Your online lender may not be a bank. Here’s how to protect your money.

Even if it looks like a bank, advertises like a bank, and accepts money like a bank – it still may not be a bank.

That’s a lesson that’s being painfully taught to tens of thousands of depositors who entrusted their savings to online-only lenders. They have names like Juno, Yieldstreet and Yotta, and they advertise accounts that pay high interest rates and offer protection from the Federal Deposit Insurance Corp., the U.S. regulator tasked with bailing out failing banks.

These characteristics make them and other popular banking startups with similar branding—such as Betterment, Chime, and Wealthfront—sound a lot like banks. But to the surprise of many depositors, these companies simply collect money and funnel it through intermediaries to banks.

This might have seemed like a rather academic point before this year, when the collapse of Synapse Financial Technologies — a software provider that was at the center of the chain — starkly highlighted the risks customers face when they use these new lenders rather than deposit money directly into a traditional bank. Because Synapse was not a bank, FDIC insurance did not automatically apply, and now nearly $100 million in deposits has been frozen or lost.

After The New York Times wrote about the issue last month, readers asked how they could tell if their own money was safe. Here are some answers.

Why do people decide to deposit their savings with an online lender rather than a traditional bank?

Go to any of the 4,884 branches of the nation’s largest bank, JPMorgan Chase, and you can open an account with a staggering 0.01% annual interest.

An online lender beats that rate: Chime, which bills itself as the “#1 most loved banking app,” offers 2%, while Wealthfront pays 5%. All three companies say their accounts are FDIC-insured.

There’s an ecosystem of rankings out there to help depositors who are willing to ditch their brick-and-mortar banks find the highest possible rates at FDIC-insured institutions. Some savers even compete with each other to find the highest rates, a goal encouraged by personal finance influencers on social media.

After all, over the course of a year, a person with $10,000 in savings would earn $500 in interest from Wealthfront, $200 from Chime, or $1 from Chase.

How can I check if my account is in a real bank?

A degree in linguistics would come in handy, as would a pair of reading glasses. Startups often describe themselves using permutations of the word “bank,” even if they’re not banks. On its website, Chime describes itself as “banking without monthly fees.” Then, in small print, it says, “Chime is a financial technology company, not a bank.”

Lender Albert uses the slogan “the easy way to bank” and then adds in small print: “Albert is not a bank.”

Somewhere on their websites—some more than others—these lenders and others disclose that customer deposits go to one or more of the more than 4,000 commercial banks in the United States that are insured by the FDIC. Many lenders call them “program banks,” “bank partners,” or “participating banks.”

For example, Wealthfront lists a staggering 40 potential participating banks, including big names like Wells Fargo and Citi, as well as much lesser-known entities like Old Plank Trail. At least one of these participating banks should be identified on the physical checks or debit cards the lender sends you when you open an account.

Does my money stay in one place?

Certainly not. Lenders often move money. In June, Betterment moved this reporter’s savings account between eight banks, for amounts as small as a penny, according to a 22-page monthly statement.

After Synapse collapsed, depositors discovered that although their debit cards showed Evolve, a small Tennessee-based payday loan company, as their bank, most of their money was no longer there, having been transferred months earlier.

A Betterment spokesperson said it “moves dollars between our program banks to optimize interest rates and FDIC insurance.”

Why does it matter who holds my money at any given time?

Whenever your money is transferred, it temporarily passes through what is essentially an opaque pipe of financial intermediaries. If one of those intermediaries runs into trouble, as happened with Synapse, you could be left without access to your money.

Moreover, although the FDIC has paid out deposits after every bank failure for nearly a hundred years (about two dozen each year), there is always a temporary delay, and most depositors would rather not have their savings stuck for an extended period of time.

Won’t regulators help me if something goes wrong?

Perhaps. Regulatory agencies and elected officials seem blindsided by Synapse’s demise, and they’re still in a cycle of increasingly concise calls for action that hasn’t yet come.

The FDIC recently proposed new rules that would give the agency more authority to oversee so-called nonbank entities, but they remain in the early stages. Even if passed, the rules could prevent regulators from paying deposit insurance to customers of such institutions. Asked about the issue during a recent Senate committee hearing, Federal Reserve Chairman Jerome Powell emphasized that his organization’s authority allows it to oversee only chartered banks, not online lenders or the brokers that feed them.

How can I find out more?

Talk to your lender. Email customer service (a written record is always valuable) and ask where your money is being held and what other companies are involved. Any lender who can’t give you a straight answer may actually give you the answer you need.

Your monthly statement should tell you a history of where your money has been held — although it may be out of date when you receive it.

c.2024 The New York Times Company