Why Your Money Might Not Be Safe in a Digital Bank Even If It’s FDIC Insured
Last year, the collapse of Silicon Valley Bank (SVB) and Signature Bank became the second and third largest bank failures in US history. These developments have naturally raised concerns about the stability of both traditional and digital banking institutions .
Over the years, consumers have begun turning to online banks and fintech platforms to meet their banking needs. These institutions often promise convenience, higher interest rates and innovative features. But how safe is your money outside of traditional banks? For example, how did the collapse of fintech intermediary Synapse deprive more than 100,000 Americans of $265 million in deposits in May of this year? Let’s take a look at the fine print surrounding digital banking security and what you need to know to protect your money.
What does it mean to be FDIC insured?
The Federal Deposit Insurance Corporation (FDIC) is the cornerstone of consumer confidence in the US banking system. The Federal Deposit Insurance Corporation guarantees account deposits up to $250,000 per depositor, per insured bank, per account ownership category. This insurance covers almost all banks in the United States, providing protection to consumers in the event of a bank failure. Likewise, credit unions are insured by the National Credit Union Administration (NCUA), providing similar protection for member deposits.
This means that if you have less than $250,000 in your FDIC-insured U.S. bank account, you don’t have to live in a constant state of panic. Your money should be safe in the bank . But here’s the thing: Many digital banks and fintech platforms are technically FDIC insured . So why are consumers locked out of their accounts?
Is your money really safe in a digital bank?
Although the SVB and Signature Bank bankruptcies were significant, regulators responded to them relatively smoothly . However, the recent collapse of Synapse (a fintech infrastructure provider) has exposed new vulnerabilities in the digital banking ecosystem. The event underscored the crucial difference between traditional bank failures and the collapse of fintech intermediaries. In traditional bank failures, the FDIC protects depositors; For fintech intermediaries, the situation is more complex because the associated banks have not failed, leaving regulators with limited options to help affected users.
Fintech promises versus reality
Many consumers believed that their money on fintech platforms was “as safe as money in the bank.” However, this assumption turned out to be too simplistic. Although FDIC insurance covers many financial technology accounts, it is important to understand its limitations. FDIC insurance is intended to save depositors of a failed bank, not to solve problems with third-party platforms. So, if a non-bank fintech company fails (like Synapse), the path to recovery becomes much more difficult.
Here are the key points consumers should pay attention to:
1. If a bank goes bankrupt and the fintech platform has a good reputation, customers will be able to receive their insured deposits relatively quickly.
2. If a non-bank fintech company fails, especially with inadequate reporting, the recovery process may be much more complex and uncertain.
3. Unfortunately, it is difficult for consumers to assess how responsibly individual fintech companies have opened accounts that promise FDIC insurance. Trust in financial technology comes with significant risks.
Tips on how to protect your cash savings
While digital banks and fintech platforms offer many benefits, consumers should take steps to protect their funds:
1. Check your FDIC insurance. Always make sure your funds are FDIC insured. This will protect you up to $250,000 per depositor at each bank if the institution fails. Here is the FDIC Banking Package for a list of FDIC-insured banking institutions.
2. Understand where you are investing your money. Research how the institution makes money. Be wary of platforms that offer unusually high profits without a clear explanation of how they generate them.
3. Read the fine print: Pay attention to fees, account minimums, and any restrictions on withdrawals or transfers.
4. Diversify your funds. Don’t keep all your money in one place. Spread your savings across different types of accounts and institutions to minimize risk.
5. Control your accounts. Check your accounts regularly for unauthorized transactions or changes in terms.
6. Be careful with promises of high returns . If an offer seems too good to be true, it probably is. Be especially wary of platforms that promise significantly higher returns than the market average.
7. Check Regulatory Compliance: Make sure the establishment is properly licensed and regulated. In the US, you can contact the FDIC, SEC or state banking regulators.
While digital banks claim to keep your money safe, it’s critical to understand the nuances of keeping your money safe. The bottom line is that, at this point, individual consumers simply cannot trust the security of fintech in the same way that you can trust a traditional bank—assuming you trust banks at all.