When a bank fails, the Federal Deposit Insurance Corp. tends to act quickly to protect customers\u2019 money and arrange for a healthy bank to buy the failed one. This process happened most recently on May 1 when\u00a0First Republic Bank failed. But what happens if a neobank fails?<\/p>\n
A neobank, such as Chime or Current, is a financial tech company that often partners with a bank to offer FDIC-insured checking or savings accounts. But a bank partnership doesn\u2019t mean a neobank failure would be identical to a bank failure. So let\u2019s break down how accounts work at neobanks and what can happen to your money if you\u2019re at a neobank that fails.<\/p>\n
Federal deposit insurance\u00a0protects your money, up to at least $250,000, if a bank fails. Federally insured banks have FDIC insurance \u2014 which can be disclosed as \u201cMember FDIC\u201d \u2014 and credit unions have the equivalent insurance through the National Credit Union Administration.<\/p>\n
Neobanks are fintech companies that usually provide online checking accounts, and sometimes savings accounts, on a mobile app or website. Neobanks offer an easy sign-up process and often forgo monthly fees on accounts. They can also attract people with consumer-friendly services that banks don\u2019t always have, such as\u00a0direct deposit up to two days early\u00a0and fee-free overdraft coverage. Their accounts usually have FDIC insurance in one of two ways.<\/p>\n
Most neobanks, such as Chime, Current and Greenwood, have a partnership with one or more banks that enable their customers\u2019 money to be held in FDIC-insured accounts at these banks. These nonbank neobanks manage the consumer-facing experience, including the banking app, website and customer service, while a bank handles the money in accounts behind the scenes.<\/p>\n
Some institutions, such as SoFi, Varo Bank and Green Dot\u2019s GO2bank, are fintech companies and banks, meaning they have bank charters and are federally insured. If one of these institutions fails, the FDIC will step in to safeguard the money of the bank\u2019s clients. Given their tech focus and checking accounts more akin to nonbank neobank products, these online banks may still be referred to as neobanks. For this article, we\u2019ll focus on the nonbank fintech firms.<\/p>\n
Related: <\/strong>Is the deposit insurance system broken? Nine things you need to know about how your bank accounts are covered \u2014 and how the system could change.<\/p>\n In a July 2022\u00a0fact sheet, the FDIC stated that \u201cby federal law, the FDIC only insures deposits held in insured banks\u201d and only if a bank fails. In other words, FDIC insurance applies if a neobank\u2019s partner bank fails but not if a nonbank neobank does.<\/p>\n Let\u2019s say a nonbank neobank fails. \u201cIf your money is at [a] bank, you\u2019ll probably eventually get it back, but we don\u2019t know what problems are going to occur\u201d at the nonbank, says Lauren Saunders, associate director at the National Consumer Law Center. She says that potential issues from a nonbank\u2019s failure could include a lack of access to your money, frozen accounts, transactions not going through, the nonbank\u2019s app not working, or the account balance displaying a wrong number.<\/p>\n \u201cFront-end fintech companies that are doing this banking as a service in partnership with a bank, what they\u2019re good at is building apps and marketing,\u201d says Suzanne Martindale, senior deputy commissioner of the California Department of Financial Protection and Innovation\u2019s consumer division. \u201cBut the questions are always going to be on the back end. Have they thought through and baked in consumer protections in their product, including robust customer service?\u201d<\/p>\n When the FDIC takes over a failed bank, the agency typically ensures that customers have continuous access to funds and services, such as mobile apps and branches. These regulatory actions don\u2019t apply to a nonbank neobank.<\/p>\n \u201cFDIC insurance isn\u2019t going to help you get customer service\u201d at a nonbank, Saunders says.<\/p>\n See<\/strong>: Banks under pressure: How to maximize your FDIC protection.<\/p>\n In practice, several U.S. neobanks that have closed gave their customers time to withdraw their money.<\/p>\n The LGBTQ-focused neobank Daylight announced in May that it was closing operations on June 30, according to the website. The neobank, which partnered with the bank Pathward, said that banking customers\u2019 money is safe and the decision to close was \u201cunrelated to the wider banking crises happening globally.\u201d In addition, the neobank said customers were given instructions for transferring money before the closure date.<\/p>\n The German neobank N26, which partnered with Axos Bank, shuttered its U.S. operations in January 2022. Like Daylight, N26 notified customers ahead of time and explained how to transfer money. For customers with funds left in accounts after closing day, the neobank stated that it would issue a paper check with the remaining balance to the address on file.<\/p>\n On the other hand, Simple, a popular neobank in the 2010s, which the bank BBVA acquired, had a\u00a0difficult shutdown process\u00a0in 2021. When Simple customers were migrated to BBVA, there were account access problems, an overwhelmed call center and an apology from the bank.<\/p>\n Access issues aren\u2019t limited to neobanks that close. For example, the neobank Chime abruptly froze or closed customer accounts in 2021 in what the company said was a crackdown on fraud, according to the nonprofit news site ProPublica\u2019s\u00a0report. And in October 2022, news sites reported more than 100 N26 customers in Europe, including Ukrainian refugees, had their accounts suddenly closed.<\/p>\n Neobanks aren\u2019t the first type of fintech company to partner with banks to offer FDIC-insured accounts. Prepaid card companies such as Netspend have done this since at least the start of the millennia. Prepaid debit cards work like debit cards but aren\u2019t linked to a checking account.<\/p>\n \u201cWe\u2019ve seen over the years a lot of problems with prepaid cards and the Chime account and others that have had difficulty with people accessing their money,\u201d Saunders says.<\/p>\n Thousands of RushCard prepaid card customers were locked out of their accounts for up to several weeks in 2015 due to a technical issue. In addition, Walmart prepaid card customers experienced a shutdown for several days in 2016.<\/p>\n The relatively simple-to-join, low-cost banking experience of a neobank can be enticing, but keep these guidelines in mind:<\/p>\n These questions are vital in determining what happens to your money if a company goes under: \u201cAt the end of the day, the question to ask is, \u2018Who\u2019s holding my money? Where are my deposits being stored?\u2019\u201d Martindale says.<\/p>\nA neobank failure might mean delays in accessing funds<\/strong><\/h2>\n
Recent neobank closures<\/strong><\/h2>\n
\n <\/figcaption><\/figure>\n<\/p><\/div>\nLosing access to funds is an issue at fintech firms<\/strong><\/h2>\n
Tips when using a neobank<\/strong><\/h2>\n
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