Some people collect coins and stamps. At one point, I was collecting debit cards. It’s not stolen! Each of them had my name right below the logos of the latest banking apps I decided to try: Venmo, Cash App, Chime, Varo, Current, and Acorns.
For the better part of a decade, I did all my banking through these apps, enjoying their slick user experience and low fees. But the problem with any bank is that they are not chartered banks. If the company that developed your app goes bankrupt, the Federal Deposit Insurance Corporation (FDIC) won’t necessarily come to your rescue.
When I finally purchased Chase and their FDIC insurance, this disaster scenario was a hypothetical concern. For millions of others, this became a reality earlier this year when a company called Synapse went bankrupt and had their accounts frozen. Users of Yotta, a popular savings app with a built-in lottery, and other apps that rely on Synapse to manage their accounts, have been unable to access their money for months. Now, with hundreds of thousands of Synapse customers’ funds left in limbo, Sen. Elizabeth Warren (D-MA) and Sen. Chris Van Hollen (D-MD) are calling for banking reform. The FDIC is proposing changes to the rules.
Still, more and more people are turning to these financial technologies, or fintech services. More than a third of Gen Z and Millennials used a fintech app or digital bank as their primary checking account, according to a 2023 Cornerstone Advisors study.
Therefore, it’s worth asking some questions. Is it a bad idea to use an app like Venmo as your main bank? Are digital banks like Chime reliable enough?
The answer to both questions is yes. Venmo is not a bank, so using it as your primary checking account comes with some risks. Some fintech companies, like Chime, are as big as traditional banks and offer some great perks. Again, being non-traditional, there are risks involved.
“We can’t go back to a world where everyone works for a small bank and walks into a branch,” said Shamir Karkar, co-founder of Simple, one of the first digital banks. “I think we all need to make fintech better because it’s going to go even further in the future.”
To do all this better, it helps to know what’s going on behind the scenes.
A brief explanation of neobanks and remittance providers
The term fintech can refer to many different things, but when we’re talking about everyday services for the general public, it usually refers to either neobanks or money transfer providers. Chime is a neobank. Venmo is a money transfer company. Although regulated in different ways, most of these companies issue debit cards, so many people treat their debit cards like checking accounts. Fintech apps are not the same as banks, which are insured by the FDIC.
Neobanks are fintech companies that partner with FDIC-insured chartered banks to offer services such as checking accounts. Neobanks sometimes work with intermediaries known as Banking-as-a-Service (BaaS), which are not insured by the FDIC. Still, you often see the FDIC logo on neobank websites, just as you see it on the glass doors of many brick-and-mortar banks. Its logo conveys trust, and thanks to its partnerships, neobanks can claim some FDIC protection. However, these neobanks and BaaS companies do not have banking charters and are therefore not directly insured by the FDIC. Instead, neobank customers can receive something called pass-through deposit insurance coverage.
Vox’s Adam Clark Estes explains the potential pitfalls of storing your money in fintech apps like Venmo and Chime.
Pass-through insurance is a simple concept, but it is actually complex. Essentially, when you deposit funds into an account with a neobank like Chime, those funds are routed to an accredited bank, possibly through one of the BaaS intermediaries. There is no problem even if a chartered bank goes bankrupt. It’s FDIC insured and you can get back up to $250,000 of your deposit. If the intermediary fails, or the neobank itself fails, it may be covered by pass-through insurance, but it may not be. In explaining when or if you’ll get your money back in these situations, the FDIC literally says, “It depends.”
“U.S. consumers see the FDIC logo and it means, ‘My money is safe, I’m going to get it back,'” said Jason Mikula, who runs the popular FinTech Business Weekly newsletter. I interpret it as such.” “That’s not exactly what the FDIC does.”
Money transfer companies, also known as money service businesses, are further removed from the FDIC’s safety recognition. Frankly, if you keep all your money in a Venmo or Cash App account, you’re not covered by FDIC insurance. Money transfer companies are not neobanks or banks, but are completely different legal entities that are regulated by each state as well as the Treasury Department. There are certain protections provided by these agencies, but FDIC insurance is not among them.
So when an app like Yotta or Chime says on its website that it’s FDIC insured, it’s not a lie, but it’s not necessarily true either.
