Be careful when using nonbanks

Consumers are used to depositing their money in banks and savings associations, which are insured by the Federal Deposit Insurance Commission.

However, some consumers are opening accounts these days with nonbank financial companies, usually online or through mobile apps, such as technology companies providing financial services, often referred to as fintech companies. These companies may or may not have business relationships with banks.

Examples of nonbank companies are investment banks, mortgage lenders, money market funds, insurance companies, hedge funds, private equity funds, pay day lenders, check cashing businesses, money services businesses, investment firms, debt collection companies, credit reporting companies, and P2P or peer to peer lenders.

Some examples of nonbank mortgages lenders are Better.com, Pennymac, New American Funding, Veterans United, Klarna, LendingTree, and Rocket Mortgage.

Examples of P2P lending companies are LendingClub and Funding Circle.

Other nonbank companies are PayPal, Venmo, Cash App, Betterment, Robinhood, Credit Karma, Wealthfront, MoneyLion, Axos Invest, and PayNearMe.

In its June 2924 newsletter, the FDIC warns consumers about the dangers of not understanding how nonbanks work. Consider the following information from the agency before using a nonbank:

FDIC deposit insurance coverage

If you open a deposit account with an FDIC-insured bank, you’re insured for up to at least $250,000 by the FDIC.

Most banks offer online and mobile banking options, in addition to having branches. So online or in person, bank customers with deposits at FDIC-insured banks have deposit insurance coverage.

Nonbank companies

If you open an account with a nonbank company that says it will deposit your money in an FDIC-insured bank, you may or may not have FDIC deposit insurance coverage.

Nonbank companies themselves are never FDIC-insured. Even if they claim to work with FDIC-insured banks, funds you send to a nonbank company aren’t eligible for FDIC insurance until the nonbank deposits them in an FDIC-insured bank and after other conditions are met.

For example, after the nonbank places your funds at a bank, records need to be kept to identify who owns the money and the amount. Ownership is important and is usually determined by deposit account agreements and state law. There are other requirements, too. It’s important to read the disclosures and terms of service carefully to understand if your account may be eligible for FDIC insurance.

However, FDIC deposit insurance doesn’t protect against the insolvency or bankruptcy of a nonbank company. While consumers may be able to recover some or all of their funds through an insolvency or bankruptcy proceeding, often handled by a court, such recovery may take time.

Be careful about where you place your funds, especially money that you rely on for day-to-day living expenses.

If a nonbank company claims to offer access to products that it states are FDIC-insured, you should identify the FDIC-insured bank or banks where they say they’ll deposit your funds. You can confirm that the bank they claim to be working with is FDIC-insured using the FDIC’s BankFind.

If technology glitches happen with the services provided by a nonbank, such as at its app or website, you could experience error messages, slow response times, or site crashes that temporarily stop access to your accounts or other mobile banking services.

Be sure to contact the nonbank company’s customer service as soon as possible to help resolve the issue.

Fake banks and apps

Watch out for scams and be vigilant about protecting your money. Scammers often create fake websites that are so similar to bank websites that they can easily trick consumers into providing personal information or money.

Scammers have also developed fake apps that contain malware. When you download the app, the malware steals personal information from your device or locks it, holding it for ransom until you pay the scammers.

Be careful of apps or websites that ask for suspicious permissions, such as granting access to your contacts, text messages, stored passwords, or credit card information.

You can use the FDIC’s BankFind to determine whether you’re dealing with an FDIC-insured bank. You can also contact the FDIC at 877-275-3342 to report a suspected scam.

An additional note:

Credit unions

Credit unions carry the same protections as banks. However, it’s offered through a different entity: the National Credit Union Administration. Consumers can use the NCUA Credit Union Locator tool to ensure that a credit union is insured.