Is your money truly secure in an FDIC-insured Fintech account?

In the rapidly evolving world of financial technology, or fintech, consumers are presented with innovative alternatives to traditional banking. These fintech companies, including neobanks and challenger banks, offer competitive rates, lower fees, and user-friendly mobile applications. However, a critical question arises: Is your money truly safe in an FDIC-insured fintech account?

The Federal Deposit Insurance Corporation (FDIC) is a government agency that insures deposits at member banks, protecting account holders from losing their money if the bank fails. FDIC insurance covers up to $250,000 per depositor, per insured bank, per ownership category. This safety net is a cornerstone of trust in the banking system.

The Role of Fintech Companies

Fintech companies themselves are not FDIC-insured. Instead, they partner with FDIC-insured banks to offer deposit accounts that are protected. For example, companies like Betterment and Wealthfront provide high-yield Cash Reserve accounts with FDIC insurance of up to $2 million for individuals and $4 million for joint accounts by sweeping funds into multiple insured banks.

Ensuring Your Fintech Deposits Are Safe

To ensure the safety of your fintech deposits, follow these steps:

Confirm FDIC Insurance Coverage: Before opening an account, verify that the fintech partners with an FDIC-insured bank. This information is typically found in the company's disclosures.

Check for Overlapping Coverage: If you have significant deposits, ensure that the partner bank does not overlap with other accounts you hold, as this could exceed FDIC coverage limits.

Practice Safe Digital Banking: Use strong passwords, download apps from reliable sources, and avoid accessing accounts over public Wi-Fi to protect your information.

The Synapse Bankruptcy: A Cautionary Tale

In April 2024, Synapse, a banking-as-a-service provider, filed for Chapter 11 bankruptcy, freezing thousands of consumer and business accounts. This incident highlighted the risks associated with fintech companies. Evolve Bank & Trust, a Synapse partner, reported that Synapse's system shutdown hindered transaction verification and compliance, leaving users unable to access their funds.

Verifying Fintech Insurance Claims

It's crucial to understand that non-bank fintech companies cannot carry FDIC insurance themselves. They rely on partnerships with insured banks. Always verify with the fintech company how and when your funds will be deposited in an FDIC-insured bank. Use tools like the FDIC’s BankFind to confirm the insurance status of the partner banks.

Examples of FDIC-Insured Fintech Partnerships

Several fintech companies have established partnerships with FDIC-insured banks to offer secure deposit accounts. For instance, Chime partners with Bancorp Bank and Stride Bank, while Ally Bank provides services through its own FDIC-insured status. These partnerships ensure that customer deposits are protected under federal insurance.

While fintech companies offer innovative and convenient banking solutions, ensuring the safety of your deposits requires due diligence. Always confirm FDIC insurance through the fintech's partner banks, understand the terms and conditions, and practice safe digital banking habits. By taking these steps, you can enjoy the benefits of fintech while safeguarding your financial assets.