The Hidden Risks of FinTech: Are Your Digital Deposits Really Safe?

Financial technology (FinTech) has revolutionized how we manage money, offering convenience, accessibility, and innovation. However, recent events have highlighted the risks lurking behind some digital banking platforms. In May 2024, the Federal Deposit Insurance Corporation (FDIC) issued a warning after the bankruptcy of Synapse Financial Technologies left thousands of Americans locked out of their accounts. Many are still struggling to regain access to their money months later.

This alarming situation underscores a critical question: Do you truly know where your money is held? While FinTech apps like PayPal, Chime, Cash App, Venmo, and Apple Pay offer seamless transactions, not all function as banks. Understanding the difference between a traditional financial institution and a tech company that provides banking-like services is crucial—and failing to recognize it can put your money at risk.

The Synapse Collapse: A Wake-Up Call for FinTech Users

Take the case of Yotta Technologies, a FinTech company that gamified saving money for its account holders. Yotta was not a bank; instead, it relied on bank partnerships, with Synapse serving as the intermediary. When Synapse collapsed, thousands of customers lost access to their funds, illustrating the significant risk of using non-bank financial platforms.

Many FinTech apps operate as intermediaries rather than direct custodians of your money. If an intermediary fails, access to your funds may be delayed or in extreme cases, lost altogether.

Protecting Your Money: Questions to Ask

To help ensure your digital deposits remain secure, consider these critical questions:

1. Do I have money stored in a bank or a non-bank?

If you use a traditional bank like JPMorgan Chase or PNC with a digital app, your funds are housed within an FDIC-insured institution. However, FinTech apps often present themselves as banking platforms when they are not banks.

For instance, Chime operates through partner banks like The Bancorp Bank and Stride Bank. This setup, known as pass-through banking, means funds are not held directly by the app but instead flow through a traditional bank.

2. Does my FinTech app partner with a traditional bank?

Some digital wallets, such as PayPal and Venmo, allow users to store funds within their platforms. However, unless users opt into features like debit cards or linked bank accounts, these funds may not be held at a bank at all. This distinction is critical because only deposits in FDIC-insured banks are protected in the event of a failure.

3. What happens if my FinTech app or intermediary fails?

Before depositing money into a FinTech app, investigate:

• Which traditional bank is affiliated with the service?
• How would you access your funds if the app experienced technical difficulties?
• What protections exist if the app or intermediary goes bankrupt?

For example, PayPal’s program banks (when applicable) include Goldman Sachs and Wells Fargo Bank, while Chime partners with The Bancorp Bank and Stride Bank. If you hold deposits with a partner bank outside of a FinTech app, the aggregate FDIC limit applies to both accounts, potentially impacting coverage limits.

Have a Backup Plan

Despite technological advancements, system outages and financial disruptions can still occur. Do you have easily accessible cash or accounts outside of FinTech platforms in case your digital funds become temporarily—or permanently—unavailable?

Stay Informed

FinTech has reshaped the financial landscape, offering new tools to manage money. However, as legendary investor Peter Lynch said, “Know what you own, and know why you own it.” Understanding the risks behind digital banking services is just as important as knowing where you invest.

With the increasing number of FinTech platforms available, staying informed is essential to help protect your financial future.

Sources:

FDIC Consumer Resource Center

CFPB Finds that Billions of Dollars Stored on Popular Payment Apps May Lack Federal Insurance

Should you replace your bank account with PayPal?

PayPal Balance Terms and Conditions

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