Fintech
FDIC issues warning to consumers about neobanks and fintechs
WASHINGTON, DC – JUNE 6: The entrance to the Federal Deposit Insurance Corporation (FDIC), located… [+] in front of the Eisenhower Executive Office Building, seen June 6, 2017 in Washington, D.C. The nation’s capital, the country’s sixth-largest metropolitan area, attracts millions of visitors to its historic sites each year, including thousands of schoolchildren during the June. (Photo by George Rose/Getty Images)
Getty Images
The FDIC has has issued a new warning to consumers on the use of neobanks and fintech companies for the banking sector. Referring specifically to third-party banking apps and non-bank companies that offer banking services, the FDIC states that “you may want to pay particular attention to where you place your funds, especially money you rely on to meet your regular expenses daily”. .”
This warning presents itself as a Fintech banking crisis left millions of Americans unable to access their funds due to the closure of a software provider that served as an intermediary between banking services and brick-and-mortar banks.
For Americans who rely on banking apps, this alert should serve as a reminder that for FDIC protection to be effective, certain criteria must be met, and even if your funds are protected, there may be a very long process before you can actually get your money.
What are neobanks or fintech companies?
Over the past decade, non-bank financial companies have emerged as a popular option for consumers. These are technology-driven companies that sometimes partner with traditional banks to offer banking services.
Second Forbessome of the largest Fintech companies in baking include Chime and Revolut.
Chime, for example, has a disclaimer that states: “Chime® is a financial technology company, not a bank. Banking services are provided by The Bancorp Bank, NA or Stride Bank, NA, Members FDIC.”
PayPal, for example, is a money transfer service. It is not a bank, but uses partner banks for some of its banking services. The disclaimer states: “PayPal is not a bank and does not accept deposits. You will not receive any interest, credit or other earnings on funds placed in one or more FDIC insureds Program banks where they are eligible for FDIC pass-through insurance up to the applicable limits, only if you have opened a PayPal debit card account, signed up for direct deposit, or purchased or received cryptocurrency with your PayPal balance account. FDIC insurance does not protect you from PayPal bankruptcy.”
Since these services and tools are popular, millions of Americans use them for their banking needs. But they may not be as insured or protected as millions of Americans assume.
What prompted this warning from the FDIC?
This warning stems from the collapse of financial services provider Synapse Financial. Synapse provided a service that connects popular banking apps like Yotta and Copper to real banks, like Evolve Bank and Trust.
However, Synapse filed for bankruptcy in April 2024, and by May, outages were already occurring. In early May, Evolve disconnected from Synapse, citing issues with recordkeeping and other discrepancies. This major change caused millions of users to see their money blocked.
Since the problems with Synapse began, several banks and companies, such as the popular teen banking app Copper, have already closed.
Yotta is the largest banking service affected, with more than $100 million in customer funds across hundreds of thousands of frozen accounts.
The result for consumers is desperation. If you browse the Yotta sub-Reddityou can read story after story of families facing financial hardship.
Many hope that regulators like the FDIC or the Federal Reserve will intervene directly, but this latest warning from the FDIC offers little hope.
How consumers can protect themselves
The FDIC reminds consumers that they are directly protected by FDIC insurance coverage only if they have their deposits at an FDIC-insured institution.
According to their statement:
To determine if you are dealing with an FDIC-insured bank and see if the URL is in FDIC records, you can use our BancaTrova tool. Because many FDIC-insured banks have provided URLs for their websites, if a website is listed in FDIC records, you can be more confident that it is operated by a bank. You can also contact the FDIC at 877-ASK-FDIC (877-275-3342) from 8:00 am to 6:00 pm ET Monday through Friday, or from 8:00 am to 1:00 pm ET on Saturdays.
It is also important to note that credit unions offer the same protections as banks, however they are offered through a different entity, the National Credit Union Association (NCUA). Consumers can use the Credit union locator tool to ensure a credit union is insured.