Pass-through insurance is a simple concept that’s deceivingly complex in practice. Essentially, if you deposit money into an account with a neobank, like Chime, the funds get routed to a chartered bank, sometimes through one of those BaaS intermediaries. If the chartered bank fails, no problem: FDIC insurance kicks in, and you can recoup up to $250,000 of your deposits. If the intermediary fails or the neobank itself fails, you might be eligible for pass-through insurance — but you might not. In its explainer about when or if you’ll get your money back in these kinds of situations, the FDIC literally says, “It depends.”
Venmo and Chime don’t have fees. They have bigger problems.
Yes, you can use an app as your checking account — but there are risks.
“American consumers see the FDIC logo, and they interpret that as meaning: My money is safe and I will get it back,” said Jason Mikula, who runs the popular Fintech Business Weekly newsletter. “That’s just not what FDIC does exactly.”
Money transmitters, also known as money services businesses, are even further removed from the perceived safety of the FDIC. Put bluntly, if you’re keeping all your money in a Venmo or Cash App account, you don’t qualify for FDIC insurance. Money transmitters are not neobanks or banks at all but rather completely different legal entities that are regulated by individual states as well as the Department of the Treasury. There are certain protections provided by these agencies, but FDIC insurance is not one of them.
So when an app like Yotta or Chime says on its website that it’s FDIC insured, it’s not a lie, but it’s not necessarily true either.
Venmo, to its credit, admits in the fine print of its homepage that its parent company PayPal “is not a bank” and “is not FDIC insured.” To confuse you even more, however, certain PayPal services that enlist a chartered bank partner, like a PayPal Mastercard or savings account, might qualify for FDIC insurance. Again, it depends.
The perils and perks of banking with an app
Fintech companies take careful steps to make banking with them feel safe. They include the FDIC logo on the website to provide customers with some peace of mind, even though the fine print on those protections is more complicated. They issue debit cards with the Visa or Mastercard logo to suggest that these cards play by the same rules as any big bank’s debit card. These logos can act as a stamp of approval, an assurance that your money is in good hands.
This is actually the heart of the problem, as far as Sen. Elizabeth Warren is concerned. This month, she and Sen. Van Hollen asked regulators to ban neobanks and fintech companies from using the FDIC name and logo if they were only offering pass-through insurance. They also called for greater supervision of these companies under the Bank Service Company Act.
“The average consumer shouldn’t be expected to understand the intricacies of FDIC insurance in order to comfortably and safely save or invest their money,” Warren’s letter says. “Consumers must feel confident that they are dealing with a regulated and insured entity when they see the FDIC logo.”
That doesn’t necessarily 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. Chime, the largest digital bank with roughly 22 million customers, scored a $25 billion valuation in its latest round of funding and is planning to go public next year. Venmo’s parent company, PayPal, is widely considered safe and trustworthy. And don’t expect Block, the $42 billion company that owns Cash App as well as its own chartered bank, to fail any time soon.
The truth is, even if there is some false sense of security, fintech apps offer certain customers features that big banks can’t or won’t. One thing that’s made Chime and many other neobanks so popular, for instance, is that they don’t charge so many fees. That’s a huge boon to young people as well as people without bank accounts. If a fintech app is your only option, then you might not care so much about FDIC insurance.
“If you’re poor in America and you’re banking at Chase or Wells Fargo, you’re going to get overdraft fees, minimum balance fees,” Mikula explained. “So there is a real need that [fintech] companies fulfill as a result of your establishment banks essentially not wanting to bank poor people because it’s difficult to do profitably.”
As many as 6 percent of Americans were living without a bank account in 2023, according to Federal Reserve data. That share grows to 23 percent for those making less than $23,000 a year. The unbanked population, which disproportionately comprises Black, Hispanic, and undocumented people, is at a greater risk of falling victim to predatory lending practices, including payday loans. Some fintech companies also offer short-term loans, though they’ve been criticized for being predatory as well.
Fraud alert
Payment apps like Venmo are popular with scammers. Using a Venmo-branded debit card comes with some purchase protection. If you happen to fall for a scam, however, there’s a good chance the app will not pay you back.
Venmo, Cash App, and Zelle are all clear about issuing refunds for payments to other individuals: They don’t do it. Or at least they can’t guarantee it. You should treat these peer-to-peer payments like cash.
Here are some tips for spotting and avoiding scams on Venmo, Cash App, and Zelle. But if you’re more of a motivated-by-fear person, read this story about a guy who wanted a deal on a swimming pool and got “a $31,000 lesson in the downside of payment apps” instead.
Still, fintech companies offer the unbanked the ability to save money and build credit. For someone who can’t open a traditional bank account, Venmo can be a lifeline, since they can add funds to their Venmo balance and then pay bills using their Venmo debit card without needing a traditional checking account. If they have access to a smartphone, getting basic banking services is simple these days.
As I learned firsthand when testing out many of these services over the years, it’s very easy to sign up for and easy to deposit money into a fintech app. If you have a problem, however, help can be hard to find. Many fintech companies and neobanks, including Chime, lack brick-and-mortar locations, which means you can’t walk into a branch to get an issue resolved. In fact, poor customer service is a common complaint for these companies.
That means you should always research a company before giving money to it. Read the 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 out with small sums rather than your life savings. And, as always, watch out for scams and frauds.
What is true in the real world is even more true in the app world: Beware of deals that look too good to be true. Only gamble with what you’d be willing to lose.
A version of this story was also published in the Vox Technology newsletter. Sign up here so you don’t miss the next one!
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