If it looks like a bank, advertises like a bank and accepts money like a bank — it still might not be a bank.
That is the lesson being meted out in painful fashion to tens of thousands of depositors who entrusted their savings to online-only lenders. They have names like Juno, Yieldstreet and Yotta and advertise accounts that pay high interest rates and offer protection from the Federal Deposit Insurance Corporation, the U.S. regulator entrusted with rescuing failed banks.
Those features made them and other popular banking start-ups with similar branding — such as Betterment, Chime and Wealthfront — sound an awful lot like banks. But to the surprise of many depositors, these companies merely collect money and funnel it through intermediaries to banks.
This may have seemed like a rather academic point before this year when the collapse of Synapse Financial Technologies — a software provider that sat in the middle of this chain — put into sharp relief the risk that customers face when using these new lenders, rather than depositing money directly into a traditional bank. Because Synapse was not a bank, the F.D.I.C. insurance did not automatically apply, and now nearly $100 million of deposits have been frozen or lost.
After The New York Times wrote about the issue last month, readers asked how they could tell whether their own money was safe. Here are some answers.
Why do people choose to put their savings with an online lender over a traditional bank?
Walk into any of the 4,884 branches of the nation’s biggest bank, JPMorgan Chase, and you can open an account that pays a whopping 0.01 percent in annual interest.
An online lender will blow that rate out of the water: Chime, which bills itself as “the No. 1 most loved banking app,” offers 2 percent, while Wealthfront pays 5 percent. All three say their accounts are F.D.I.C. insured.
There is an entire ecosystem of rankings that help depositors who are willing to forgo physical banks find the highest possible rates at F.D.I.C. insured institutions. Some savers even compete with one another to find the highest rates, a pursuit encouraged by personal finance influencers on social media.
After all, over a year, a depositor with $10,000 in savings would earn $500 in interest from Wealthfront, $200 from Chime or $1 from Chase.
How can I tell if my account is with an actual bank?
A degree in linguistics would help, as would reading glasses. Start-ups frequently describe themselves using permutations of the word “bank,” even if they aren’t one. On its website, Chime describes itself as “banking with no monthly fees.” Fine print then reads, “Chime is a financial technology company, not a bank.”
The lender Albert uses the slogan “the simple way to bank,” and then adds in the fine print, “Albert is not a bank.”
Somewhere on their websites — some more prominently than others — these lenders and others disclose that customer deposits end up at one or more of the over 4,000 commercial banks in the United States that are F.DI.C. insured. Many lenders call them “program banks,” “banking partners” or “participant banks.”
Wealthfront, for instance, lists a dizzying 40 potential participant banks, including big names like Wells Fargo and Citi and considerably lesser-known entities like Old Plank Trail. At least one of those participant banks should be identified on the physical checks or debit cards that a lender sends after an account is opened.
Does my money stay in one place?
Assuredly not. Lenders frequently move money. In June, Betterment transferred this reporter’s savings account between eight different banks, at sums of as little as one penny, according to the 22-page monthly account statement.
In the aftermath of Synapse’s collapse, depositors discovered that even though their debit cards identified the small Tennessee lender Evolve as their bank, much of their money was no longer there because it had been transferred out months earlier.
A Betterment spokesman said that it “moves dollars across our program banks to optimize for interest rate and F.D.I.C. insurance.”
Why does it matter who holds my money at any time?
Each time your money is transferred, it temporarily passes through what is essentially an opaque tube of financial intermediaries. If one of those intermediaries runs into trouble, as happened with Synapse, you could be left without access to your money.
Additionally, although the F.D.I.C. has paid back deposit money in every bank collapse for nearly a century (there are about two dozen every year), there is always a temporary delay, and most depositors would prefer not to have their savings stuck for any period of time.
Won’t regulators help me if something goes wrong?
Maybe. Regulatory agencies and elected officials appear to have been taken by surprise by the collapse of Synapse, and they are still in a phase of swapping increasingly terse words urging action that has yet to happen.
The F.D.I.C. last week proposed new rules that would give the agency more power to oversee the so-called nonbanks, but those remain in the early stages. Even if adopted, the rules might not allow regulators to pay out deposit insurance to customers of such institutions. Asked about the matter during a Senate committee hearing last week, the Federal Reserve chair, Jerome H. Powell, emphasized that his organization’s authority allowed for supervision only of registered banks, not online lenders or the middlemen who feed into them.
How do I find out more?
Talk to your lender. Send an email to its customer service department (a written record is always valuable), and ask where your money is held and what other companies are involved. Any lender that can’t provide a straightforward answer may actually be giving you the answer you need.
And your monthly statement should provide the history of where your money was held — although it may be out of date by the time you receive it.