. Are there other Evolve core accounts that we should take into consideration for the totals?”
Synapse’s Pathak made a public statement about the reconciliation challenges that October — seven months before end users’ funds were frozen by Evolve — where he wrote in part (emphasis added):
“We laid bare the challenges we’ve faced in the reconciliation process and our need for response and resolution to open processing incidents and data feed requests. These are crucial issues for us to conduct effective reconciliations. To clarify, our concern is not that this has simply been a challenge. It is that, in addition to this being a challenge, we were stressing the need for increased attention and resources.”
By December 2023, the situation between Mercury and Synapse had escalated substantially.
Mercury filed a private arbitration claim against Synapse, stemming from a contract dispute. Mercury was seeking some $30 million in interest payments from its users’ deposits that it argued Synapse owed it.
But Mercury also filed a public lawsuit, seeking to freeze Synapse’s assets, arguing that “Mercury may not succeed in collecting money from Synapse through arbitration because Synapse is collapsing.”
In that December 2023 filing — about five months before users’ funds were frozen — Mercury argued that “[g]iven Synapse’s ongoing financial collapse, its failure to pay its outstanding debts, its apparent lack of liquidity, and the risk that it will liquidate its assets, Mercury has brought this application for provisional relief pending arbitration.”
Synapse CEO Pathak fired back in a statement, arguing that Mercury’s claims were “knowingly meritless,” and, in January 2024, the company filed a countersuit against Mercury.
Amidst this chaos, one of Synapse’s bank partners, Lineage, was negotiating a consent order with its regulators, the FDIC and the Tennessee Department of Financial Institutions.
That enforcement action, which stemmed from Lineage’s banking as a service activities, became public in February 2024.
Still, there was hope of a soft landing of sorts: in March 2024, this newsletter reported that Synapse was working on a deal to sell itself to TabaPay, potentially through a bankruptcy process, writing at the time:
TabaPay’s potential acquisition of Synapse may be the last-best hope to contain the fallout and mitigate collateral damage to TabaPay, Evolve, and the banking-as-a-service and fintech industry at large.
Just before the bankruptcy was officially filed, Evolve moved the approximately $43 million of Synapse’s money it had withheld, putting about $35 million in an FBO to cover a deficiency in end user funds. (This is the $35 million Evolve confirmed in January 2025 that it still held as reserve, though the bank refuses to comment on the current status of these funds.)
But Evolve kept nearly $8 million of those funds for itself, money it claims Synapse owed it and “to cover potential losses” as the bank wound down its relationship with Synapse.
The Bankruptcy Begins
On April 19th, 2024, TabaPay announced that it would acquire the assets and affiliates of Synapse Financial Technologies, Inc., subject to the approval of the bankruptcy court.
The Chapter 11 bankruptcy case was officially filed on April 22nd.
The initial bankruptcy filing revealed that Synapse owed secured creditors SVB (yes, the same SVB) and TriplePoint Capital $1.5 million and $7.2 million, respectively.
The filing also revealed additional terms of TabaPay’s prospective deal to acquire Synapse’s assets; namely, that it was “contingent on satisfactory program reconciliation of demand deposit accounts, saving accounts, reserve accounts, and FBO accounts at banks being reconciled to Synapse’s records and fully funded.”
Concurrently, there was a proposed settlement between Evolve and Synapse, which would have required Evolve to ensure that all account balances of End-Users in FBO Accounts were fully funded to TabaPay’s satisfaction.
But the TabaPay deal ultimately collapsed on May 8th.
According to filings in the bankruptcy, Evolve initially said it needed more time to fully fund the FBO accounts — but then changed position, saying the accounts already were fully funded, and that Evolve didn’t need to contribute additional money.
In a bankruptcy hearing the day after the deal collapsed, on May 9th, Evolve’s lawyer reiterated that Evolve’s position was that accounts at Evolve related to Synapse were fully funded and that there “[were] no end user issues whatsoever.”
At the same time, Synapse CEO Pathak — who hadn’t yet been replaced by the Chapter 11 Trustee — alleged that Mercury had effectively taken more than $50 million of end user funds that it shouldn’t have; about $32 million at the time of the migration, and an additional $17.7 million due to inappropriate debits from Synapse accounts after the migration.
While $32 million is a sizable sum, Mercury was moving approximately $3.2 billion from Synapse FBOs. A $32 million error would represent about 1% of that amount.
