Are online savings accounts FDIC insured? Understanding your protection

Technology and banking are combined in ways that can make saving money faster, more convenient and more rewarding. The catch is, in some cases, that combination can make saving money riskier.

Financial technology companies, or fintech companies, provide a variety of innovative online tools that replace traditional savings accounts. In some ways, these can do things that most traditional savings accounts don’t do. However, they also blur the line between what is and isn’t a bank. That makes all the difference in whether your money is covered by federal deposit insurance.

When using any online savings account, it’s vital to be clear on whether your money is Federal Deposit Insurance Corporation (FDIC) insured. Sometimes you have to look beyond the advertising claims a company is making to figure out if your money really is going to be protected.

So, are online savings accounts FDIC insured? It depends on whether it is held at an FDIC-member bank or through a third-party provider.

What is FDIC insurance and why does it matter?

The FDIC is a U.S. government agency that insures bank deposits.

The FDIC insures up to $250,000 per depositor, per bank, per account ownership category. It applies to savings accounts, money market accounts, checking accounts, and certificates of deposit. A similar type of insurance is provided for credit unions by the National Credit Union Administration (NCUA).

FDIC and NCUA insurance make banks and credit unions a safe place to put your money. Normally, the U.S. banking system is very stable. However, like any business, a bank can run into financial problems and fail to meet its obligations. For example, the 2008/2009 banking crisis led to hundreds of bank failures.

Despite those failures, all insured deposits at those banks were covered. Customers at those banks were able to get their money back. Because of FDIC insurance, they could then put that money in other banks with confidence.

Are online savings accounts FDIC-insured?

If you use online tools to manage your savings, is your money FDIC insured?

Not necessarily. To figure out the answer, you have to dig into the details a little bit. It depends on whether or not the company you’re depositing money with is a bank. It also depends on how your deposits are handled.

Traditional online banks vs. non-banks

These days, many online savings accounts function very much like traditional bank products. They pay interest on your money and may also offer features such as direct deposits or payments.

The crucial difference is that not all of these accounts are covered by FDIC insurance. Unless the institution offering the account is an FDIC member (or NCUA member, if it’s a credit union), you can’t count on your deposits being insured.

Here are some examples of what’s covered and what’s not covered:

• Are online savings accounts FDIC-insured? While many banks still offer accounts through traditional, physical branches, there are also several FDIC-member banks like Ally and Capital One that offer online accounts. These include the popular benefits of online banking, such as mobile apps and high interest rates. If it’s an eligible type of account and is offered by an FDIC member bank, it is covered.
• Is a cash app FDIC-insured? Apps like Chime and Betterment can play a few different roles. They can help you automate savings. They also provide mobile tools that make it easy to keep close track of your savings. However, one role they don’t play is that of an FDIC-insured bank. Some of these apps have relationships with FDIC-member banks that allow them to transfer money into insured accounts. However, depending on how this is structured, there can be gaps in FDIC coverage while funds are in transit or held by the app.
• Are fintech banks and neobanks FDIC-insured? Companies with savings apps and other automated financial tools can merge the worlds of finance and technology. This makes new capabilities for savings possible. However, just because a company advertises savings accounts that look like bank offerings doesn’t mean they are an FDIC-insured bank.
  

FDIC pass-through insurance explained

Some companies that offer savings products but are not FDIC-member banks rely on something called FDIC pass-through insurance.

When money is deposited in one of these nonbank savings accounts, the company receiving the deposit may turn around and deposit the money in an FDIC bank to get it covered by insurance. They may even spread the money among multiple FDIC-insured banks to obtain coverage for their customers that exceeds the standard $250,000 insurance limit.

If all goes well, this pass-through insurance can cover your deposits. However, if there is a delay in transferring the money, discrepancies between the nonbank records and those of an insured bank they use, or if your money is mixed with those of other customers, FDIC insurance may not apply.

The truth about savings apps and FDIC insurance

So, does pass-through insurance really work? Here’s how the FDIC answers that question: “It depends.”

How savings apps partner with banks

A savings app may have a relationship with one or more FDIC-insured banks. Once customer deposits are received, the app will transfer that money to an FDIC-member bank so it can be insured.

Technology makes this kind of transfer fast, but it’s not instantaneous. The crucial thing here is that if the app is not provided by an FDIC-insured bank, the money is not insured as soon as it is deposited with the app. That leaves some room for risk.

Potential risks with savings apps and FDIC insurance claims

If a fintech company says it is depositing your money in an FDIC-insured bank, what could go wrong?

Here are some risks:

• If the fintech company experiences financial problems that result in the loss of your deposits, you are not covered.
• If there is a discrepancy between the nonbank’s records and the bank’s records, the bank’s records will determine your coverage.
• If the nonbank does not deposit money with the bank specifically in your name, it may not be covered. For example, if the nonbank keeps separate accounts on its system but deposits money from different customers into a bank as one lump sum, the individual customers would not be entitled to FDIC insurance.
• If the nonbank deposits money at a bank where you already have an account, you may inadvertently go over the FDIC insurance limit.
  

The bottom line is this: A nonbank may make an effort to obtain FDIC insurance on your behalf. However, unless you are depositing money directly with an FDIC-insured bank, you can’t be sure of getting the full $250,000 of protection.

How to ensure your online savings are FDIC protected

Here’s how to verify FDIC coverage:

• Use the FDIC’s BankFind tool. Only deposits made directly with an FDIC-insured institution are certain to be eligible for FDIC insurance.
• If you are depositing money with an FDIC-member bank, make sure you’re putting it in an insured account. For example, a bank may offer investment accounts, but these are not covered by FDIC insurance.
• If you are using a nonbank that claims to provide pass-through insurance, get a written explanation of their procedures for depositing money at an FDIC-insured bank. The frequency and speed of those deposits is crucial, and so is making sure deposits are made separately in the name of each customer. Even if the process seems very efficient, it won’t be as foolproof as depositing money directly with an FDIC-insured bank or an NCUA-insured credit union.
• Review the list of banks the nonbank uses for pass-through insurance. Make sure you don’t already have any accounts at those banks. If your total deposits at a bank exceed the $250,000 limit, you may not be fully insured – even if the money is in separate accounts.
  

How to stay within FDIC coverage limits

Staying within the FDIC insurance limits can be more complex than it appears. Sometimes a bank will be doing business under one name, but is actually a subsidiary of another bank. If these organizations are registered as the same FDIC institution, your deposits will be combined for the purpose of determining your insurance limit.

You can get more than $250,000 in deposit insurance if your money is spread among different insured banks or credit unions. Just be sure to check the name of the bank that is providing the insurance. Whether you’re dealing directly with a bank or with a non-bank using pass-through insurance, this will help you avoid exceeding the coverage limit with multiple accounts at the same institution.

Finally, while the digital tools provided by nonbanks may be attractive, keep in mind that some banks also feature some innovative technology and highly competitive interest rates. Your safest move is often to choose an FDIC-insured bank that offers both strong digital tools and direct deposit protection.