Money Apps and FDIC Insurance: What’s Protected – and What Isn’t | Banking Advice
Key Takeaways
- FDIC insurance covers insured bank failures, but customers can lose money from other points of failure.
- When a money app or intermediary fails, missing funds and conflicting records can limit customer access to funds.
- Fintech customers should be aware of how their money moves and keep essential funds directly with an FDIC or NCUA-insured financial institution.
More than 100,000 people lost access to $265 million when Synapse Financial Technologies collapsed in 2024. Although their money was in FDIC-insured accounts, FDIC insurance doesn’t cover failures of apps or intermediaries handling your money. You might not realize that gap exists until something goes wrong.
What FDIC Insurance Covers On Money Apps
“A fintech can say truthfully that funds are held at an FDIC-insured bank and still leave you locked out,” says Neta Pyasi, founder of Bloomera Solutions, a fintech operations advisory firm.
Money apps are often nonbank fintechs that offer services through FDIC-insured partner banks. Pass-through coverage provides FDIC insurance for eligible deposits held at partner banks on customers’ behalf. Although the bank deposits are insured, FDIC insurance doesn’t cover fintech failures or guarantee uninterrupted access to funds.
You could lose the ability to withdraw or transfer funds if your money app shuts down. Missing funds may not be recovered if the records are unclear, and FDIC insurance doesn’t cover that shortfall.
Why FDIC Insurance Wasn’t Enough for Synapse Customers
Synapse was a middleman fintech that connected money apps and banks and tracked and moved customer funds. When Synapse filed for bankruptcy in April 2024, customers of apps that used its services couldn’t access their money.
Customer balance records didn’t match the amounts held at partner banks, and customers had to wait weeks or months for reconciled records and the distribution of funds. Many didn’t receive their full balances – a shortfall of $60 million to $90 million, as identified by the Consumer Financial Protection Bureau.
FDIC insurance didn’t cover the shortfall because the failure was with Synapse, not the partner banks.
How Fintech Middlemen Can Put Your Money at Risk
Fintech middlemen like Synapse use pooled “for benefit of” accounts that hold money belonging to multiple customers. They use records to identify each customer’s share.
“Where funds are stored is not the only critical control point when money passes through a fintech intermediary,” says Vimal Teja Manne, business analyst and product owner at Verifone, the global payment technology company. “It is whether the system can reliably reconcile each customer’s balance, determine ownership, trace a transaction, and perform a controlled recovery in the event of a participant failure.”
When the records conflict with bank balances or aren’t accessible, it can be difficult to determine who the money belongs to and how much. Customers can lose access to funds while the records are sorted out, and could lose money if there’s not enough to repay everyone.
How To Protect Your Funds on Money Apps
Money apps can be convenient, but customers may not know who actually holds their money – or whether it’s in their name. That can be a problem when an app or its intermediaries fail. Opening an account directly with an FDIC-insured bank can remove uncertainty.
Take these precautions if you use a money app:
- Identify the app’s partner bank and verify the institution is insured using the FDIC’s BankFind tool.
- Limit your app balances to small amounts you could manage without. Deposit your emergency savings or money you need to pay bills directly into an FDIC-insured bank instead of using a fintech app.
- Save statements to document your funds, including account balances and transaction histories, which may be helpful if you need to resolve discrepancies.
- Find out whether deposits made with a money app go into a bank account with your name on it or into a for-benefit-of pooled account.
“Before you park anything significant, ask three things: which bank actually holds the money, whether the account is in your name or a pooled for-benefit-of account, and whether the app will show you your balance at that bank rather than only inside its own screen,” says Pyasi. “If a company cannot answer those (questions) in plain language, that is your answer.”