Lineage ceased acting as an Originating Depository Financial Institution for Synapse Brokerage on May 9th. And it was over the following weekend that Synapse cut off Evolve’s access to “the dashboard,” and, Evolve maintains, this necessitated it freezing end user funds that it held and payment processing for funds held at other partner banks — touching of confusion and panic for end users who suddenly no longer had access to their money.
In a court hearing the following Friday, May 17th, the U.S. Trustee sought to have the case converted to a Chapter 7 liquidation or to have a Chapter 11 Trustee appointed, arguing the remaining Synapse team had “grossly mismanaged” the estate; ultimately, former FDIC Chair Jelena McWilliams was appointed as Chapter 11 Trustee on May 24th.
At that more than five-hour long court hearing, the U.S. Trustee relayed a statement from the Federal Reserve, which seemed to be trying to distance itself from the situation, that said in part:
The Federal Reserve understands that [Synapse] has a deposit relationship with Evolve. The Fed is the primary federal banking agency responsible for the supervision and regulation of Evolve Bank.
In this role it conducts examinations of the bank and does so on a very regular basis to assess its safety and soundness and has the legal authority to address regulatory violations of the banking laws as appropriate.
The Federal Reserve does not though supervise or regulate fintech companies, such as [Synapse], nor does it mediate or have the authority to mediate disputes among commercial entities.
With McWilliams taking the reins as Chapter 11 Trustee toward the end of May, she filed her first status report with the court on June 7th, saying at the time that end users were owed an aggregate of $265 million — but that the partner banks held only $180 million, for what was thought to be a shortfall of $85 million.
This shortfall was later revised to a range of approximately $65 million to $95 million.
It was also revealed in this status report that, at one point, Synapse had inappropriately used $60 million of end user funds to meet its reserve obligations to Lineage; when Lineage realized this, it moved those funds into an FBO account for the benefit of end users.
The following week’s creditor committee meeting and status report made clear that Synapse had been co-mingling end users’ funds, fintech programs’ funds, and Synapse’s own funds in FBO accounts, further complicating the prospect of reconciling and paying out end users.
June saw things go from bad to worse for Evolve, which was hit with a wide-reaching enforcement action from its federal regulator, the St. Louis Federal Reserve, though the Fed made the unusual disclaimer that the enforcement action wasn’t related to the Synapse bankruptcy.
It also became public in June that Evolve’s systems had been compromised in a ransomware scheme, with Russian cybergang Lockbit releasing a reported 33 terabytes of data, including on customers of Synapse’s programs, as well as other high-profile fintechs, like Affirm, Wise, and Stripe.
Over the summer and into the fall, as AMG and Lineage disbursed end user funds, Evolve hired what it describes as a “world class” forensic consultancy, Ankura, but also engaged the services of another Synapse cofounder, Bryan Keltner, who boasts a lengthy criminal record and faced fraud allegations.
Evolve took a considerable amount of time to gather the data it said it needed to undertake a full reconciliation that would reveal how much each end user was owed from each bank.
But, when Evolve announced it had “completed” its reconciliation efforts in mid-October, the goal posts had moved, and it said it had only calculated users’ Synapse “ecosystem” balance and what was held specifically at Evolve — but not at the other banks.
Further, the arbitrary baseline Evolve set for its reconciliation was September 30th, 2023, at which point substantial evidence suggests there was already a known shortfall in customer funds.
Evolve informed end users of what they would get back, if anything, on November 4th, 2024 — the day before the U.S. presidential election.
Many users learned they would get pennies on the dollar back, or nothing at all.
With things seemingly reaching a stalemate, interactions between the partner banks seem to have become increasingly toxic, with Evolve implying end user funds must be at Lineage or AMG, and those two banks expressing “disappointment” with Evolve and describing its statements as “irresponsible and disingenuous.”
By December 2024, the writing was on the wall, at least for the bankruptcy process. Chapter 11 Trustee McWilliams, herself a former banking regulator, told the court that “the system has failed so many end users in so many ways.”
Moved to tears, McWilliams said she found the situation “incredibly demoralizing” and “personally painful.”
Despite repeatedly describing its reconciliation efforts as being “complete,” Evolve sent some end users an additional payment just last month, though the bank now refuses to provide any information about the total amount paid out to end users, the size of the shortfall, or the status of the $35 million in reserve funds that remained after Evolve took $8 million for itself.
With the Synapse estate lacking any resources, McWilliams indicated earlier this month that she will move to dismiss the case, leaving end users to pursue private litigation in hopes of getting their funds returned.
