The Murky Rules Behind Financial Apps – Kiplinger’s Personal Finance

Long gone are the days when every financial transaction involved a trip to the bank. In fact, if you’re like many Americans, the tools you rely on to deposit checks, pay bills and track your budget — all from the comfort of your couch — may not even belong to a bank. Instead, you may be using a fintech’s app on your smartphone to manage your finances.

The number of older adults turning to fintech services is soaring. Seventy-nine percent of baby boomers used fintech last year, up from 39% in 2020, according to a survey by Plaid, a financial services technology firm. Many older users find the apps convenient, the survey found.

The apps are often those of neobanks, which are fintechs that offer banking services, though most neobanks aren’t banks. Customers are drawn to neobanks with the promise of no fees or for features traditional banks may not offer. But neobanks and other fintechs operate in a regulatory gray area, with less oversight, which can sometimes leave customers in limbo whenever there’s a problem.

Fine Distinctions

Neobanks should not be confused with online-only banks, such as Ally Financial and Marcus by Goldman Sachs. Online banks are federally insured and offer the same deposit and lending services as traditional brick-and- mortar institutions.

Neobanks are not insured by the Federal Deposit Insurance Corp. and cannot legally hold deposits. Instead, they partner with an FDIC-insured bank, which holds the deposits and is usually the issuing institution for a credit or debit card. While the deposits are federally insured (up to $250,000 per account holder), it’s still a neobank account, and it’s the neobank that customers interact with for service or questions.

Partnering banks are supposed to vet neobanks, which also may have some state and federal oversight depending on the products offered. That oversight, however, isn’t nearly as stringent as it is for banks, which undergo routine exams, including those for financial performance. “There is a certain level of protection and security you have with banks because of regulatory requirements,” says Vincent Hui, managing director at bank consulting firm Cornerstone Advisors in Scottsdale, Ariz.

That protection includes an established process to resolve a problem when, for example, a bank fails or customers can’t access their accounts. With neobanks, the processes are less clear. Customers of Chime, a neobank, discovered this when they couldn’t use their debit cards or access their money temporarily last year. Chime said it had closed a slew of accounts, some of them by mistake, after detecting suspicious activity. Eventually, most depositors seemed to resolve their concerns by working with Chime, says Stephen Piepgrass, a partner in the government enforcement, compliance and investigations group practice at law firm Troutman Pepper. …….


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