Robinhood, a popular investment app, has just announced a checking account with 3% interest and is already in hot water. Robinhood is just the latest app to get your paycheck and all your cash without taking out insurance if the business goes down.
The FDIC insurance is pretty simple. Bank deposits of up to $ 250,000 are insured with the Federal Deposit Insurance Corporation, which is backed by the US government. The FDIC was founded in 1933 during the Great Depression to restore Americans' confidence in the failed banking system. Since then it has always failed. Whenever an FDIC-insured bank goes out of business, the FDIC intervenes and ensures that you get the last penny of your money. Nobody has lost one cent of an insured FDIC bank account in 85 years.
However, some technology startups believe that they do not need FDIC insurance for their banking products. What is the likelihood that a start-up will go out of business?
Typically, companies do not look like Robinhood. Robinhood announced that its new product will be insured for testing and saving by the SIPC. This is the Securities Investor Protection Corporation, a private organization that insures investment. The very next day, the SIPC boss said he has serious concerns and does not believe that the money is protected by the SIPC. Robinhood would not comment on his comments publicly.
In other words, if Robinhood goes out of business, you could lose all the money in your Robinhood bank account. Do you really want to be sure that a startup does not run out of business?
Robinhood is just the latest example, but there are others. Square Cash wants you to pay your paycheck into their app. However, Square Cash does not offer FDIC insurance for all the money you put in there, as Walt Mossberg has pointed out on Twitter. Until Square Cash receives this FDIC insurance, you should not use it as a bank account. It's a great app for sending money to people, but do not keep all your money in your pocket.
I'm a fan of the company and I liked the app on launch (https://t.co) with enthusiasm / 9frjhdFZys). I still use it. My beef is that its latest feature is tempting people to store all their paychecks in an unregulated company outside of the direct FDIC system. That's risky for me.
̵1; Walt Mossberg (@waltmossberg) March 8, 2018
This does not mean that you can not use online banking or app-based banking services. Most of them actually offer FDIC insurance!
For example, online banks such as Ally Bank, Alliant Credit Union, American Express and Discover offer all savings accounts with 2% interest and FDIC insurance. Simple is a popular app-based bank offering 2.02% savings on full FDIC insurance.
Whichever bank you deposit your money, make sure it offers FDIC insurance.
It usually deals with financial and banking issues, but we're fed up with trendy startups announcing banking products without the standard insurance that Americans have had for 85 years. We should all expect better from these companies and we should not let them cut corners.
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