More Questions Than Answers
A year since the bankruptcy began, there have been maddeningly few conclusive answers, only more questions:
What is the size of the shortfall in end user funds? Comparing the $265 million owed to end users stated earlier in the bankruptcy vs. the approximately $219 million paid out suggests the shortfall is about $46 million — but this has never officially been confirmed.
Speaking of that $219 million or so that’s been paid out, that is nearly $40 million more than the partner banks reported they held at the beginning of the bankruptcy. Where did this money come from?
Though Synapse cofounder Sankaet Pathak has made allegations about the causes of the shortfall, including the alleged Mercury “over migration,” the causes of the shortfall in end user funds have never been officially established.
Was there criminal wrongdoing? Pathak seemingly thinks he did nothing wrong, but there are credible allegations that Synapse misused customer funds by leveraging them to fund the reserve at Lineage, allowing end user funds to be debited for fees Synapse itself owed, and the “accidental” $3.25 million of FBO funds Synapse took and was unable to fully repay. The Southern District of New York convened a criminal grand jury, but the status of this inquiry is unknown.
How did each bank approach reconciliation and what data was used? Did each partner bank follow consistent practices based on the same underlying data?
In Evolve’s case specifically, as the only bank involved that is known to have used an external consultancy, what data and guidance did Evolve give to its third party, Ankura?
Are reconciliation efforts ongoing? If so, which banks are involved, what is the current status, and what is the timeline or goal of these efforts?
What is the status of the $35 million in reserve funds Evolve held? Were these used to pay end users? Does Evolve still hold these funds? Why hasn’t McWilliams mentioned this reserve or filed suit seeking to reclaim it for the estate, given that these funds may belong to Synapse?
Why didn’t banking regulators step in before Synapse fell into bankruptcy and users’ funds were frozen? There were ample red flags, particularly about Evolve, for years before the situation came to a head.
The questions about how the Federal Reserve’s actions or inactions may have allowed the Synapse-Evolve disaster to happen come at an uncomfortable time for the central bank, with President Trump seemingly suggesting he may seek to fire Federal Reserve Board Chairman Powell before the end of his term in that role.
These outstanding questions seem increasingly unlikely to be answered in the bankruptcy process, though one fintech’s request for a “2004 Examination,” or a demand that Evolve produce documents and give testimony, could shed additional light on some of these topics.
But, it seems like the most likely outcome, at this point, is that the bankruptcy winds down without satisfactory answers for end users, fintech programs, and the public at large.
Would You Keep Your Life Savings at a Fintech?
While Americans have, on average, 5.3 financial accounts, most have a “primary” account into which they receive direct deposits, like payroll or benefits payments.
Given that nearly half of Americans live “paycheck to paycheck,” a primary bank account represents a substantial proportion of accessible cash for many households.
For too many of the unlucky end users dealing with the fallout of the Synapse situation, the loss of access to their funds has been catastrophic, with consequences and stories that include cars being repossessed, a woman’s plan to escape an abusive relationship dashed, and more than one person contemplating suicide.
The recent collapse into bankruptcy of another banking as a service platform, Solid, suggests Synapse may not be as much an outlier as the industry hoped it would be (though Solid faced idiosyncratic problems of its own making.)
While banking as a service platform Synctera recently announced it was able to raise an additional $15 million of capital, fellow middleware platforms Unit and Treasury Prime haven’t announced new funding since May 2022 and February 2023, respectively.
With little to no visibility into their financial health, burn rates, or runway, it’s an open question of whether there could be another BaaS bankruptcy in the future.
Asked how it ensures programs and users would be protected in the event of its insolvency, Treasury Prime’s COO, Remy Carole, clarified via email that, “All of the end user accounts opened through Treasury Prime’s platform are our partner bank’s customers. We do not intermediate or abstract away that relationship nor the data.”
Carole added that, “In the unlikely event of Treasury Prime’s insolvency, we’ve set up business continuity guardrails to ensure programs can either continue to operate through our technology or smoothly transition to a different solution.”
Asked the same questions, a representative for Synctera pointed to the company’s recent fundraise and new customers, as well as statements company cofounder and CEO Peter Hazlehurst has made about the company’s future and path to profitability.
Middleware platform Unit didn’t respond to questions about the company’s financial health and what steps it and its bank partners take to protect programs and end users in the event Unit itself were to become insolvent.
