Spencer Tierney
speaker
50 appearances
1 recordings
1 series
first heard Nov 2024
last heard Nov 2024
Spencer Tierney’s voice in public audio — every appearance, attributed to the second.
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Appearances
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.
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.
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.
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.
That has led to some well-warranted fear about new online banking services. Anything I'm missing there, Spencer?
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.
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.
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.
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.
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.
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.
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.
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.
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.
Yes, it is. If a neobank fails, FDIC insurance does not kick in.
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.
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.
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.
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.
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.
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