3 ways to ensure your Fintech deposits are safe

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 attract customers through advantages such as competitive prices, cheaper products and well-designed mobile apps.

If you’re considering opening a savings or checking account with one of these fintech companies, an important factor to consider 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 has insurance through the Federal Deposit Insurance Corp. (FDIC).

How fintechs partner with FDIC-insured banks

The FDIC is a government agency that insures the money deposited in member banks so that account holders will not lose their money if the bank should 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 customers’ funds in FDIC-insured banks include:

• Carillon: This fintech offers a current account, a savings account and a debit card. These are provided by federally insured banks Bancorp Bank or Stride Bank.
• Dave: Dave customers are offered a spending account and Dave debit card. FDIC-insured Evolve Bank holds all deposits and issues the debit card.
• Opportunity: Formerly known as Digit, Oportun’s offerings include a checking and savings account at cooperating FDIC-insured banks.

On its website, the FDIC states that when a non-bank company offers products it says are FDIC-insured, customers should “confirm with the company that your money will be deposited into an FDIC-insured bank, how and when it will happen, and the specific FDIC-insured bank or banks where they will be deposited.”

A spokesperson for fintech Dave said that funds sent to the company from customers are covered by FDIC insurance immediately, including when they are on their way to the company’s partner bank, saying: “The funds that are on their way to our partner bank are FDIC insured. Banks keep records of transfers precisely for this reason.”

The transfers usually take two to three days during the week, the spokesperson said.

Similarly, funds sent from customers go directly into Chime’s cooperating FDIC-insured banks, ensuring coverage from the start, a Chime spokesperson said.

Money placed in Opportun 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 broker-dealer fintechs offer savings accounts — often called sweep accounts or cash management accounts — for which they get extra FDIC insurance by sweeping the money into accounts at multiple federally insured banks. An advantage of this is that it can result in higher FDIC coverage limits per client.

Examples include:

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

Funds you have turned over to a brokerage firm for deposit into a deposit account may be covered by Securities Investor Protection Corporation (SIPC) insurance until the money reaches a cooperating FDIC-insured bank.

As an enhancement, funds in transit to or from cooperating FDIC-insured banks are not yet covered by FDIC insurance, but 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.

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

How to make sure your fintech deposits are safe

1. Make sure your accounts are covered by FDIC insurance

If you are 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 protected immediately.

If it turns out there is no FDIC coverage or 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 deposit a significant amount of money into the accounts offered by a fintech, check to see which partner bank insures the funds. In case you already have separate accounts with the particular bank, you may end up being over the FDIC coverage limit.

3. Carry out secure digital banking

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

• Only download the company’s app from a trusted 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 that hackers will be able to find out.
• Avoid checking your accounts over public Wi-Fi. Fraudsters can potentially see your online activity when you’re not using a secure network.
• Set up account alerts so that you are notified of things such as low balances or large purchases. This can tip you off quickly in case thieves have found their way into your account.

FAQs about Fintech deposits

• Are fintechs FDIC insured?

  A corporation that is not a chartered bank cannot carry its own FDIC insurance. However, many fintechs that offer deposit accounts choose to place the funds in one or more cooperating FDIC-insured banks so that 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 disclosures on the website will provide information about whether the accounts are housed in an FDIC-insured bank.

• Why is FDIC insurance important?

  FDIC insurance protects your money so that it is not lost to you if the bank should fail. (This insurance does not protect your money against things like identity theft or fraud.)

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

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

The bottom line

Fintech companies often offer well-designed, intuitive money management apps as well as deposit accounts with low fees and competitive prices. A fintech company may be a good choice for you, as long as you do your research to ensure that the funds you deposit will be federally insured immediately.