Even absent the most extreme outcome of bankruptcy, the safety of holding funds through a non-bank fintech is contingent on the accuracy of books, records, account titling, reconciliation between the ledgers and actual cash held on behalf of users, and related requirements — attributes impossible for an external customer to verify.
If these requirements are not met, so-called “pass through” FDIC coverage wouldn’t apply, even in the event a fintech’s insured partner bank were to fail.
Which begs the question, knowing what you know now, would you keep your money in a non-bank fintech?
Do you work at the Federal Reserve, OCC, or FDIC and want to share information about the Synapse-Evolve disaster? Reach me on secure messaging app Signal: mikulaja.01
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To help keep Fintech Business weekly accessible to all, please consider upgrading to a paid subscription if you haven't already!MoneyLion, DailyPay Committing Criminal Usury, NY AG Says
The New York Attorney General, Letitia James, has filed suit against two fintech firms, alleging they are in violation of state lending law and elements of the federal Consumer Financial Protection Act (CFPA), which states are also empowered to enforce.
MoneyLion and DailyPay are the subjects of the separate complaints filed last week.
And, while at first glance, the companies, their products, and the allegations appear largely similar, there are material differences worth parsing.
MoneyLion’s Instacash “Boosts” Are “F’in Brilliant,” Founder Told Employees
As a company, MoneyLion began by offering cash advances and has expanded its offerings over time, including through the acquisitions of affiliate network Even (rebranded as Engine by MoneyLion) and content creator platform MALKA Media.
In addition to its “Instacash” cash advance product, MoneyLion also operates banking product, RoarMoney, through a partnership with Pathward, managed investing (basically a roboadvisor-type product), credit monitoring, and cryptocurrency trading through a partnership with ZeroHash.
MoneyLion offers a membership program for $9.99 per month, dubbed MoneyLion WOW, which purportedly offers cashback on loans, 1% bitcoin back on crypto purchases, purchase protection, and unspecified deals and discounts.
The Engine MoneyLion affiliate network is generally comparable to a CreditKarma or NerdWallet, in which MoneyLion earns a commission by offering other companies’ products.
MoneyLion has faced scrutiny before: in Colorado, the company paid $350,000 to settle allegations it collected illegal membership fees tied to the loans it offers, and the Consumer Financial Protection Bureau sued the company, alleging it overcharges members of the military, in violation of the Military Lending Act.
Despite dismissing numerous other cases since the change in administration, the CFPB hasn’t dismissed its case against MoneyLion.
The New York complaint focuses specifically on MoneyLion’s Instacash offering, which the filing refers to as a “paycheck advance.”
Instacash offers users up to $500, or up to $1,000, if they use the company’s RoarMoney account and have qualifying direct deposits.
Although MoneyLion has taken to describing Instacash as a “earned wage access” product, it does not integrate with nor leverage employer or payroll data for assessing how much to offer users or to facilitate repayment.
MoneyLion markets Instacash as having “no interest,” “no credit check,” and “no mandatory fees.” As its name suggests, MoneyLion heavily emphasizes that users can “get fast cash” and can access their pay whenever they need it.
Users are defaulted into “instant” delivery — which carries a fee — and are encouraged to leave a “tip.”
Despite it being technically possible for a user to take an advance without incurring a fee or paying a tip, in practice, nearly all users incur costs associated with taking the advance.
Per the complaint, from October 2018 to December 2023, for nearly 9 out of 10 advances, users were charged an expedited funding fee. For nearly 4 in 10 advances, users paid tips.
With the increasing availability of faster payments, such as same-day ACH, The Clearing House’s Real-Time Payments, and FedNow, the wholesale cost for instant payments has declined, vs. using push-to-card via debit rails.
The complaint states that MoneyLion’s actual cost of instant payment processing is less than $0.05: “The Clearing House, which operates a real-time payment network, states that per-transaction charges for users of its network, such as MoneyLion, are less than 5 cents—a fraction of what MoneyLion charges Instacash users.”
For users that changed the default setting in order not to leave a tip, the complaint says that MoneyLion would “retarget” those users the next time they sought to take an advance, reminding them that they hadn’t tipped the previous time.
During the timeframe the New York Attorney General analyzed, New Yorkers paid about $25.6 million in instant funding fees and $7.1 million in tips. Per the complaint:
During the Data Period, the most common amount of a Paycheck Advance was $50, the most common fee was $4.99, the most common tip was $2, and the most common term was ten days. Combining these most common traits to create a “typical” Paycheck Advance, the annualized cost of credit for this Paycheck Advance exceeds 350% APR.
