Is your bank…a bank? This probably seems like a silly question, but financial technology companies – commonly known as fintechs – such as Chime, Cash App, and Current offer user-friendly mobile banking apps with low fees, budgeting tools, and features like early direct deposit. For many consumers, these financial technology companies provide a more convenient banking experience than traditional banks, but the thing is, they aren’t banks.
If they aren’t banks, what are they? Fintech companies partner with FDIC-insured banks that actually hold customer deposits. While the fintech provides the app and customer experience, the partner bank is responsible for safeguarding deposits and providing FDIC insurance, assuming all eligibility requirements are met.
Let me pause here and make a distinction between financial technology companies and online banks such as SoFi, Ally, Synchrony, etc. While online banks don’t have brick-and-mortar locations, they are still registered as banks and don’t rely on another institution for FIDC insurance.
Most of the time, the fintech experience works seamlessly. But because it adds another layer between customers and their money, it also introduces unique risks. In 2024, a company called Synapse Financial Technologies collapsed, leaving thousands of customers unable to access their money and bringing attention to a little-known risk of fintech banking. Synapse connected fintech companies with partner banks. Although the banks holding customer deposits remained financially healthy, problems reconciling account records left many customers without access to their funds.
To put it simply, when Synapse went out of business, its customers’ money was still in the FDIC-insured partner bank, but since Synapse, and not the bank, kept track of which money belonged to each customer, there was no way for the bank to identify how much money belonged to each Synapse customer. Because no insured bank had failed, the FDIC did not step in.
The Synapse collapse does not mean fintechs are unsafe. Millions of people use them every day without issue. However, it demonstrated that FDIC insurance protects customers when an insured bank fails, not necessarily when a technology company in the banking chain experiences problems.
So, should you use a financial technology company? For everyday spending fintech accounts can be an excellent option. However, for emergency savings, a home down payment, or other money you cannot afford to have tied up, consider keeping those funds at a traditional bank or credit union where the institution holding your deposits is also the institution servicing your account. The best choice depends on your needs, but understanding who actually holds your money and what protections apply can help you make a more informed decision.
Did You Know?
Your employer sponsors this financial wellness benefit from Francis. The benefit connects you with down-to-earth financial planners who educate and advise on any money matters…without the sales pitch. We are exclusively engaged by employers like yours and have no investment products to sell, so you can feel confident that you will always receive objective advice.
Your financial planner will help you set priorities and achieve your money goals, without judgment or financial jargon. Know that all discussions are kept strictly confidential. This service is offered as an employee benefit with no per-session co-pays, so you can meet with a financial planner as often as you wish. Services are paid by your retirement plan or your employer.
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- Visit FrancisWay.com > Services > Participant Portal
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