To its credit, Venmo admits in the fine print on its homepage that its parent company, PayPal, is “not a bank” and “not insured by the FDIC.” However, to make things even more confusing, certain PayPal services that utilize authorized banking partners, such as the PayPal Mastercard and savings accounts, may be FDIC insured. Again, it depends.
Dangers and benefits of banking using apps
Fintech companies are taking careful steps to ensure you can bank with confidence. The website includes the FDIC logo, which provides some reassurance to customers, although the detailed explanation of protections is more complex. They issue debit cards with Visa or Mastercard logos, suggesting that these cards operate according to the same rules as big bank debit cards. These logos act as a stamp of approval and ensure that your money is in safe hands.
As far as Sen. Elizabeth Warren is concerned, this is the crux of the matter. This month, she and Sen. Van Hollen asked regulators to ban neobanks and fintech companies from using the FDIC name and logo if they offer only pass-through insurance. They also called for stronger supervision of these companies under the Banking Services Companies Act.
“The average consumer should not be expected to understand the intricacies of FDIC insurance in order to comfortably and safely save and invest money,” Warren’s letter said. are. “When consumers see the FDIC logo, they should be confident that they are dealing with a regulated and insured entity.”
That doesn’t mean all neobanks and fintech companies are untrustworthy. In some cases, a fintech company’s size and track record can provide considerable credibility. Chime, the largest digital bank with about 22 million customers, was valued at $25 billion in its latest funding round and plans to go public next year. Venmo’s parent company, PayPal, is widely considered safe and trustworthy. And don’t expect Block, the $42 billion company that owns Cash App and its own chartered bank, to go out of business anytime soon.
The truth is, even with a false sense of security, fintech apps offer certain customers features that big banks can’t or won’t offer. For example, one of the reasons Chime and many other neobanks are so popular is that they don’t charge very many fees. This is a big boon not only for young people but also for those without bank accounts. If a fintech app is your only option, you may not care much about FDIC insurance.
“If you’re a poor person in America and you bank with Chase or Wells Fargo, you’re going to get overdraft fees and minimum balance fees,” Mikula explained. “So there’s a real need for (fintech) companies to fill as a result of incumbent banks basically not wanting to bank poor people because it’s hard to make a profit. is.”
According to data from the Federal Reserve Board, as many as 6 percent of Americans will be living without a bank account by 2023. The proportion of people with annual incomes of less than $23,000 increases to 23%. Unbanked people, who are predominantly Black, Hispanic, and undocumented, are at greater risk of falling victim to predatory lending practices, including payday loans. Some fintech companies also offer short-term loans, which have also been criticized as predatory.
Payment apps like Venmo are popular with scammers. Using a Venmo-branded debit card provides some purchase protection. However, if you get scammed, there’s a good chance the app won’t refund your money.
Venmo, Cash App, and Zelle are all clear about refunds for payments made to other individuals. they haven’t done that. At least, we can’t guarantee that. These peer-to-peer payments should be treated like cash.
Here are some tips to spot and avoid scams on Venmo, Cash App, and Zelle. But if you’re someone who’s motivated by fear, read this story about a man who wanted a pool deal but instead received a “$31,000 lesson on the downsides of payment apps.”
Still, fintech companies are offering the unbanked the ability to save money and build credit. For people who can’t open a traditional bank account, Venmo can be a lifeline. That’s because you can add funds to your Venmo balance and pay your bills using your Venmo debit card without the need for a traditional checking account. These days, anyone with access to a smartphone can easily access basic banking services.
As I’ve learned firsthand when testing many of these services over the years, signing up and making deposits into fintech apps is very easy. However, if you run into problems, finding help can be difficult. Many fintech companies and neobanks, including Chime, don’t have brick-and-mortar locations, so you can’t go directly to a branch to resolve your issue. In fact, poor customer service is a common complaint for these companies.
This means you should always research a company before providing funding. Read reviews and read the fine print. Obvious red flags include reports of hidden fee structures and customers not being able to withdraw their money. You should also consider trying out a service with a small amount rather than saving up for life. And as always, be wary of scams and scams.
What’s true in the real world is even more true in the app world. Be wary of deals that seem too good to be true. Only gamble with what you are willing to lose.
A version of this article also appeared in the Vox Technology newsletter. Sign up here to never miss our next event!
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