Cash App, Venmo, and Chime don’t have fees. But they don’t have FDIC insurance either.
Adam Clark Estes at Vox:
Some people collect coins or stamps. For a time, I collected debit cards. Not stolen ones! Each one of them had my name on them, right below the logo of the latest banking app I’d decided to try out: Venmo, Cash App, Chime, Varo, Current, Acorns. For the better part of a decade, I did all my banking through these apps, enjoying their slick user experience and lack of fees. The problem with every one of them, however, is that they’re not chartered banks. If the company behind the app went bankrupt, the Federal Deposit Insurance Corporation (FDIC) would not necessarily come to my rescue. This disaster scenario was a hypothetical worry when I eventually settled for Chase and its FDIC insurance. For millions of others, it became a reality earlier this year when a company called Synapse collapsed and froze them out of their accounts. Users of Yotta, a popular savings app with a built-in lottery, and other apps that relied on Synapse to help manage their accounts couldn’t access their money for months. Now, as hundreds of thousands of Synapse customers’ dollars remain in limbo, Sens. Elizabeth Warren (D-MA) and Chris Van Hollen (D-MD) are calling for banking reforms, and the FDIC is proposing changes to its rules.
Still, a growing number of people are embracing these financial technology, or fintech, services. More than a third of Gen Z and millennials used a fintech app or a digital bank as their primary checking account, according to a 2023 Cornerstone Advisors study. So some questions are worth asking: Is it a bad idea to use an app like Venmo as your main bank? Are digital banks like Chime trustworthy enough? The answer to both questions is yes. Venmo is not a bank, and using it as your primary checking account comes with some risks. Some fintech companies, like Chime, are just as big as traditional banks and offer some nice perks. Again, because they’re nontraditional, there are risks. “You’re not going to go back to a world where everybody works with a small bank and walks into a branch,” Shamir Karkal, co-founder of Simple, one of the first digital banks. “The future is just going to be more fintech, and I think we all just need to get better at it.”
Neobanks and money transmitters, briefly explained
The term fintech can refer to a lot of things, but when you’re talking about everyday services for everyday people, it typically refers to either neobanks or money transmitters. Chime is a neobank. Venmo is a money transmitter. They’re regulated in different ways, but because most of these companies issue debit cards, many people treat them like checking accounts. Fintech apps are not the same thing as FDIC-insured banks.
Neobanks are fintech companies that offer services like checking accounts in partnership with chartered banks, which are FDIC-insured. Neobanks sometimes enlist intermediaries known as banking-as-a-service, or BaaS, companies, which are not FDIC-insured. Still, you will often see the FDIC logo on neobank websites, just like you see it stuck to the glass doors of many brick-and-mortar banks. That logo instills trust, and thanks to their partnerships, neobanks can claim some FDIC protections. But because they do not have bank charters, these neobanks and BaaS companies are not directly FDIC-insured. Instead, neobank customers can be eligible for something called pass-through deposit insurance coverage.
[...] Money transmitters, also known as money services businesses, are even further removed from the perceived safety of the FDIC. Put bluntly, if you’re keeping all your money in a Venmo or Cash App account, you don’t qualify for FDIC insurance. Money transmitters are not neobanks or banks at all but rather completely different legal entities that are regulated by individual states as well as the Department of the Treasury. There are certain protections provided by these agencies, but FDIC insurance is not one of them. So when an app like Yotta or Chime says on its website that it’s FDIC insured, it’s not a lie, but it’s not necessarily true either. Venmo, to its credit, admits in the fine print of its homepage that its parent company PayPal “is not a bank” and “is not FDIC insured.” To confuse you even more, however, certain PayPal services that enlist a chartered bank partner, like a PayPal Mastercard or savings account, might qualify for FDIC insurance. Again, it depends.
[...] That doesn’t necessarily mean that all neobanks and fintech companies are untrustworthy. In some cases, the sheer size and track record of fintech companies can instill quite a bit of trust. Chime, the largest digital bank with roughly 22 million customers, scored a $25 billion valuation in its latest round of funding and is planning to go public next year. Venmo’s parent company, PayPal, is widely considered safe and trustworthy. And don’t expect Block, the $42 billion company that owns Cash App as well as its own chartered bank, to fail any time soon. The truth is, even if there is some false sense of security, fintech apps offer certain customers features that big banks can’t or won’t. One thing that’s made Chime and many other neobanks so popular, for instance, is that they don’t charge so many fees. That’s a huge boon to young people as well as people without bank accounts. If a fintech app is your only option, then you might not care so much about FDIC insurance.
“If you’re poor in America and you’re banking at Chase or Wells Fargo, you’re going to get overdraft fees, minimum balance fees,” Mikula explained. “So there is a real need that [fintech] companies fulfill as a result of your establishment banks essentially not wanting to bank poor people because it’s difficult to do profitably.” As many as 6 percent of Americans were living without a bank account in 2023, according to Federal Reserve data. That share grows to 23 percent for those making less than $23,000 a year. The unbanked population, which disproportionately comprises Black, Hispanic, and undocumented people, is at a greater risk of falling victim to predatory lending practices, including payday loans. Some fintech companies also offer short-term loans, though they’ve been criticized for being predatory as well.
If you have Venmo, Cash App, Zelle, or any fintech or digital banking app, be aware: don’t use them as your primary checking account.
