The traditional way of putting your hard-earned money into a federally insured bank has always been considered a safe bet. In case of a bank failure, up to $250,000 of your savings is protected. But what happens when this guarantee is no longer reliable?
The assurance of bank insurance, a cornerstone of U.S. consumer protection since the Great Depression, is currently being put to the test by a crisis involving online-only lenders with significant deposits. Accounts have been frozen, leaving customers unable to access their life savings. Most depositors are left in the dark about the whereabouts of their money and whether they will ever see it again.
The chaos began earlier this year with the bankruptcy of Synapse Technology, a company that operated banking software for online lenders like Juno, Yieldstreet, and Yotta. These start-ups, backed by prominent venture capitalists, offer accounts with lower fees and higher interest rates than traditional banks. They advertise insurance from the Federal Deposit Insurance Corporation (F.D.I.C.), the government agency responsible for compensating lost funds.
Unlike traditional banks, these online lenders promise a more enjoyable banking experience. Yotta, for example, encourages its customers to “Play Games. Win Big,” with a lottery-like system that offers increased returns to select users. This modern banking model is gaining popularity, especially among younger generations, and is perfectly legal.
However, these start-ups, though they may resemble banks, are not actual banks. They merely collect customer deposits and transfer them to partner banks like Evolve Bank & Trust, which may have minimal physical or online presence. In case of any disruption in this process, accessing funds can become extremely complicated.
After Synapse’s bankruptcy, account holders at Juno, Yotta, and other online lenders found themselves unable to withdraw nearly $300 million in deposits. The only institution covered by F.D.I.C. insurance among these entities is Evolve, which did not fail, making the customers of the online lenders ineligible for automatic federal banking insurance.
This unprecedented situation has left customers stranded, as different parties involved shift blame onto each other. While some of the frozen funds have been released, a significant shortfall still remains, causing uncertainty among depositors. The lack of clarity on what happens next has added to the confusion.
Customers like Erick Baum and Mark Hingle, who trusted these online lenders with their savings, were shocked to learn that they were not entitled to immediate federal insurance. The lack of regulatory intervention in this matter has left many feeling helpless and frustrated.
As depositors struggle to seek resolution, the future remains uncertain. The ongoing tussle between involved parties has created a complex scenario, leaving customers in limbo.
