: Is your cash in a real FDIC-insured bank or a look-alike? Are you sure?

Mercury, a financial technology company and major beneficiary of recent turmoil in the banking industry, is not a bank–but that key point hasn’t always been clear to consumers, according to California’s financial-services regulator. 

San Francisco-based Mercury, which helps startups access banking services through its partner banks, added more than $2 billion in deposits and thousands of new customers in the days following Silicon Valley Bank’s fall, a Mercury spokesperson told MarketWatch. But just over a year ago, the California Department of Financial Protection and Innovation found that Mercury’s useof the Federal Deposit Insurance Corp.’s logo, @bankmercury Twitter handle, and phrasing on its website–including “building a bank for startups” and “Mercury makes bank accounts”–were confusing to consumers and violated state law. Without admitting or denying the findings, Mercury agreed to avoid any representations that it operates as a bank or provides banking products.

“We believe in transparency and seek to be clear in our communications that banking services are provided by our regulated partner banks,” the Mercury spokesperson told MarketWatch. When the California regulator raised its concerns, the spokesperson said, “we acted quickly to settle the matter and update any marketing materials that were ambiguous or needed clarification.” 

The issue goes far beyond Mercury, according to regulators, consumer advocates and industry experts. Consumers may not be aware that a fintech company is not a bank and that their deposits are held by another institution, the U.S. Government Accountability Office said in a report released earlier this month, citing concerns raised by regulators and consumer groups. And in some cases, it may be difficult for consumers to determine whether their deposits are fully insured or how to get their money back if the fintech company fails, the GAO said. The FDIC generally insures up to $250,000 of an individual’s deposits in each ownership category at every insured bank. 

The FDIC since the start of 2019 has taken action against several hundred websites regarding potential misuse of the FDIC name or logo or other misrepresentations relating to deposit insurance, according to the agency’s recent annual reports.After finalizing one rule on misrepresentations of deposit insurance in mid 2022, the FDIC late last year proposed modernizing its rules governing deposit-insurance communications for a digital age.    

Amid the scrutiny, the FDIC is seeing an increase in misrepresentations about deposit insurance, the agency said in a February statement announcing that it had sent cease and desist letters to several companies making false and misleading statements about the insurance coverage. “These practices not only harm those who are targeted with the false promise of deposit insurance, but, if left unchecked,could also undermine confidence in the FDIC, FDIC-insured banks, and the U.S. banking system,” FDIC chair Martin Gruenberg said in the statement. 

That was several weeks before the collapse of Silicon Valley Bank sent many savers scrambling to ensure their cash is stashed in a safe spot and fully covered by federal deposit insurance. Recent bank failures have triggered a wave of deposits into the nation’s largest banks but also benefited some fintech companies, according to public statements by fintech executives. Given the current banking turmoil, “everyone wants to be associated with the FDIC,”–even if they’re not actually banks, said Ed Mierzwinski, senior director of the federal consumer program at U.S. PIRG, a consumer advocacy group. “This is a time when consumers should be very careful with their money.”    

The FDIC over the past year has sent cease and desist letters to several crypto-related companies and other firms that the agency said had made misleading statements about deposit insurance. In a mid-February letter to crypto exchange CEX.IO, for example, the FDIC pointed to a section of the CEX website that said “U.S. dollars held in your CEX.IO fiat currency wallet are FDIC-insured up to $250,000 per account,” noting that no insured institution was identified in connection with the statement. In fact, the FDIC wrote, “CEX is not FDIC-insured, and FDIC insurance does not protect cryptocurrency or any assets other than U.S. dollar deposits held” at insured institutions. After receiving the FDIC’s letter, “we took immediate action, and the unintentionally misleading statement was removed from our Security page within 24 hours,” CEX spokesperson Becky Sarwate told MarketWatch. “There are no shortcuts in our operations or ethics,” Sarwate said. “We regret our error, and worked quickly to correct it.”

Many non-bank fintech companies clearly state that they’re not banks and not FDIC insured–but in some cases, there’s still room for confusion, consumer advocates say.The website of fintech company Tellus states in several places that it is not a bank and not FDIC-insured, but it compares the interest earned on a Tellus account with major banks such as Bank of America

and Wells Fargo
“Earn up to 17x more interest on your savings today, while keeping your cash out of the markets,” the site says. “A Tellus account powers your money with residential real estate, and pays you 4.50-5.90% APY.” It’s not clear what, if any, guarantees stand behind those statements, Mierzwinski said. 

The Tellus site’s statements about where user deposits are custodied have shifted amid the banking turmoil in recent weeks, archived versions of Tellus web pages show. An archived Tellus page headed “is my money safe?,” which says it was updated Feb. 17, 2023, includes Silicon Valley Bank among the list of banks where user deposits held on Tellus’s balance sheet are custodied. The current version of that page, dated March 10, 2023, removes Silicon Valley Bank from the list of banks. A Tellus blog post dated March 14, 2023 said that Tellus was not impacted by Silicon Valley Bank’s closure “as we have zero exposure to Silicon Valley Bank.” Tellus did not respond to requests for comment.   

Non-bank fintech companies’ relationships with insured banks can also generate consumer confusion, researchers and consumer advocates say. In some cases, fintech companies funnel multiple consumers’ funds into a single account established with a partner bank, according to the GAO report. If certain requirements are met, each of those consumers is insured up to the $250,000 FDIC limit, the report said. The account must be clearly identifiable as holding money beneficially for others, and there needs to be a ledger of who the beneficial owners are and the amounts attributable to them, said Ronald Vaske, partner in the consumer financial services group at Ballard Spahr. 

If the requirements are not met, only the account itself–and not each consumer–would be insured up to $250,000, the GAO report said. “If this is the case, consumers may not be aware that their deposits are not fully FDIC-insured,” the GAO said.     

Members of the Financial Technology Association, an industry trade group, “provide clear and transparent disclosures of their terms and conditions and prioritize customer wellbeing in their product offerings,” the group’s CEO Penny Lee said in a statement to MarketWatch. 

If the FDIC’s December rule proposal is finalized, it should add some more clarity, industry experts say. For example, the proposal would beef up requirements to disclose that non-deposit products are not FDIC-insured, not deposits, and may lose value, said Carlin McCrory, associate attorney at Troutman Pepper. 

Some experts are still looking for more transparency. “I don’t like the asterisks and FAQs” and multiple clicks required to find the key details on some non-bank products, Mierzwinski said. “Why doesn’t it have the FDIC sticker with a giant red mark through it?” 

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