Smart Money Podcast — Online Banking vs Neobanks: Understand FDIC Safety and Protect Your Money

Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions. In this episode:

Learn how to distinguish neobanks from traditional banks, understand FDIC insurance, and get tips for affordable holiday hosting.

What is the difference between a neobank and a traditional bank? Is my money safe in an online bank or neobank? Hosts Sean Pyles and Sara Rathner discuss how to distinguish a neobank from a traditional bank and ways to safeguard your savings, helping you understand what to look for in financial institutions. But first, they begin with a discussion of affordable holiday hosting, with tips and tricks on hosting a potluck, budgeting for extra food, and setting boundaries with overnight guests. Then, NerdWallet banking expert Spencer Tierney joins Sean and Sara to discuss the ins and outs of online banks and neobanks. They discuss how FDIC insurance works, what to look for in a neobank’s fine print, and the potential risks of using a neobank.

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Have a money question? Text or call us at 901-730-6373. Or you can email us at [email protected]. To hear previous episodes, go to the podcast homepage.

Episode transcript

This transcript was generated from podcast audio by an AI tool.

Sara Rathner:

Thanksgiving is in 10 days. Wow. This year has flown by… and also gone very slowly. If you haven't finalized your menu yet, honestly, you're probably not alone. Elizabeth, how are you spending your Thanksgiving?

Elizabeth Ayoola:

Well, this will be my first one in Houston, and guess what?

Sara Rathner:

What?

Elizabeth Ayoola:

I got invited to my first Friendsgiving. Yay. I think I'll spend the day house hopping. I will be attending a Friendsgiving and just crashing anyone's house who has food, really. But of course, I'm going to bring a dish to each home I crash. How about you?

Sara Rathner:

Well, I plan to transport a casserole across several state lines, and hopefully it arrives in one piece. But the beauty of most casseroles is that by design, they already look like they got shaken up in the car a little bit.

Welcome to NerdWallet's Smart Money Podcast. I'm Sara Rathner.

Elizabeth Ayoola:

And I'm Elizabeth Ayoola.

Sara Rathner:

This episode, Sean and I answer a listener's question about how to tell a neobank from a traditional bank and how safe your money is if you go the neobank route. We even partake in a little real-time online research, which is, surprisingly, a lot more fun than it sounds.

Elizabeth Ayoola:

I'm definitely surprised by that too.

Sara Rathner:

I was shocked, but let me tell you, it was a lot of fun. We had a great time.

Elizabeth Ayoola:

I'm going to take your word for that, Sara, but I'm still side-eyeing you.

Sara Rathner:

Don't hate it until you listen to it.

Elizabeth Ayoola:

But first, let's talk turkey. Specifically, how expensive it can be to buy, prepare, and serve a Thanksgiving meal to a table full of hungry guests. And that's just if you're hosting one meal. Oftentimes you have guests staying at your house for a few nights or even weeks, too. But honestly, I don't have that experience because my family is scattered around the globe.

Sara Rathner:

And we also did not factor in the cost of going out to a bar the night before Thanksgiving to give yourself the emotional fortitude to deal with the next few days, especially if you have house guests in your house for weeks. Not okay, guys, go home.

Now, here's the thing. We cannot stop your great aunt from asking you when you'll finally get married or whatever, but we can try to save you some money on the cost of holiday hosting so at least if you have any awkward conversations, it'll be easier on your budget. Elizabeth, start us off.

Elizabeth Ayoola:

Tip number one, host a potluck. You prepare the main dish, and everyone else brings the sides and the desserts. Not only do others share in the cost, but they also share in the labor. Now, I don't know about you all, but after cooking 10 dishes all day, I'm usually exhausted and my appetite is gone. So, I like this idea.

Sara Rathner:

Yeah. Not only is hosting expensive, but it takes a ton of work. And if you cook the whole meal by yourself, by the time your guests arrive, you'll want them to immediately leave so you can go lie down. Ask me how I know this.

Elizabeth Ayoola:

Sara, I have a confession. I take a secret lie down. While everyone's laughing, hahaha, I sneak off and go and lie down. But anyway. Plus, you get to sample a wider variety of food with this idea, too. Every guest will be bringing their own holiday traditions to the table by sharing their favorite foods with you. Now, one thing you’ve got to make sure of is that everyone exchanges recipes afterward. And of course, don't forget the takeaway boxes for your leftovers.

Sara Rathner:

Moving on to tip number two. For anybody hosting overnight guests, don't forget to budget for extra food to have around while they're visiting. Especially if any of those guests are teenagers, because they never stop eating.

