Early this year, a popular online-based savings app called Yotta filed for bankruptcy. Since the bankruptcy, over 85,000 Yotta customers have yet to return their money, which is stuck in their locked accounts. The total funds not returned due to the bankruptcy is $112 million! 

Was Yotta FDIC insured?

Yotta offered competitive interest rates and a compelling app with raffles, etc. And on their website Yotta advertised to be FDIC insured. So without thinking twice, people signed up and kept all their hard earned savings with them. But now after the bankruptcy, the FDIC said that Yotta was not FDIC insured, and if there is a shortfall they will not cover.

What, when, why, and where?

You may be asking how this is possible. And the answer lies in the small print. Yotta was not their own bank. They were what’s called a “banking as a service” app.

The “banking as a service” model allows fintech companies to quickly launch savings accounts because they are not their own bank; they just act as a bridge between the consumer and FDIC-backed banks that ultimately hold the deposits.

Many of these apps advertise as FDIC insured even if they are really not. The reason these fintech apps get away with it is because they don’t write that they are FDIC insured. Rather, they write that your funds are held in FDIC insured banks. .For an average consumer, this might sound the same but as we are going to explain in the post, it’s not. 

The FDIC clearly stated in a bulletin after the Yotta bankruptcy that the FDIC deposit insurance does not protect against the insolvency or bankruptcy of a nonbank company. 

So where is the money?

That’s a good question.

Yotta passed over the funds to a company called Synapse (which also filed for bankruptcy) and Synapse passed it over to a network of banks (which were FDIC insured) that held the money in FBO accounts managed by Synapse.

So technically, whatever money was really passed over all the way to the FDIC insured account will be returned, but the issue is that $112 million is lost! 

Yotta is blaming Synapse, and Synapse is blaming a bank called Evolve. Everyone is saying that the other one has the money. But while they are fighting, thousands of Yottas customers do not have access to their hard-earned savings and do not know if they ever will.

The chain is as strong as its weakest link

When keeping your money in these so-called pass through banks, your money is only FDIC insured if it actually reaches the FDIC insured bank. But you have no way of knowing how many hands it will pass through until it reaches the FDIC insured bank and how much will get lost along the way. As the Yotta bankruptcy has proven, millions of dollars get lost with one bankrupt money handler blaming the other and the FDIC is refusing to ensure money not accounted for.

How to avoid this mess?

My point of this post is not to cry over spilled milk but rather to warn my readers not to fall into the same trap.

If you are holding money with any of these fintech apps then I would suggest you withdraw your money ASAP. The extra few fraction of interest offered is not worth it if your principal is not secure.

You can look up any bank to verify their FDIC status here. If you don’t see the bank listed then find yourself a different bank. 

 You can check out competitive rates on high-yield real FDIC insured savings accounts on a website called Raisen (always double check yourself for the FDIC status here. You can also check if you need a heter iska here).