Spencer Tierney
Appearances
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
I'm a solid maybe. So let's see. It says for more information, read our FDIC notice. Good idea. Clicking that.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
And here we are, another website. We are at Axos Bank, which we've heard mentioned a few times. It says, Axos Bank is backed by the Federal Deposit Insurance Corporation, which guarantees the safety of deposits in member banks, yada, yada, yada. Currently, the banking brands operated by Axos Bank include UFB Direct. So I think that UFB is a bank. You'd be correct, Sean.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
Banks can have multiple brands or divisions, and they all have FDIC insurance. Another place that can be useful to check for is an About Us page. In UFB Direct's case, there's a small link to About Us on the bottom of the homepage. When you click on that, you'll go to a page that says UFB Direct, a division of Axios Bank.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
I'm going to be honest with you, Spencer. I was not 100% confident in my answer there, as you could maybe tell. So how else can people vet if an institution they want to put their money into is actually FDIC insured or not?
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
If you have anxiety about this type of stuff like me and don't want to trust the institution's website alone, check out the FDIC.gov's data tool called BankFind. This online directory can help you find FDIC-insured institutions, but I will be the first to admit it's not the easiest tool to use. You won't find banks like UFB Direct because only parent banks are listed, not divisions.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
And a bank might have a more official name than you're used to calling it. Chase Bank, for example, shows up in this tool as JPMorgan Chase Bank, National Association. There are multiple banks with the same name out there as well. But what you can do is type in the bank name as best as you can and then search the listings for the primary website provided and confirm it's the bank website you use.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
or in the case of bank divisions, confirm the parent bank's website. And last tip from me, if you see the word direct in the name of a financial institution like UFB Direct, Popular Direct, or Brio Direct, it's a good indicator that it's a bank because direct bank is an industry term for an online bank.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
Okay, that is all good to know. So for the sake of our listener Jocelyn's question, this would mean that the funds that they have in their UFB savings account are FDIC insured. So Jocelyn, good news.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
Reading the website's fine print is, again, the answer. You'll typically see text such as, institution name is a financial technology company, not a bank. Banking services provided by. And then you see a bank name, usually followed by member FDIC.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
Sure. Let's get nerdy. So I'm there. And what I'm seeing is right at the top, it says the number one most loved banking app. But then scrolling, looking for fine print, lots of nice modern graphic millennial oriented images. Let's see. Let's see. Wow. So many images here. Then at the bottom, it says Chime is a financial technology company, not a bank. Banking services are provided by
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
the Bancorp Bank NA or Stride Bank NA members FDIC. So you're getting mixed messaging here. It says the number one most loved banking app, but then it says it's not a bank. With this mixed messaging, I can see why people would have a really hard time parsing between a neobank and an online bank.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
I'd say be aware of the risks of a neobank, but also prioritize what you need in your banking. Neobanks can be a lifeline for some people, especially low-income folks and others who might have a hard time at traditional banks. Banks can hit you with monthly maintenance and overdraft fees for not having enough money and ultimately kick you out.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
Neobanks, however, are easy to sign up for and use, and many of their accounts don't have mandatory fees. They're also early adopters of new banking technology. Sometimes new banks have features such as early direct deposits or no fee overdraft services that are available years sometimes before online or traditional banks adopt them.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
In fact, new banks and other fintech apps, early direct deposit services played a key role in the rollout of COVID-19 stimulus checks. These fintech firms are able to take more risks and move faster into new services and and consumer segments than banks generally can.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
For example, banking for kids and teens with the likes of Greenlight and GoHenry by Acorns are combining debit cards with digital chore charts and financial literacy tools for kids and parents to have a more customized experience than a bank typically offers.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
And just so folks know, Acorns is a NerdWallet partner, but as ever, that does not affect how we talk about them. So Spencer, any other thoughts for folks who want to take advantage of the new banking products while also protecting their cash?
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
Yeah, neobanks have a role in the banking industry. Just be mindful of their risks when things go wrong. The Synapse Collapse is an extreme cautionary tale that doesn't reflect how many neobanks operate, which is with their own bank partnerships.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
What tends to happen when a neobank business is not working out, in my experience covering them for a few years, is that the neobank will announce that it's closing and give usually a month's notice to customers to withdraw funds. For folks who missed that memo, the neobank typically mails out checks of remaining balances to customers' addresses on file.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
Now, I would say consider neobanks if you need a way to spend and save money that's an alternative to banks, especially if you've been burned by banks before or want certain banking tools that you can't find at a normal bank. Online banks are no doubt safer, as well as credit unions, which have equivalent FDIC insurance, called NCUA insurance, to banks.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
Know what type of banking institution you're joining and how your money is protected ahead of time.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
All right. Well, that's all we have for this episode. Remember, listener, that we are here to answer your money questions. So turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com. Visit nerdwallet.com slash podcast for more info on this episode.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
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NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
And with that said, until next time, turn to the nerds.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
To help us answer Jocelyn's question, on this episode of the podcast, we are joined by NerdWallet banking writer Spencer Tierney. Spencer has been covering banking at NerdWallet for nearly 10 years and has written countless reviews of banking products, so he is just the guy to talk with about your question, Jocelyn. Spencer, welcome back to Smart Money. Great to be back, Sean.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
So let's start by giving our listeners a quick recap of the banking drama Jocelyn mentions in her question. It's a little complicated, but I'll try to keep this brief and hopefully easy to understand. Essentially, a company called Synapse Financial Technologies, which operated banking software for some neobanks, filed for bankruptcy earlier this year.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
Synapse, which partnered directly with banks to store neobank customers' money, didn't keep accurate records of the neobank customers' accounts. As a result, the banks which hold customer money on behalf of the neobanks don't know whose money is whose.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
So people who deposited money at some of these neobanks have been unable to access their money for months now, and it's unclear how they'll get their money back. Many people who use these neobanks assume that they were covered by FDIC insurance, like banks are, when in reality, these neobanks only had FDIC coverage through the banks that they partnered with.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
That has led to some well-warranted fear about new online banking services. Anything I'm missing there, Spencer?