Elizabeth Ayoola:

I don't have a teenager yet. I have a seven-year-old, and he never stops eating. I'm very concerned about my future grocery bill.

Sara Rathner:

Honestly, I have an eighteen-month-old, and same. He also never stops eating.

Elizabeth Ayoola:

Oh my god.

Sara Rathner:

I don't know where it goes, but it goes out of my wallet and into his diaper, essentially.

Elizabeth Ayoola:

I think they have bottomless bellies, honestly, very confusing. Anyways, it's okay to set some boundaries with overnight guests. That's one thing I want to tell y'all. Maybe you can only afford to host people for one or two nights, instead of a whole week. Or maybe you can put your guests to work if they're staying with you. You can have them do grocery store runs or help with the cooking.

Sara Rathner:

Not everyone feels comfortable asking guests to pitch in. Maybe the culture in your family or your social circle is one where hosting is this solemn duty, and the guests are royalty in your home. And that's okay, but if it's hard on you, it's okay to change the culture a little bit within your own home. Ask for some help, you're not running an Airbnb. And you know what? Even Airbnb hosts require guests to basically deep clean the property before a ridiculously early checkout time. Bring a little bit of that entitled Airbnb Host energy to this holiday season.

Elizabeth Ayoola:

Say it again for the people at the back, Sara. And side note to Airbnb hosts, you either charge for professional cleaning, or you make the guest clean. You don't get to do both. Onto tip number three, earn some credit card rewards on all of that holiday spending.

Sara Rathner:

Yes, if you use a credit card for holiday expenses, pick one that earns some cash back or travel rewards when you spend more than usual at the grocery store. It's like using a coupon and getting some money back.

Elizabeth Ayoola:

And just to sprinkle a little TMI, too much information into the conversation.

Sara Rathner:

Always.

Elizabeth Ayoola:

Well, I'm pretty good at it. I just got my second travel credit card, and I'm going to need to snag my bonus points. This is a really good tip. If you have credit card debt at the moment, the interest you're paying is going to wipe out the value of those rewards that you earn. It's important to be careful about adding to your existing debt by spending a lot this time of the year.

Sara Rathner:

We have some NerdWallet holiday spending data for you. 28% of last year's holiday shoppers are still paying off their credit card debt from last year right now. Definitely be careful this time of year; there is so much pressure to spend, spend, spend on gifts, on food, on travel. You want to be cautious because this is something that can follow you well into the New Year and make it hard to meet your other money goals. Yes, signup bonuses are awesome, but so is being debt free. That's definitely something to shoot for.

I will throw in a bonus fourth tip for anybody who's feeling pressure to host this perfect holiday gathering that looks good on Instagram but really makes you want to lie down. I heard this term the other day called "Scruffy Hospitality," and, like, I'm kind of into it. Apparently, it's this cutesy name, like cash stuffing or one of those other TikTok things, where you don't bend over backwards to clean your home so thoroughly before hosting that it looks like it's staged for an open house. Clean your bathroom and don't cook food in a dirty kitchen. But if your kid's toys aren't all put away or there's unfolded laundry on your bed, it's okay to have guests over and have them see this part of your life, because real life is better than faking it. If your mother-in-law is mental, she can fold your laundry for you.

Elizabeth Ayoola:

I love that. Absolutely. I second that, Sara, I have nothing else to add to that. And I've been practicing that actually. Because, I used to be so obsessed with having the house looking sparkling clean when people come over. But, as you said, I'm a real person, so no need to do all that.

Listeners, now we want to hear from you. How are you saving money on holiday expenses? Text us or leave a voicemail on the Nerd hotline at (901) 730-6373. That's (901)730-N-E-R-D. Or you can email us at [email protected].

Sara Rathner:

And please send us your holiday hosting horror stories. We might not share them on air, but I just want to read them. Let's turn now to this episode's money question segment, where we learn how to tell if a bank is actually a bank. Because if it looks like a duck, and quacks like a duck, apparently sometimes it's not a duck. That's coming up in a moment. Stay with us.

We are back and answering your real world questions to help you make smarter decisions about your money. This episode's question comes from Jocelyn, who sent us a text message. Here it is. "Hi Nerds. Last year my partner and I put the bulk of our savings into a high yield savings account. We did some research before choosing one and landed on UFB, as we saw it on the NerdWallet site as well as Forbes and others. It has been a great financial move for us and it's been amazing to have our money in an account that is actually accruing interest. That being said, I recently read a New York Times article entitled, What Happens When Your Bank Isn't Really a Bank and Your Money Disappears? And it freaked me out a little bit."

