There is a new type of bank intown and it is accessible only via an app. These low or no-fee digital banks are run by fintech companies.
What is a Fintech?
Fintech is short for “financial technology.” Fintech describes new technology that automates and improves the delivery of financial services. It has enabled mobile check deposits, online shopping, budgeting apps, online bill-paying, digital cash and cryptocurrencies, crowdfunding platforms, instant credit scores, and other financial functions that can be done via technology instead of a person.
Fintech has also led to app-based banks.
How Do Fintech Banks Differ from Traditional Banks?
Traditional banks are financial institutions that are licensed by the government to accept deposits and make loans. They can exchange currency, provide wealth management services, and rent safe deposit boxes. Traditional banks are regulated by the Government and they need a charter to operate.
Where traditional banks, with their charters, focus on keeping depositors’ accounts safe, insured and accessible, fintech banks focus on the customer experience. They are all-digital and aim to provide convenience, functionality, personalization, and accessibility.
Many fintech banks don’t have charters or FDIC insurance. Instead, they rent the regulatory oversight of a bank. They tend to partner with smaller regional banks that don’t have the resources to compete with fintechs and bigger banks.
With these partnerships, the fintech company provides access to ever advancing technology including apps and online interfaces. In exchange, the fintech bank can accept deposits and hold them in an FDIC-insured traditional bank.
What Are the Benefits of a Fintech Bank?
- Access to a bank. Many fintechs promote their services to communities and demographics not served by traditional banks, including minorities and younger consumers.
- A variety of free or low-cost features. Most fintech banks charge no or low fees. Their services include quicker advance access to paychecks, no minimum balances, and no overdraft fees. (According to Kiplinger’s Personal Finance, in 2020 banks made an estimated $31.3 billion in overdraft fee revenue.)
- High Yields. Some fintechs are offering yields as high as 3 percent on savings accounts when you meet the bank’s deposit account requirements.
What About Customer Service?
A draw-back to fintech banks is a lack of customer service. This is a low priority; there is no face-to-face interaction with a person. Frequently you communicate only via email or live chat.
What to Know When Opening a Fintech Bank Account:
- How are problems handled? Will you need to send an email or use live chat? Will there a human on the other end of the conversation?
- Is the fintech bank partnering with a traditional bank? If not, your deposits may not be covered by FDIC insurance.
- At what bank will your funds be held? Will your money be held in an account with your name?
- Does the fintech bank work with multiple FDIC-insured banks, “sweeping” all its deposits into multiple accounts? If so, it may be difficult to know where your money is held and to access it.
- What is the potential for “fee creep”? Many consumer advocates are concerned that fintech banks can’t provide their services for free forever. And, as they add more features, they may want their customers to pay for them.
- How long will high yields last? What will be the requirements to obtain them?
Many consumers are embracing the all-digital banks. And it’s not just younger consumers. Many Baby Boomers are also banking with fintechs. You can find a fintech bank by searching the internet. There are many.
Regardless of whether you bank with a traditional bank, a fintech bank or both, you can report any problems with the Consumer Financial Protection Bureau at www.consumerfinance.gov/complaint.
This blog is published to provide you with general information only and is not intended to provide specific or comprehensive advice. Money Care, LLC encourages individuals to seek advice from competent professionals when appropriate.
