In June, the Consumer Financial Protection Bureau’s (CFPB) Office of Competition and Innovation and Office of Markets issued an analysis of deposit insurance coverage on funds stored through popular payment companies, finding that such funds are often not stored in an account at a bank or credit union and thus lack individual insurance coverage. As a result, such funds can be at risk of loss in the event of financial distress or failure of the entity operating the nonbank payment platform.
With the recent collapse of several crypto asset platforms and banks, the safety and security of stored funds, including whether the stored funds have been federally insured, has been of growing public concern. The growth and popularity of payment companies as an alternative to traditional banking to transfer funds and perform other services has raised further discussions surrounding deposit insurance and money-transmission requirements. With the advent of new financial services platforms, it is often unclear to consumers if their funds are protected by deposit insurance like at traditional banks and credit unions. These platforms often offer the same or substantially similar services to those of a bank, including payment transfers and stored value services. However, there are notable differences between these entities and federally insured institutions.
For example, if funds placed with a payment company have not been deposited into an account at a Federal Deposit Insurance Corporation (FDIC)-insured bank or a National Credit Union Administration (NCUA)-insured credit union, then consumers do not have deposit insurance coverage in the event of the failure of the payment company. Payment companies generally have a financial incentive to keep consumer funds on the platform rather than sweep them into a linked bank or credit union account, including investing the users’ funds into loans and bonds. Consumers often lack awareness of where their funds are stored, due in part to confusing or silent user agreements. Worse yet, misleading claims may be made about the nature, extent, or availability of deposit insurance. Though some nonbank payment companies advertise deposit insurance eligibility for certain accounts that hold customers’ funds at an insured institution, those representations are difficult to verify. Overall, funds stored with a payment company may be at a higher risk of loss than those stored in an insured bank or credit union.
One trending model to mitigate potential risk is the FBO account model, whereby an insured institution maintains one or more accounts “for the benefit of” (FBO) the customers and allows the funds to flow through accounts that are controlled by that bank (and not the payment company). Thus, the funds deposited into the FBO account (assuming applicable requirements are met) are insured up to applicable FDIC or NCUA limits.