"If some of these online banks that failed were advertising themselves as FDIC insured, and yet it turns out that they really weren't due to the fine print of where the money is actually being held. How are customers supposed to protect themselves? As far as I can tell, the UFB service is offered under Axos Bank and is therefore insured through Axos Bank's FDIC certificate. But could UFB fail and not be protected if Axos is still a legitimate bank? Feeling confused and a bit fearful of keeping my savings in an online bank, please help. Love the pod. Thanks so much, Jocelyn."

Sean Pyles:

To help us answer Jocelyn's question on this episode of the podcast, we are joined by NerdWallet Banking Writer, Spencer Tierney. Spencer has been covering banking at NerdWallet for nearly 10 years and has written countless reviews of banking products. He is just the guy to talk with about your question, Jocelyn. Spencer, welcome back to Smart Money.

Spencer Tierney:

Great to be back, Sean.

Sara Rathner:

And just before we get into this conversation, just a heads-up for listeners that we'll be discussing a couple companies, UFB and Chime, which are both NerdWallet partners, but that doesn't affect how we talk about them.

Sean Pyles:

Let's start by giving our listeners a quick recap of the banking drama Jocelyn mentions in her question. It's a little complicated, but I'll try to keep this brief and hopefully easy to understand. Essentially, a company called Synapse Financial Technologies, which operated banking software for some neobanks, filed for bankruptcy earlier this year. Synapse, which partnered directly with banks to store neobank customers' money, didn't keep accurate records of the neobank customers' accounts. As a result, the banks which hold customer money on behalf of the neobanks, don't know whose money is whose. People who deposited money at some of these neobanks have been unable to access their money for months now, and it's unclear how they'll get their money back.

Many people who use these neobanks assume that they were covered by FDIC Insurance like banks are, when in reality, these neobanks only had FDIC coverage through the banks that they partnered with. That has led to some well-oriented fear about new online banking services. Anything I'm missing there, Spencer?

Spencer Tierney:

That's an excellent summary, Sean. I'll just add that this devastating domino effect that Synapse's collapse caused has affected only a subset of these so-called neobanks and their customers. Many neobanks partner with banks directly and don't use Synapse or other similar banking software. However, what this disaster has brought to light is that, any neobank or other non-bank entity that provides consumer banking, has more risks than banks do.

Sara Rathner:

We should also help folks understand what a neobank actually is. And how it's different from an online bank or your old-fashioned, brick-and-mortar bank with branches you could actually walk into. Can you lay out the difference for us Spencer?

Spencer Tierney:

Yeah, certainly. And it can be hard to tell at first. Let's start by defining online banks. An online bank is an actual bank, so it has a license to hold and borrow money, and it has FDIC insurance directly. It's also known as an internet bank or a direct bank. But unlike traditional banks, online banks typically don't have physical locations. And their names might be less familiar to you if you don't spend a lot of time looking at banks online like I do.

Now, A neobank is not a bank, it's a financial technology company that partners with a bank to offer digital banking accounts. If neobank isn't a word that you've ever heard before, that's okay. It's not in Merriam-Webster's Dictionary either, but the word has gotten traction online since maybe the mid-2010s. Folks might be familiar with some big neobank names, like Chime and Greenlight. As consumer-facing tech platforms, neobanks don't hold your money like banks do. Instead, when you add money to your account, neobanks transfer it to their partner banks for them to hold onto it. Usually holding multiple even thousands, of customers' money in a single account. That's how neobank's checking and savings accounts become FDIC-insured.

It's a third-party arrangement, which doesn't affect your everyday banking. You can use a debit card or transfer money online, the same way as you do at a bank. But if a neobank goes bankrupt, you aren't guaranteed to get your money back because FDIC insurance doesn't kick in.

Sean Pyles:

And that's in contrast to the money that I have in my high-yield savings account at an online bank, which, as you mentioned, is FDIC-insured. And just so folks know, FDIC Insurance covers $250,000 per person, per account type, per FDIC-insured bank. But with a neobank, that is not the case. Even though these companies transfer your money to a partner, which is actually FDIC-insured, your money is not protected if the neobank fails, which is very scary, Spencer.

Spencer Tierney:

Yes, it is. If a neobank fails, FDIC Insurance does not kick in.

Sara Rathner:

Yowch. What I'm thinking about is, how a lot of these neobanks are pretty new companies. Because of that, they might not have the most stable or proven business models compared to a bank that's been around for 200 years. And some of the banks we still use today have been around for that long. That can make them more likely to fold, than a bank that's been around for a while. Does that mean the money that people put in a neobank is totally vulnerable, or is there some protection if the neobank goes bankrupt?

