Convenience and Safety in e-Banking: Why FDIC Insurance is More Important than Ever

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June 18, 2021

Once upon a time, if you wanted to keep your money in a safe place, you had to drive to a bank and deposit it. When it was time to pay for something, you went to the teller and withdrew cash, wrote a check (remember those?) or put it on a credit card.

Today, we’re feeling more and more comfortable using an array of Internet-enabled financial services. Want to make a deposit/take out a loan/pay the ransom for your dognapped shar-pei? There’s an app for that. From online banking to Venmo to Bitcoin, you can find a resource for virtually any transaction.

Welcome to the world of fintech!

You may not know the word, but it’s almost a guarantee that you’ve used it in one way or another.

In its broadest definition, fintech (short for financial technology) refers to the platforms, software and applications that automate financial products and services. Banks, lenders and credit card companies use fintech at the back end to make it easier for customers to interface with them. Consumers use it up-front to pay for a latte, or save for retirement, or help crowdsource a start-up company.

In a more narrow sense, fintech banking applies strictly to banking functions. And this is where fintech can get tricky. Thanks to the Federal Deposit Insurance Corporation (FDIC), we’ve gotten used to feeling secure about the safety of our deposits (we’ve all seen the “Member, FDIC” signs). But that might not always be the case with Internet-based options.

What is FDIC and why is it important?

FDIC is an independent agency created by Congress to prevent people from losing money in the very unlikely event of a bank failure. It insures each depositor in every FDIC-insured bank up to at least $250,000 if the bank closes. However, it’s not universal: it doesn’t protect the customers of non-bank companies, or money that has not been deposited in an FDIC-insured bank.

Who offers FDIC?

Only banks can participate in FDIC. But what, exactly, is a bank? Although it is traditionally defined as a financial institution licensed to receive deposits and make loans, fintech has blurred the lines between banks and non-banks.

FDIC banks may be:

  • Brick-and-mortar banks offering mobile banking services.
  • Internet-based, FDIC-insured banks that provide no physical branches for customers; banking is conducted on a computer, mobile device or ATM.
  • Traditional banks launching digital-only brands separate from their own brand.

Non-bank fintech companies may also offer some sort of FDIC protection, but it’s important to know that fintechs themselves are never FDIC insured. FDIC insurance only kicks in when – and if – your funds are actually deposited with an FDIC-insured bank. Some fintech companies offer FDIC insurance through connections with actual banks, either as brokers (much like mortgage brokers) or through other contractual relationships.

Other non-bank companies market fintech apps for accounts that may or may not be FDIC-insured.

How do I protect my funds?

First, make sure the bank you’re planning to use is FDIC insured (you can find out at FDIC’s online resource, BankFind).

If a non-bank company offers products that it states are FDIC-insured, verify that your funds will be deposited in an FDIC-insured bank, and find out which one. Ask how and when that transfer will happen. If they hold on to your money for a period of time, that puts you at risk.

And be warned: some fintechs or other non-bank companies only appear to be banks. They may offer products similar to deposit accounts, or use the world ‘banking’ in their name, but that’s no guarantee. Before you decide to open an account, make sure it’s a legitimate bank and not a fake one, set up by scammers to get your money or personal information. Once again, you can find out whether any bank participates in FDIC by checking the BankFind site.

Learn about our FDIC Insurance at salisburybank.com/fdic-insurance/

 

This article is designed to provide informative material and is distributed with the understanding that it does not constitute legal or other professional advice. Opinions expressed herein are subject to change without notice. Information has been obtained from sources believed to be reliable, but its accuracy and interpretation are not guaranteed.


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