The Hidden Risks of Online-Only Lenders

If it resembles a bank, markets itself like a bank, and accepts deposits as a bank does, you might assume it is a bank. However, this assumption can be misleading. This is the harsh reality that many depositors are now facing after placing their trust and savings in the hands of online-only lenders. Companies such as Juno, Yieldstreet, and Yotta promote high-interest savings accounts and claim to offer protection through the Federal Deposit Insurance Corporation (FDIC), which is designed to safeguard depositors in the event of bank failures.

These features have made such financial start-ups — including Betterment, Chime, and Wealthfront — appear to function like traditional banks. Unfortunately, many depositors have discovered that these platforms do not operate as banks; rather, they merely collect funds and distribute them through third-party institutions that are banks.

This distinction might have seemed trivial until recent events illuminated the potential dangers of using these non-traditional lenders. The collapse of Synapse Financial Technologies, a software provider that facilitated transactions for many of these online lenders, has revealed significant risks. Since Synapse is not classified as a bank, the protections offered by FDIC insurance do not extend to the funds held within these platforms. As a result, nearly $100 million in deposits have either been frozen or lost, leaving many customers in a precarious financial situation.

After the New York Times covered this pressing issue last month, numerous readers expressed concerns about the safety of their own funds. To address these legitimate worries, here are some key considerations and tips to determine whether your money is secure.

• Verify FDIC Insurance: Always check if the institution where your money is being held is FDIC insured. This insurance protects your deposits up to $250,000 per depositor, per insured bank.
• Understand the Business Model: Research how the lender operates. Are they a bank, or do they merely act as intermediaries? Knowing how your funds are managed is crucial.
• Read the Fine Print: Before committing your funds, thoroughly review the terms and conditions of the account. Look for any clauses that may indicate potential risks or limitations.
• Stay Informed: Keep up-to-date with news regarding the financial stability of the platforms you use. Changes in leadership, business models, or financial health can impact your funds.