The Risks of Online-Only Lenders
If it resembles a bank, promotes itself like a bank, and accepts deposits like a bank, you might assume it is indeed a bank. However, that assumption can lead to significant financial repercussions. This lesson is becoming painfully clear for tens of thousands of depositors who placed their trust—and their savings—in the hands of online-only financial institutions. Companies like Juno, Yieldstreet, and Yotta have attracted customers with enticing high-interest accounts and claims of protection from the Federal Deposit Insurance Corporation (FDIC), the U.S. agency responsible for safeguarding depositors in the event of bank failures.
These features made these emerging banking start-ups—alongside others such as Betterment, Chime, and Wealthfront—appear to function much like traditional banks. However, many depositors were taken aback to discover that these entities do not operate as banks at all; rather, they merely collect funds and channel them through intermediaries to established banks.
This distinction may have seemed somewhat theoretical until recent events unfolded. The collapse of Synapse Financial Technologies—a key software provider in this chain—has starkly illustrated the risks associated with utilizing these modern financial platforms instead of depositing directly into a conventional banking institution. Since Synapse does not hold a banking license, the FDIC insurance protections do not automatically extend to the deposits managed through it. As a result, nearly $100 million in deposits have been either frozen or lost, leaving many customers in financial limbo.
Following coverage of this issue by The New York Times last month, numerous readers have inquired about how to ascertain the safety of their funds. Below are some essential guidelines to help you navigate this complex landscape:
- Verify the Institution: Always ensure that the entity you are dealing with is a federally insured bank.
- Understand the Structure: Be aware of whether the institution is managing your funds directly or acting as an intermediary.
- Check for FDIC Coverage: Confirm that your deposits are covered by FDIC insurance to protect against losses.
- Research User Experiences: Look for reviews and testimonials from other customers to gauge the reliability of the lender.
- Stay Informed: Keep up with news regarding the financial health of any institution where you consider depositing your money.