Spencer Tierney:

Customers might have to wait for a neobank's bankruptcy proceeding to recover the money in their deposit accounts. There might be disruptions or shutdowns of banking services, such as direct deposit and debit cards. If a neobank fails and you're about to get paid, for example, your paycheck might be in limbo. Now, all this said, one thing, the FDIC proposed a rule this September, 2024, to help neobank customers get their money back in a timely manner if their company fails. More protections could be coming, we don't know yet.

But now, you might be asking, so when does FDIC Insurance protect neobank's accounts? The answer is only when the neobank's partner bank fails. But even if that happens, a neobank has to have accurate record-keeping in order for it to recover its customers' funds and not create any service disruptions or other money issues. A shorter way to put this, the FDIC only protects banks, period. Even during the historic bank failures in 2023, the customers with checking and savings accounts at those banks had continuous access to their money, and they didn't lose a penny. The FDIC swooped in quickly for Silicon Valley Bank and First Republic Bank and the other banks, took over operations, and eventually sold each bank to a healthy bank. And their customers' money ultimately got moved to that new bank.

Sara Rathner:

It seems clear that some folks might have a hard time determining if the money they put into a financial institution is actually covered by FDIC Insurance. How can someone really be confident that they're insured? Like our listener mentioned, UFB Direct, is that institution covered by FDIC Insurance?

Spencer Tierney:

For starters, the clearest way through this very murky area of banking, is to know a bank from a non-bank. The words, FDIC Insured Account, don't automatically mean your money back guaranteed in this day and age. Since I research online banks and neobanks all the time, let's make this interactive activity where you, Sara and Sean, will go to a financial institution's website and interpret the fine print to figure out whether it's a bank or not a bank. Are you ready?

Sara Rathner:

Let's do it.

Sean Pyles:

I do love a field trip, Spencer. Especially one as nerdy as exploring the fine print of a neobank.

Sara Rathner:

I do this all the time for credit cards, so this is definitely in my wheelhouse.

Sean Pyles:

Let's do it. Cracking my knuckles. Getting ready here.

Spencer Tierney:

Let's take the listener's bank as an example. UFB Direct. On the website's homepage, are there any signs to indicate this is a bank?

Sara Rathner:

I'm going to do a find and replace for the word bank. There's 12 mentions, oftentimes referring to mobile banking, but if you go to the bottom, the fine print, it says bank products and services are offered by Axos Bank.

Sean Pyles:

I'm also seeing that it says, deposits FDIC insured in the middle of the page, and there's a big banner on the page touting their FDIC coverage with a picture of a dollar sign on a shield. They really want you to know that they're protecting your money. They got the symbolism there.

Spencer Tierney:

The middle of the page is a little unique for this institution. But, yes, the bottom of this website, Sara, that is where you usually go, as your typical starting location for where the fine print will almost certainly list a bank name and FDIC information. It is confusing because UFB Direct is not the name of the bank that's the member FDIC. Do you think it's a bank?

Sara Rathner:

Right now I'm leaning on no.

Sean Pyles:

I am a solid maybe. So, let's see. It says, for more information, read our FDIC notice.

Spencer Tierney:

Good idea.

Sean Pyles:

Clicking that.

Sara Rathner:

I'm really going down the rabbit hole here everyone.

Sean Pyles:

And here we are. Another website. We are at Axos Bank, which we've heard mentioned a few times. It says, Axos Bank is backed by the Federal Deposit Insurance Corporation, which guarantees the safety of deposits in member banks, yada, yada, yada. Currently, the banking brands operated by Axos Bank include UFB Direct. I think that UFB is a bank?

Spencer Tierney:

You'd be correct, Sean. Banks can have multiple brands or divisions, and they all have FDIC insurance. Another place that can be useful to check for is an About Us page. In UFB Direct's case, there's a small link to About Us on the bottom of the homepage. When you click on that, you'll go to a page that says, UFB Direct, a division of Axos Bank.

Sean Pyles:

I'm going to be honest with you, Spencer, I was not 100% confident in my answer there, as you could maybe tell. So how else can people vet if an institution they want to put their money into is actually FDIC-insured or not?

Spencer Tierney:

If you have anxiety about this type of stuff like me, and don't want to trust the institution's website alone, check out the fdic.gov's data tool called BankFind. This online directory can help you find FDIC-insured institutions, but I will be the first to admit, it's not the easiest tool to use. You won't find banks like UFB Direct because only parent banks are listed, not divisions. And a bank might have a more official name than you're used to calling it.

Chase Bank, for example, shows up in this tool as JPMorgan Chase Bank, National Association. There are multiple banks with the same name out there as well. But what you can do is type in the bank name as best as you can, and then search the listings for the primary website provided, and confirm it's the bank website you use. Or in the case of bank divisions, confirm the parent bank's website.

