Don’t use Venmo as your checking account

Some people collect coins or stamps. For a while, I collected debit cards. Not stolen! Each one had my name on it, right below the logo of the latest banking app I decided to try: Venmo, Cash App, Chime, Varo, Current, Acorns.

For the better part of a decade, I’ve done all my banking through these apps, enjoying their slick user experience and lack of fees. The problem with each of them is that they are not chartered banks. If the company behind the app goes bankrupt, the Federal Deposit Insurance Corporation (FDIC) won’t necessarily come to my rescue.

This disaster scenario was a hypothetical concern when I finally settled on Chase and its FDIC insurance. For millions of others, it became a reality earlier this year when a company called Synapse collapsed and froze their accounts. Yotta, a popular savings app with a built-in lottery, and other apps that rely on Synapse to help manage their accounts have been unable to access their money for months. Now thousands of Synapse customers as dollars to be restlessSense. Elizabeth Warren (D-MA) and Chris Van Hollen (D-MD) Calling for banking reformAnd the FDIC is Change proposal According to its rules.

still, A growing number of people These financial technology, or fintech, services are taking over More than that Gen Z and a third of millennials A 2023 used a fintech app or a digital bank as their primary checking account, according to a Cornerstone Advisor study.

So it’s worth asking some questions: Is it a bad idea to use an app like Venmo as your main bank? Is a digital bank like Chim trustworthy enough?

The answer to both questions is yes. Venmo is not a bank and using it as your primary checking account carries certain risks. Some fintech companies, like Chim, are as big as traditional banks and offer some nice perks. Again, because they are unconventional, there are risks.

“You don’t go back to a world where everyone works with a small bank and goes to a branch,” says Shamir Karkal, co-founder of Simple, one of the first digital banks. “The future is going to be more fintech, and I think we all have to get better at it.”

To get better at all of this, it helps to know what’s going on behind the scenes.

Neobank and money transmitters, briefly explained

The term fintech can refer to many things, but when you’re talking about everyday services for everyday people, it usually refers to neobanks or money transmitters. CHIM is a neobank. Venmo is a money transmitter. They are regulated in different ways, but since most of these companies issue debit cards, many people treat their accounts as checking. 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. NeoBank sometimes lists intermediaries known as banking-as-a-service or BaaS companies, which are not FDIC-insured. Still, you’ll often see the FDIC logo on NeoBank websites, just as you’ll see it stuck to the glass doors of many brick-and-mortar banks. This logo instills trust, and thanks to their partnership, NeoBank can claim some FDIC protection. But because they don’t have bank charters, these neobanks and BaaS companies aren’t directly FDIC-insured. Instead, Neobank customers may be eligible for something called Pass-through deposit insurance coverage.

Pass-through insurance is a simple concept That’s a deceptively complex exercise. Basically, if you deposit money into an account at a neobank like Chim, the funds go to a chartered bank, sometimes through that BaaS intermediary. If Chartered Bank fails, no problem: FDIC insurance kicks in and you can recover up to $250,000 of your deposit. If the intermediary fails or NeoBank itself fails, you may qualify for pass-through insurance — but you may not. In its explanation of when or if you will get your money back in this type of situation, the FDIC literally says, “it depends“

“American consumers see the FDIC logo, and they interpret it to mean: My money is safe and I’ll get it back,” said Jason Mikula, who is popular Fintech business weekly newsletter. “That’s not exactly what the FDIC does.”

Money transmitters, also known as money service businesses, are further removed from the perceived safety of the FDIC. To be clear, if you keep all your money in a Venmo or Cash App account, you are not eligible for FDIC insurance. Money transmitters are neither neobanks nor banks, but purely Different legal entities which are regulated by individual states as well as the Treasury Department. There are certain protections offered by these companies, but FDIC insurance is not one of them.

So when an app likes iota or Chim Its website says it’s FDIC insured, which isn’t a lie, but it’s not necessarily true either.

Venmo, to its credit, acknowledges in the fine print on its homepage that its parent company PayPal is “not a bank” and is “not FDIC insured.” To further confuse you, however, some PayPal services that list a Chartered Bank partner, such as a PayPal MasterCard or savings account, May qualify for FDIC insurance. Again, it depends.

Perils and benefits of banking through an app

Fintech companies take careful steps to make banking with them feel secure They include the FDIC logo on the website to give consumers some peace of mind, although the fine print on those protections is more complicated. They issue debit cards with Visa or MasterCard logos that play by the same rules as any major bank debit card. These logos can act as a stamp of approval, an assurance that your money is in good hands.

As far as Sen. Elizabeth Warren is concerned, this is actually the crux of the problem. This month, he and Sen. Van Hollen Ask the regulators Prohibiting neobanks and fintech companies from using the FDIC name and logo if they only offer pass-through insurance. They also called for greater oversight of these companies in the Bank Service Companies Act.

“Average consumers should not expect to understand the complexities of FDIC insurance in order to comfortably and safely save or invest their money,” Warren’s letter said. “Consumers must feel confident that they are dealing with a regulated and insured entity when they see the FDIC logo.”

This does not 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. Chim, the largest digital bank With nearly 22 million subscribersscored a $25 billion valuation in its latest round of funding and It plans to go public next year. Venmo’s parent company, PayPal, is huge Considered safe and reliable. And don’t expect Block, the $42 billion company that owns the cash app As well as its own chartered bankTo fail anytime soon.

The truth is, despite some misconceptions about security, fintech apps offer consumers features that big banks can’t or won’t. One thing that makes Chime and many other neobanks so popular, for example, is that they don’t charge very high fees. This is a huge boon for the youth as well as people without bank accounts. If a fintech app is your only option, you may not think so much about FDIC insurance.

“If you’re poor in America and you bank at Chase or Wells Fargo, you’re going to get overdraft fees, minimum balance fees,” Mikula explained. “So there is a real need [fintech] Banks basically don’t want to bank poor people because it’s hard to do it profitably.”

Like 6 percent of Americans Was living without a bank account in 2023, according to data from the Federal Reserve. That share rises to 23 percent for those earning less than $23,000 a year. Disproportionately unbanked populations, including blacks, Hispanics and the undocumented, are at a greater risk of falling victim to predatory lending practices, including payday loans. Some fintech companies also offer short-term loans, although they have been criticized As well as being a hunter.

Still, fintech companies offer unbanked Ability to save money and build credit. For someone who can’t open a traditional bank account, Venmo can be a lifeline, as they can add funds to their Venmo balance and then use their Venmo debit card to pay bills without the need for a traditional checking account. Basic banking services are easy to access these days, provided they have access to a smartphone.

As I’ve learned firsthand while testing many of these services over the years, it’s very easy to sign up for and deposit money into a fintech app. If you have a problem, however, getting help can be difficult. Many fintech companies and neobanks, including Chime, lack brick-and-mortar locations, meaning you can’t walk into a branch to resolve a problem. In fact, poor customer service A common complaint For these companies.

That means you should always research a company before paying. Read reviews and study the fine print. Obvious red flags include hidden fee structures and reports of customers not being able to withdraw their money. You should also consider trying services with a small amount of money instead of your life savings. And, as always, Beware of scams and fraud.

What’s true in the real world is even truer in the app world: Beware of deals that look too good to be true. Only gamble with what you are willing to lose.

A version of this story also appeared in the Vox Technology Newsletter.Sign up hereSo you don’t miss the next one!

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