Please Use a Real Bank
The risk of handing your money over to fintechs.
Fintech offers a lot of promises. Send money faster. Get your paycheck early. Earn higher interest rates on deposits. Make saving and investing fun. But the convenience and user-friendliness many of these companies offer can’t overcome the real risk of handing over your money to tech startups aiming to “disrupt”. Some people learn this the hard way.
In May, more than 100,000 customers of fintech apps, most of them at Yotta, lost access to nearly $300 million in funds they were promised were FDIC-insured. Yotta is an app that combines a savings account with lottery games. Instead of earning interest, for every $25 you have in the account, you get one ticket per day. You can then use these tickets to play games and win prizes. So far, so bad.
The primary culprit in this debacle was Synapse, one of many financial intermediaries that help connect fintechs offering banking-like products with the banks that are supposed to hold customer money. These accounts, typically marketed as checking accounts, savings accounts or cash management accounts, prominently advertise FDIC insurance on their websites thanks to the partner banks they work with. You open an account, deposit money and then the fintech takes your money and puts it in one or many federally insured banks.
The problem is that these partner banks, in this case Evolve Bank & Trust, don’t maintain accounts in these customers’ names. Rather, a company like Synapse sets up a for benefit of (FBO) account that pools the customer money at these banks while they manage the ledger of what money belongs to which user. But in May, Synapse declared bankruptcy, and amid the chaos shut off a critical dashboard that Evolve relied on to process transactions.
The details beyond that are pretty murky and a court battle is underway. Synapse and Evolve both seem to be pointing fingers at each other. The customers, who include small business owners and people saving up to buy a home, may never see their money. While this is an exceptional example of a fintech failure, it highlights some of the risks inherent in trusting non-bank entities with large amounts of money and how the FDIC insurance they advertise on the accounts may not always save customers in the event of failure.
If Evolve had failed, federal deposit insurance would have made the customers, the end users, whole. But because Synapse was the one that failed, the federal government has no real oversight or authority to step in.
The problem isn’t just fintechs claiming FDIC insurance, but apps that don’t offer it at all. The Consumer Financial Protection Bureau (CFPB) raised the alarm last year about keeping money in peer-to-peer payment apps like PayPal, Venmo and Cash App. These apps make it easy to pay your friends or split a bill at a restaurant, but you should never treat them like a checking account. Keeping money inside the account instead of immediately sweeping it into a connected bank account puts your money at risk. If Venmo were to collapse, there are no federal guarantees that you would get your money back. If your bank collapses, up to $250,000 per account holder is covered. Even if there’s a slight delay, you will get your money back. That’s what we saw when several banks, including Silicon Valley Bank, collapsed last year.
Fintech apps are convenient to use and beat traditional banks when it comes to user experience and aesthetics. But you need to remember one thing before dealing with these companies: They aren’t banks. They don’t have banking licenses. They aren’t federally regulated. Your deposits are not insured directly, so while your money is safe if the partner bank goes under, intermediaries like Synapse don’t have the same oversight and may undo the fragile arrangement.
While it may sound boring, you should use a real bank. That doesn’t mean you need to bank with Chase, Bank of America or Wells Fargo (don’t bank with Wells Fargo). There are plenty of regional banks and credit unions that also come with the same protections.
Using a real bank also doesn’t mean rejecting fintech entirely. Many online-only banks offer a lot of the conveniences and ease of use of flashy fintech startups but actually have banking licenses and FDIC coverage, like Discover and Ally. Even SoFi became a bank a couple of years ago. Online banks can offer better online and in-app experiences, not to mention higher interest rates, than many brick-and-mortar banks because they don’t have the expenses of maintaining physical branch locations.
Yotta and Synapse seem to be particularly reckless, and I wouldn’t expect bigger companies like Wealthfront or Betterment to come with the same risks. Still, when you use a fintech, you’re rolling the dice on whether that company will even be around in the next year. A lot of them aren’t profitable and offer products that aren’t sustainable. One red flag to watch out for is unusually high interest rates. Most banks don’t pay more than half a percentage point. Online banks pay much closer to the interest rate set by the Federal Reserve. But some fintechs offer well beyond that as a way to attract customers. You shouldn’t expect any of that to last.
Another red flag is gamification. Many fintechs embrace gamification as a way to make their apps more engaging. Yotta for example turns saving money into a lottery. This is the kind of thing you should stay far away from. It’s a fundamentally unserious product and just sounds like a disaster waiting to happen.
Instead of FDIC insurance with an asterisk, you can just choose the real thing. Saving and investing can be fun, but that doesn’t mean it should be turned into a literal game. Stay away from fintech fads and use a real bank.