What Happens When Your Bank Isn’t Really a Bank and Your Money Disappears?

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For close to a century, putting your savings into a federally insured bank has been a sure thing: If the institution fails, up to $250,000 of your money will be protected.

What if it isn’t anymore?

The promise of bank insurance — a tenet of U.S. consumer protection since the Great Depression — is now being tested by a crisis swirling around online-only lenders with hundreds of millions of dollars of deposits between them. Customer accounts have been frozen, preventing people from cashing out their life savings. Most depositors have little clue where their money has gone, and whether they will get any of it back.

The turmoil was set off this spring with the bankruptcy of Synapse Technology, the kind of company you’ve probably never heard of unless you suffered through all the fine print of your account statements. It operated banking software for fast-growing online lenders with names like Juno, Yieldstreet and Yotta.

Backed by some of Silicon Valley’s bigger venture capitalists, the startups offer accounts that charge lower fees and pay far higher interest rates than traditional brick-and-mortar banks. Their slick websites advertise insurance from the Federal Deposit Insurance Corp., the U.S. agency that pledges to pay back lost funds.

Unlike stodgy brick-and-mortar institutions, this group’s pitch is that banking can be downright fun. “Play Games. Win Big,” says Yotta, which features a lottery-like system that boosts returns for some lucky customers.

This model is increasingly popular — especially among 20- and 30-somethings — and legal.

The rub is that although these startups may look and feel like banks, they are not. They simply collect customer money and pass it through financial technology intermediaries like Synapse to old-school banks that may have as few as one physical branch and minimal online presence. The banks, including Evolve Bank & Trust of West Memphis, Arkansas, according to filings, are the ones that actually manage the depositors’ money.

If one link breaks in this sequence, it can become intensely complicated for people to access their funds.