Financial technology (fintech) companies provide consumers with innovative alternatives to traditional banking. Fintechs that offer bank accounts, also known as challenger banks or neobanks, often draw customers through perks like competitive rates, lower-cost products and well-designed mobile apps.
If you’re considering opening savings or checking accounts with one of these fintech companies, one important factor to research is whether the accounts offered are federally insured.
Rather than being official banks themselves, these fintech companies often provide federal insurance for your deposits by partnering with a chartered bank that carries insurance through the Federal Deposit Insurance Corp. (FDIC).
Synapse bankruptcy results in frozen accounts
In recent news, thousands of consumer and business bank accounts were frozen in May 2024 when fintech company Synapse was shut down abruptly after filing for Chapter 11 bankruptcy protection on April 22. Synapse had acted as a middleman between partnering tech companies and FDIC-insured banks.
Evolve Bank & Trust, a Synapse partner, said in a statement that Synapse’s “shutdown of essential systems” had jeopardized users 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, the fintechs are able to offer federally insured deposit accounts to their customers.
Users of several fintech services associated with Synapse have been unable to access their funds, according to recent California bankruptcy court filings.
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 the money deposited at member banks so account holders won’t lose their money if the bank were to fail. FDIC insurance covers up to $250,000 per depositor, per FDIC-insured bank, per ownership category.
While non-bank companies that offer deposit accounts are not FDIC insured, they often enter into contractual agreements with 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:
- Chime: 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.
- Oportun: Formerly known as Digit, Oportun’s offerings include a checking and savings account held at partnering FDIC-insured banks.
On its website, the FDIC advises that when a non-bank company offers products it states are FDIC insured, customers should “verify with the company that your funds will be deposited in an FDIC-insured bank, how and when that will happen, and the specific FDIC-insured bank or banks where they will be deposited.”
Similarly, funds sent from customers go directly into Chime’s partnering FDIC-insured banks, ensuring coverage from the start, a Chime spokesperson said.
Money placed in Oportun also goes directly to the fintech’s FDIC-insured partner banks, which include Pathward, Citibank, Wells Fargo and JP Morgan Chase, ensuring that the funds are protected by FDIC insurance immediately.
Fintechs that act as deposit brokers
Some fintechs that are brokers offer savings accounts — often called sweep accounts or cash management accounts — for which they obtain extra FDIC insurance by sweeping the money into accounts at multiple federally insured banks. An upside of this is it may result in higher FDIC coverage limits per client.
Examples include:
- Betterment: The high-yield Cash Reserve account offered from Betterment advertises FDIC insurance with the fintech’s program banks of up to $2 million for individuals and $4 million for joint accounts.
- Wealthfront: This fintech’s Cash Account pays a highly competitive annual percentage yield (APY). Wealthfront advertises FDIC insurance with its partner banks of up to $3 million for individuals and $6 million for joint accounts.
Funds you’ve handed over to a brokerage firm to be placed into a deposit account may be covered by Securities Investor Protection Corporation (SIPC) insurance until the money reaches a partnering FDIC-insured bank.
In the case of Betterment, funds in transit to or from partnering FDIC-insured banks are not yet covered by FDIC insurance, but they are protected by SIPC insurance at that time. The exception is when funds are held in a sweep account after a deposit or before a withdrawal, in which case they are eligible for FDIC insurance but are not protected by SIPC insurance.
Similarly, money deposited by clients into the Wealthfront Cash Account will be covered by SIPC insurance while it’s in transit to or from FDIC-insured partner banks.
But when your money is not directly with an FDIC-insured bank, according to the FDIC, you have to make sure that:
- The company actually deposits the money.
- The account must be titled properly at that FDIC-insured bank.
- The money needs to stay within FDIC insurance limits. So if you had an individual savings account with $250,000 at an FDIC-insured bank, and the nonbank uses that FDIC-insured bank as one of its program banks, your from the nonbank wouldn’t be FDIC-insured. So it’s important to know which FDIC-insured bank your money is going to.
How to make sure your fintech deposits are safe
1. Ensure your accounts are covered by FDIC insurance
If you’re interested in opening accounts with a particular fintech or challenger bank, read through the company’s fine print to confirm it’s backed by an FDIC-insured bank and that your money will be protected immediately.
If it turns out there’s no FDIC coverage or that your funds won’t be covered during transfer to the fintech’s partner bank, that’s a good indicator to look elsewhere.
2. Make sure all your money is insured
If you’re depositing a significant sum of money into the accounts offered by a fintech, check to see what partner bank is insuring the funds. In the event you already have separate accounts with that particular bank, you could end up being over the FDIC coverage limit.
3. Practice safe digital banking
When managing deposit accounts through the website or mobile app provided by the fintech company or neobank, follow the same safety precautions you would with an app provided by a traditional bank. These include:
- Only download the company’s app from a reliable app store — not from online forums or through links sent in text messages.
- Create a strong password that you’re not using for other apps or websites. This will reduce the chances that hackers will be able to figure it out.
- Avoid checking your accounts over public Wi-Fi. Fraudsters could potentially see your online activity when you’re not using a secure network.
- Set up account alerts so you’ll be notified of things such as low balances or large purchases. This could tip you off quickly in the event thieves have found their way into your account.
Fintech deposits FAQs
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A company that is not a chartered bank cannot carry its own FDIC insurance. However, many fintechs that offer deposit accounts choose to place the funds into one or more partnering FDIC-insured banks so their customers’ funds are protected.
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If a fintech company offers deposit accounts, the disclosures on its website will provide information on whether the accounts are placed into an FDIC-insured bank.
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Not having FDIC insurance coverage means you could lose some or all of your money if the financial institution ends up closing down.
Bottom line
Fintech companies often provide well-designed, intuitive money management apps as well as deposit accounts with low fees and competitive rates. A fintech company might be a good choice for you, so long as you do your research to ensure the funds you deposit will be federally insured immediately.
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