Financial technology (fintech) companies offer consumers innovative alternatives to traditional banking. Fintechs offering bank accounts, also known as challenger banks or neobanks, often attract customers through benefits such as competitive rates, low-cost products and well-designed mobile apps.

If you’re thinking about opening savings or checking accounts with one of these fintech companies, an important factor to research is whether the accounts offered are federally insured.

Rather than being the same official banks, these fintech companies often provide federal insurance for your deposits by partnering with a licensed bank that carries the insurance through the Federal Deposit Insurance Corps (FDIC).

Synapse’s bankruptcy results in frozen accounts

According to recent news, thousands of consumer and business bank accounts were frozen in May 2024, when fintech company Synapse suddenly shut down after filing for Chapter 11 bankruptcy protection on April 22. Synapse had acted as an intermediary between partner technology companies and FDIC-insured banks. .

Evolve Bank & Trust, partner of Synapse, said in a statement that Synapse’s “shutdown of essential systems” had put users at risk by hindering Evolve’s “ability to verify transactions, confirm end-user balances, and comply with applicable law.”

Banking as a Service (BAAS) providers, such as Synapse, connect non-bank fintech companies with FDIC-insured banks. As a result, fintechs are able to offer their customers federally insured deposit accounts.

According to recent California bankruptcy court filings, users of several fintech services associated with Synapse have been unable to access their funds.

Meanwhile, various Reddit message boards contained posts in which customers of Synapse partners, such as Evolve and savings rewards company Yotta, said they were unable to access their money.

How fintechs partner with FDIC-insured banks

The FDIC is a government agency that insures money deposited at member banks so that account holders do not lose their money if the bank fails. FDIC insurance covers up to $250,000 per depositor, per FDIC-insured bank, per ownership category.

Although non-bank companies that offer deposit accounts are not FDIC-insured, they often enter into contractual arrangements with the FDIC-insured banks that hold the funds.

Examples of fintech companies that offer deposit accounts and place their customers’ funds in FDIC-insured banks include:

• Music box: This fintech offers a checking account, a savings account, and a debit card. These are provided by federally insured banks Bancorp Bank or Stride Bank.
• Opportunity: Formerly known as Digit, Oportun’s offerings include a checking account and a savings account held at partner FDIC-insured banks.

On its website, the The FDIC recommends that when a non-bank company offers products that it claims to be FDIC-insured, customers should “verify with the company that the funds will be deposited into an FDIC-insured bank, as and when that occurs, and the specific bank or FDIC-insured bank banks where they will be deposited”.

Likewise, funds sent by customers go directly to Chime’s partner FDIC-insured banks, ensuring coverage from the start, a Chime spokesperson said.

Money deposited into Oportun also goes directly to the fintech’s FDIC insureds partner bankswhich include Pathward, Citibank, Wells Fargo and JP Morgan Chase, ensuring that funds are immediately protected by FDIC insurance.

Fintechs that act as deposit intermediaries

Some fintechs that are brokers offer savings accounts, often called sweep accounts or cash management accounts – for which they get extra FDIC insurance by transferring money to accounts at multiple federally insured banks. An advantage of this is that it may result in higher FDIC coverage limits per customer.

Examples included:

• Improvement: The high-yield cash reserve account offered by Improvement advertises FDIC insurance with fintech program banks of up to $2 million for individuals and $4 million for joint accounts.
• Wealth front: This fintech’s cash account pays a highly competitive annual percentage yield (APY). Wealth front advertises FDIC insurance with its partner banks of up to $3 million for individuals and $6 million for joint accounts.

Funds that you handed over to a brokerage firm to place in a custodial account may be covered Securities Investor Protection Society (SIPC) until the money reaches an FDIC-insured partner bank.

In case of Improvement, funds in transit to or from FDIC-insured partner banks are not yet covered by FDIC insurance, but are at that time protected by SIPC insurance. The exception is when funds are held in a holding account after a deposit or before a withdrawal, in which case they are eligible for FDIC insurance but are not protected by SIPC insurance.

Likewise, the money deposited by customers into the Wealthfront Cash Account will be covered by SIPC insurance while in transit to or from FDIC-insured partner banks.

But when your money isn’t directly at an FDIC-insured bank, according to the FDIC, you need to make sure that:

• The company actually deposits the money.
• The account must be held in the correct name of the FDIC-insured bank.
• The money must remain within the FDIC insurance limits. So, if you had an individual savings account with $250,000 at an FDIC-insured bank, and the non-bank uses that FDIC-insured bank as one of its program banks, your account from the non-bank would not be FDIC-insured . So it’s important to know which FDIC-insured bank your money will go to.

How to make sure your fintech deposits are safe

1. Make sure your accounts are covered by FDIC insurance

If you’re interested in opening accounts with a particular fintech or challenger bank, read the company’s fine print to confirm that it is backed by an FDIC-insured bank and that your money will be immediately protected.

If it turns out that there is no FDIC coverage or that your funds will not be covered when transferring to the fintech’s partner bank, this is a good indicator to look elsewhere.

2. Make sure all your money is insured

If you are depositing a significant sum of money into accounts offered by a fintech, check which partner bank insures the funds. If you already have separate accounts with that particular bank, you may be beyond the FDIC coverage limit.

3. Practice secure digital banking

When managing deposit accounts through the website or mobile app provided by the fintech company or neobank, follow the same security precautions that you would follow with an app provided by a traditional bank. These include:

• Download the company’s app only from a reliable app store — not from online forums or via links sent in text messages.
• Create a strong password that you don’t use for other apps or websites. This will reduce the chances of hackers being able to figure it out.
• Avoid checking your accounts over public Wi-Fi. Scammers could potentially see your online activity when you are not using a secure network.
• Setting up account alerts then you will receive notifications about low balances or large purchases. This could quickly alert you if thieves have managed to get into your account.

Frequently asked questions about fintech deposits

• Are fintech companies insured by the FDIC?

  A company that is not a chartered bank cannot carry its own FDIC insurance. However, many fintechs offering deposit accounts choose to place funds in one or more FDIC-insured partner banks so that their customers’ funds are protected.

• How do I know if deposit accounts offered by a fintech company are FDIC insured?

  If a fintech company offers deposit accounts, the information on its website will provide information on whether the accounts are located in an FDIC-insured bank.

• What can happen if my accounts are not covered by FDIC insurance?

  Not having FDIC insurance coverage means you could lose some or all of your money if the financial institution ends up closing.

Bottom line

Fintech companies often provide intuitive, well-designed money management apps as well as savings accounts with low fees and competitive rates. A fintech company could be a good choice for you, as long as you do your research to make sure the funds you deposit are immediately federally insured.

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