The federal Truth in Lending Act defines a “finance charge” as “any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit.”
New York has a civil usury cap of 16% APR and a criminal usury cap of 25% APR.
Yet, treating fees and tips as finance charges and calculating the cost of credit as an APR, functionally all of MoneyLion’s advances exceed these caps, with more 13% carrying APRs that exceed 1,000%.
Short duration credit, whether structured and described as a payday loan, overdraft, or “cash advance,” will nearly always carry a high APR, given how that metric is calculated: paying $10 to borrow $100 for one week is equivalent to a 260% annualized rate.
There is a legitimate discussion about to what extent APRs are helpful for consumers, in general, and particularly if they are meaningful and appropriate for small-dollar, short-term credit.
Still, as of now, federal regulation about what constitutes a finance charge and how APR is calculated and New York state law setting usury caps are what they are — rather than work to influence laws and regulations those through political and regulatory processes, MoneyLion appears to be seeking to avoid applicable regulation altogether.
MoneyLion works to maximize its fee revenue by artificially limiting the amount a user can request in a single transaction, the complaint argues.
Until late 2021, MoneyLion offers a maximum advance of $250, but only allowed users to request $50 in a single transaction. In late 2021, MoneyLion increased the max possible advance to $500 and the per transaction max to $100.
According to the complaint, users would frequently take out a second advance just minutes after the first one: (emphasis added) “During the Data Period, nearly two million Paycheck Advances were by Instacash users who had previously obtained a Paycheck Advance minutes earlier. And Instacash users who engaged in these consecutive transactions paid millions of dollars in fees and tips on the subsequent Paycheck Advances as a result of MoneyLion’s artificial transaction limits.”
To drive additional usage, MoneyLion develop its “Boost” marketing strategy, in which it offered users the ability to access an additional $25 in Instacash. The company targeted these offers around specific holidays and events, like Valentine’s Day, the Super Bowl, Thanksgiving, and even user’s individual birthdays.
MoneyLion took this to the next level with its “Peer Boosts,” in which users could send each other the ability to borrow an additional $5 in Instacash.
According to the complaint, (emphasis added) “MoneyLion’s founder touted Peer Boosts to employees as ‘F’ing brilliant,’ instructing employees to work to ‘make this viral’ and highlight it ‘on social media.’”
The strategy worked, with users leveraging social media platforms like Reddit and MoneyLion’s own “Discover” content feed to ask and offer Boosts.
The complaint alleges that MoneyLion violated New York’s civil and criminal usury limits, committed fraud by falsely representing that Instacash carried 0% APR, violated the federal Consumer Financial Protection Act by committing deceptive and abusive acts or practices, and related allegations.
The New York Attorney General is seeking to enjoin MoneyLion from further violations of the law, for MoneyLion to pay restitution and damages to impacted New York consumers, disgorgement of profits stemming from MoneyLion’s fraudulent and illegal practices, civil penalties, and costs.
Employer-Integrated Earned Wage Access Is Empirically Less Expensive
While DailyPay meets the same need as MoneyLion, the company’s model and the suit against it have some notable differences.
MoneyLion, though it describes itself in some cases as “earned wage access,” is marketed directly to consumers and does not integrate with employers’ time and attendance systems, while DailyPay does.
MoneyLion debits consumers bank accounts, typically timing such debits to occur as soon as possible after a user’s paycheck or other income is deposits. DailyPay argues it is providing users access to money they have already earned — wages they have accrued but that have not yet been paid out. Rather than collected repayment from a user’s bank account, a user’s employer directly remits funds to DailyPay as part of the payroll process.
The New York Attorney General, however, disagrees with DailyPay’s characterization, arguing, “DailyPay’s Paycheck Advances are loans, and its fees are interest. Though DailyPay promises that it will not sue or engage in debt collection, the Company has no need to do so. When an employee obtains a Paycheck Advance, she assigns wages to the Company sufficient to repay her loan and all fees.”
Earlier this month, DailyPay filed a lawsuit against the New York Attorney General, making a strong argument that its product doesn’t meet the definition of a “loan” under New York law and seeking a declaratory judgment saying as much.
Per New York’s complaint, DailyPay has a dual fee structure; like MoneyLion, it charges a fee for instant funding. The terms vary based on DailyPay’s contract with a user’s employer, with next-business-day disbursement costing between $0 and $1.99, and immediate disbursement costing users up to $3.99.
Unlike MoneyLion, DailyPay does not accept “tips.”
DailyPay, through its employer partners, directed employees to get DailyPay’s “free app” and emphasized that they could “get started for free,” according to the complaint.
While MoneyLion set an arbitrary cap of how much a user could advance at $50, later increased to $100, DailyPay sets the maximum advance amount based on the actual number of hours a user has worked in the pay cycle, and the corresponding accrued but unpaid wages, net of taxes and benefits.
Though DailyPay charges up to $3.99 for immediate disbursement, like MoneyLion, its actual costs are a small fraction of that, the complaint argues. The per-transaction cost for instant payments via The Clearing House RTP is just $0.045 cents, the suit says.
The complaint further illustrates this by saying, “DailyPay’s own investor materials emphasize that its ‘Transaction Costs’ are decreasing as a result of ‘the shift to Real Time Payments (RTP).’ Indeed, while the Company generated nearly $100 million more in fee revenue in its most recent fiscal year—an increase of more than 73% over the prior year—the transaction costs of the Company, which are defined as ‘everything directly related to settlements and security costs’ such as ‘instant transaction’ and ‘next-day ACH’ costs, increased by less than 1%.”
During the period evaluated by the New York Attorney General, DailyPay engaged in nearly 10 million transactions with more than 130,000 New Yorkers. Per the suit, the median transaction was for $77.07, which incurred a $2.99 fee, for a period of 8 days; this would be equivalent to an APR of about 177%.
The most common transaction was for $20, with the most common fee for that size transaction being $2.99. Given the small size and the short duration, the APR for such a transaction would be 750%.
While on an APR basis, the majority of DailyPay’s transactions exceed the state’s civil and criminal usury limits, they are materially lower — less expensive — than MoneyLion’s.
Although DailyPay doesn’t leverage tips and, therefore, doesn’t deploy some of the kinds of “dark pattern” user experience techniques that MoneyLion seems to use, it does, per the complaint, use push alerts and text messages to make users aware of their “pay balance,” thereby implicitly encouraging them to make use of it.
The complaint alleges DailyPay’s practices constitute illegal wage assignment, civil and criminal usury, false advertising, and violated the federal CFPA’s prohibition of unfair, deceptive, and abusive acts or practices, among other related allegations.
The suit seeks to enjoin DailyPay from further violations of the law, asks the court to order DailyPay to pay restitution and damages to impacted consumers, requests disgorgement of profits from fraudulent and illegal practices, and seeks a civil money penalty.
Like Squeezing On A Balloon
An element of both complaints that tends to show up in any critique of short-term credit is repeat use — what consumer advocates will sometimes refer to as a “debt trap.”
Whether earned wage access, overdrafts, payday loans, or buy now pay later, the short-duration, in which repayment is often aligned with payday, borrowers too often find themselves short pay cycle after pay cycle, and meet that shortfall by borrowing and repaying over and over again.
It’s understandable that the New York Attorney General, Letitia James, is using the tools available to her.
But focusing only on the supply side — DailyPay and MoneyLion, in this case — is like squeezing on a ballon. It does nothing to change consumer demand for small-dollar short-term credit.
That isn’t to say there aren’t empirically “better” and “worse” choices available when a consumer needs access to short-term liquidity: a typical bank overdraft, a typical payday loan, a neobank “no fee” overdraft, a direct-to-consumer cash advance, an employer-integrated earned wage access, and BNPL all address fundamentally the same need, but can have very different costs (even on an APR basis), different risks, and different levels of consumer protections.
Other Good Reads
Deepfakes and the AI Arms Race in Bank Cybersecurity (Fed Governor Michael Barr)
Stablecoin Legislation: An Overview of S. 919, GENIUS Act of 2025 (Congressional Research Service)
The Stablecoin Transparency and Accountability for a Better Ledger Economy (STABLE) Act of 2025: An Overview (Congressional Research Service)
Community Banks Have Maintained Profitability in a High-Interest Rate Environment (Federal Reserve Bank of Kansas City)
White House Seeks to Bring Financial Regulators Under Its Sway (Bloomberg)
Trump Team Eyes Politically Connected Startup to Overhaul $700 Billion Government Payments Program (ProPublica)
Court filings describe DOGE-led, scream-filled, 36-hour mass layoff scramble at consumer protection agency (Fortune)
Trump’s newest grift: Building a cryptocurrency empire while destroying its regulators (Citation Needed)
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