Few things are as American as mom’s apple pie and the Federal Deposit Insurance Corp. Although most Americans understand the benefits that come from the warm crust of baked apples, the same understanding cannot be said about the protection provided by the FDIC.
In short, the FDIC is one of the main reasons why the American banking industry is a world leader in safety and soundness. Insured deposits in financial institutions are protected in the event of a financial crisis at the bank. That’s the main difference for US banks (technically, deposit insurance companies): The FDIC protects customers in the event that the bank goes into trouble.
Fintech companies are not as safe for customers as FDIC-insured institutions because the FDIC does not protect customer deposits if the fintech fails.
Fintech companies often deposit customer funds in a single bank account, and that type of account can be known by different names: “passing,” “trust accounts,” “omnibus,” or “benefit” accounts. Regardless of the name, a fintech company is responsible for protecting the information of its beneficial owners.
If the fintech fails, or for any reason the total amount of money the customer is supposed to have on deposit does not match what the fintech deposited in the account, the FDIC insurance does not trigger.
Unless the bank fails, and if the bank and fintech set up an account system to meet the requirements to pass insurance, those customers will be covered by FDIC insurance.
In other words, customer deposits in fintechs are often at risk of the fintech economy. This should be a concern for customers, and in order to protect themselves, customers should avoid fintechs and look to the safety and security of their insurance companies.
The digital economy industry has recently seen the collapse of some of the biggest non-banking companies in the industry, and customers have been stripped of access to their money. Voyager Digital and Celsius Network both had billions in customer deposits, and in July 2022 both companies filed for Chapter 11 bankruptcy protection. We don’t know if customers will get the money and be perfect.
There is no such thing as “too big to fail,” and large investments in a company from well-known venture capital firms do not guarantee that the company is managed wisely. Unlike many fintech companies, transparency and regulation are hallmarks of US banking.
I don’t know many people who would say they love their banks, but, in general, in the United States people trust their banks to protect their money. According to the agency, no one, in the nearly 90-year history of the FDIC, has ever lost a penny on an insured deposit.
Fintech companies have many people who want to borrow from this reliable source, and perhaps the leaders who are doing this are from the cryptocurrency industry.
Founders and founders with little financial knowledge want to leverage their limited knowledge to save other people’s money by encouraging clients’ dollars to be deposited in FDIC-insured institutions.
Guess what? Indeed, they are! The wording is not much different from simply saying that money is held in a bank, but the mention of the FDIC can be misinterpreted, and perhaps the result is what some companies wanted.
It is very rare in the US to find a bank that is not FDIC insured, and if it is, it is not a member of the Federal Reserve System. The most commonly mentioned non-FDIC bank is the Bank of North Dakota, which is fully sponsored by the state of North Dakota and is the only state bank in the country.
The FDIC works with banks, and although they offer similar products and services, fintechs are not banks. It is a serious violation for an uninsured entity to claim the FDIC. There is one cryptocurrency lender, it almost looks like a bank with its own ingredients, which may have played fast and loose with what it claims to offer. It will be interesting to see if the FDIC and the Consumer Financial Protection Bureau take action. Cleaning up bad actors is good for the industry and good for the consumer.
The FDIC is an independent agency created by Congress and sponsored by the general faith and credit of the US government. It is important to note that the FDIC does not receive government funding, and instead receives money paid by banks and savings associations to provide deposit insurance.
The FDIC does more than provide deposit insurance. The agency oversees and regulates financial institutions to ensure safety, soundness and consumer protection; makes financial institutions large and difficult to dissolve; and runs receivers.
The agency is an active and important member of the US financial network that protects the safety and soundness of banks. In some cases where an insurance company is in financial trouble, the FDIC steps in and directs the receivership process. The FDIC protects the deposits of customers and the power of all companies.
Fintechs may have some advantages in terms of flexibility and speed of change, but for consumers it is not part of the game. Only banks that are insured have the safety and security that comes with the supervision of the FDIC and other regulators, and one does not have to worry about the stability of the organization that handles their money.
For many years there was a commercial on American television in which a cartoon rabbit wanted to eat a bowl of children’s porridge but was told that he could not, because it was only for children. When it comes to federal insurance, many fintechs need a similar reminder: “Silly fintechs, the FDIC belongs to the banks.”