And last tip from me. If you see the word direct in the name of a financial institution like UFB Direct, Popular Direct, or BrioDirect, it's a good indicator that it's a bank because direct bank is an industry term for an online bank.

Sean Pyles:

That is all good to know. For the sake of our listener Jocelyn's question, this would mean that the funds that they have in their UFB savings account are FDIC-insured. Jocelyn, good news.

Sara Rathner:

We've confirmed that this particular institution is a bank. And we've also learned a little bit about how to tell if other institutions are banks if it's not immediately clear. How would you confirm a neobank?

Spencer Tierney:

Reading the website's fine print is again the answer. You'll typically see text such as, institution name, is a financial technology company, not a bank. Banking services provided by, and then you see a bank name usually followed by “member FDIC.”

Sara Rathner:

All right. And since we're already on this magic school bus banking adventure, maybe we could also check out a neobank's website too, just to see what it looks like. How about Chime, since you mentioned them earlier, Spencer?

Spencer Tierney:

Sure. Let's get nerdy.

Sean Pyles:

I'm there and what I'm seeing is, right at the top it says, the number one most loved banking app. But then scrolling, looking for fine print, lots of nice, modern graphic, millennial-oriented images. Let's see. Let's see. Wow. So many images here. Then at the bottom it says, Chime is a financial technology company, not a bank. Banking services are provided by the Bancorp Bank, N.A. or Stride Bank, N.A., members FDIC.

You're getting mixed messaging here. It says the number one most loved banking app, but then it says, it's not a bank. With this mixed messaging, I can see why people would have a really hard time parsing between a neobank and an online bank.

Sara Rathner:

Spencer, do you think it's wise for people to just avoid using neobanks and instead opt for an online bank instead? Or do you still see a use case for neobanks given the risk?

Spencer Tierney:

I'd say be aware of the risks of a neobank, but also prioritize what you need in your banking. Neobanks can be a lifeline for some people, especially low-income folks and others who might have a hard time at traditional banks. Banks can hit you with monthly maintenance and overdraft fees for not having enough money and ultimately kick you out. Neobanks, however, are easy to sign up for and use, and many of their accounts don't have mandatory fees.

They're also early adopters of new banking technology. Sometimes neobanks have features such as early direct deposits or no-fee overdraft services that are available years, sometimes, before online or traditional banks adopt them. In fact, neobanks and other fintech apps, early direct deposit services played a key role in the rollout of COVID-19 stimulus checks. These fintech firms are able to take more risks and move faster into new services and consumer segments than banks generally can.

For example, banking for kids and teens, with the likes of Greenlight and GoHenry by Acorns, are combining debit cards with digital short charts and financial literacy tools for kids and parents to have a more customized experience than a bank typically offers.

Sean Pyles:

And just so folks know, Acorns is a NerdWallet partner, but as ever, that does not affect how we talk about them. Spencer, any other thoughts for folks who want to take advantage of the new banking products while also protecting their cash?

Spencer Tierney:

Yeah. Neobanks have a role in the banking industry. Just be mindful of their risks when things go wrong. The Synapse collapse is an extreme cautionary tale that doesn't reflect how many neobanks operate, which is with their own bank partnerships. What tends to happen when a neobank business is not working out, in my experience covering them for a few years, is that the neobank will announce that it's closing and give usually a month's notice to customers to withdraw funds. For folks who miss that memo, the neobank typically mails out checks of remaining balances to customers, which addresses on file.

Now, I would say consider a neobank if you need a way to spend and save money that's an alternative to banks. Especially if you've been burned by banks before or want certain banking tools that you can't find at a normal bank. Online banks are no doubt safer, as well as credit unions, which have equivalent FDIC Insurance, called NCUA Insurance, to banks. Know what type of banking institution you're joining and how your money is protected ahead of time.

Sara Rathner:

All right, Spencer. This has been such an educational experience. Thank you for joining us today and taking us on this journey through the world of banking or in some cases, not really banking.

Spencer Tierney:

Of course.

Sean Pyles:

All right. Well, that's all we have for this episode. Remember, listener, that we are here to answer your money questions. Turn to the Nerds and call or text us your questions at (901) 730-6373. That's (901) 730-N-E-R-D. You can also email us at [email protected]. Visit nerdwallet.com/podcast for more info on this episode and remember to follow, rate, and review us wherever you're getting this podcast. Also, you can follow the show on your favorite podcast app, including Spotify, Apple Podcasts, and iHeartRadio to automatically download new episodes.

Sara Rathner:

And here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.

Sean Pyles: