No, your funds at a fintech are not 100% safe just because the fintech partners with an FDIC-insured bank

Fintech, neobank, challenger bank, financial technology company. These are all terms that you may have heard or read in reference to a company that offers banking services, but is not legally classified as a bank.

More importantly, these fintechs (which we’ll refer to the collective as) are usually not insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC’s deposit insurance program safeguards up to $250,000 of your funds in the event that your bank fails.

Not surprisingly, some consumers are nervous and apprehensive about keeping funds on deposit with companies that aren’t insured by the FDIC. Fintechs, however, often offer banking services, like checking and savings accounts and Certificate of Deposits (CDs) through partner banks that are FDIC-insured.

Knowing that, did you wonder why fintechs don’t reassure nervous potential and existing customers by proclaiming, “No, we’re not FDIC insured. But, your funds are held in an FDIC-insured partner bank. So, your money’s 100% safe!”?

That would be the obvious thing to do to calm the fears of anxious consumers. But, the fintech’s statement would be incorrect and an illegal claim to make. If you didn’t catch it three paragraphs above, the below statements from the FDIC will confirm that your funds are not recoverable through an FDIC claim if your fintech fails.

According to the FDIC:

“FDIC insurance does not protect against the default, insolvency, or bankruptcy of any non-bank entity, including crypto custodians, exchanges, brokers, wallet providers, and neobanks.”

The FDIC further adds:

“By federal law, the FDIC only insures deposits held in insured banks and savings associations (collectively, “insured banks”) and only in the unlikely event of an insured bank’s failure. The FDIC does not insure assets issued by non-bank entities, such as crypto companies.”

The truth is that while the FDIC would protect up to $250,000 of your funds deposited at a fintech’s partner FDIC-insured bank, it would do so only if the partner bank fails. The collapse of the FDIC-insured bank would trigger the FDIC insurance. You would file a claim with the FDIC and your funds (up to $250,000) would be returned to you, usually within one business day. 

Since it’s the collapse of the FDIC-insured bank (and not the fintech) that causes the FDIC insurance to kick in, you would be ineligible to file an FDIC claim to recover your funds if your fintech fails. You would work directly with the fintech, which would hopefully be transparent and proactive in providing information to customers.