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
That's an excellent summary, Sean. I'll just add that this devastating domino effect that Synapse's collapse caused has affected only a subset of these so-called neobanks and their customers. Many neobanks partner with banks directly and don't use Synapse or other similar banking software.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
However, what this disaster has brought to light is that any neobank or other non-bank entity that provides consumer banking has more risks than banks do.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
Yeah, certainly. And it can be hard to tell at first. Let's start by defining online banks. An online bank is an actual bank. So it has a license to hold and borrow money, and it has FDIC insurance directly. It's also known as an internet bank or a direct bank.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
But unlike traditional banks, online banks typically don't have physical locations, and their names might be less familiar to you if you don't spend a lot of time looking at banks online like I do. Now, a neobank is not a bank. It's a financial technology company that partners with a bank to offer digital banking accounts. If neobank isn't a word that you've ever heard before, that's okay.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
It's not in Merriam-Webster's dictionary either. But the word has gotten traction online since maybe the mid-2010s. Folks might be familiar with some big neobank names like Chime and Greenlight. As consumer-facing tech platforms, neobanks don't hold your money like banks do.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
Instead, when you add money to your account, neobanks transfer it to their partner banks for them to hold onto it, usually holding multiple, even thousands, of customers' money in a single account. That's how neobanks checking and savings accounts become FDIC insured. It's a third party arrangement, which doesn't affect your everyday banking.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
You can use a debit card or transfer money online the same way as you do at a bank. But if a neobank goes bankrupt, you aren't guaranteed to get your money back because FDIC insurance doesn't kick in.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
Okay. And that's in contrast to the money that I have in my high yield savings account at an online bank, which, as you mentioned, is FDIC insured. And just so folks know, FDIC insurance covers $250,000 per person, per account type, per FDIC insured bank. But with a neobank, that is not the case.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
Even though these companies transfer your money to a partner which is actually FDIC insured, your money is not protected if the neobank fails, which is very scary, Spencer.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
Yes, it is. If a neobank fails, FDIC insurance does not kick in.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
customers might have to wait for a neobank's bankruptcy proceeding to recover the money in their deposit accounts. There might be disruptions or shutdowns of banking services, such as direct deposit and debit cards. So if a neobank fails and you're about to get paid, for example, your paycheck might be in limbo.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
Now, all this said, one thing, the FDIC proposed a rule this September 2024 to help neobank customers get their money back in a timely manner if their company fails, so more protections could be coming. We don't know yet. But now, you might be asking, so when does FDIC insurance protect Neobank's accounts? The answer is only when the Neobank's partner bank fails.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
But even if that happens, a Neobank has to have accurate record keeping in order for it to recover its customers' funds and not create any service disruptions or other money issues. A shorter way to put this, the FDIC only protects Neobank banks, period.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
Even during the historic bank failures in 2023, the customers with checking and savings accounts at those banks had continuous access to their money, and they didn't lose a penny.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
The FDIC swooped in quickly for Silicon Valley Bank and First Republic Bank and the other banks, took over operations, and eventually sold each bank to a healthy bank, and their customers' money ultimately got moved to that new bank.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
For starters, the clearest way through this very murky area of banking is to know a bank from a non-bank. The words FDIC insured account don't automatically mean your money back guaranteed in this day and age.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
Since I research online banks and neobanks all the time, let's make this an interactive activity where you, Sarah and Sean, will go to a financial institution's website and interpret the fine print to figure out whether it's a bank or not a bank. Are you ready? Let's do it.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
Okay, I do love a field trip, Spencer, especially one as nerdy as exploring the fine print of a neobank.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
Cracking my knuckles, getting ready here. Let's take the listener's bank as an example, UFB Direct. On the website's homepage, are there any signs to indicate this is a bank?
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
Okay.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
I'm also seeing that it says deposits FDIC insured in the middle of the page. And there's a big banner on the page touting their FDIC coverage with a picture of a dollar sign on a shield. So they really want you to know that they are protecting your money. They got the symbolism there.
NerdWallet's Smart Money Podcast
Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money
Yeah. So the middle of the page is a little unique for this institution. But yes, the bottom of this website, Sarah, that is where you usually go as your typical starting location for where the fine print will almost certainly list a bank name and FDIC information. It is confusing because UFB Direct is not the name of the bank that's the member FDIC. So do you think it's a bank?