The Neobanking Scam: What You Need to Know

While we focus mostly on scams in the cryptocurrency and blockchain world on this blog, PayPal, a payment platform we reference frequently, was recently mentioned in a video on neobanking, and how millions of Americans were scammed out of their hard-earned savings. As such, we took a deep dive into how this scam came to be and wanted to share what we found with you.

Neobanks are on the rise, but what most don’t know is that these aren’t actual banks. Rather, they are fintech companies masquerading as banks, and while they aren’t all scams, they are houses of cards at best, liable to collapse if a single piece of paper is removed. Read on to learn what you need to know about neobanking scams.

What is Neobanking?

Whether you realize it or not, you likely use a neobank. A neobank is any bank that helps you to store or spend your money without actually storing it themselves. Neobanks are banks without brick-and-mortar locations, often backed by fintech companies rather than actual banks.

Venmo, PayPal, CashApp, Chime, Robinhood, BetterMint, SoFi, Revolut, and Current are all neobanks, but they aren’t the only ones. There are so many that we couldn’t list them here.

How Do Neobanks Work?

Neobanks, as we mentioned in the introduction, are, at their heart, fintech companies. They develop easy-to-use, colorful apps that make it easy to send your money around the world. But as we said, they are not banks, and therefore, under US law, they are not allowed to hold your money.

Sure, you see a fun number on the screen, showing your balance. But PayPal or Venmo doesn’t actually have any of that money. Rather, they partner with banks that allow them to store your money with them. But here is where the scam comes in—you aren’t known to that bank. Basically, a company like PayPal may have one account at Bank X for all of its users. Then, when a user withdraws, they withdraw directly from that bank, but the name ‘PayPal’ is slapped on the transaction.

Now, we aren’t saying PayPal is a scam, because PayPal is actually one of the better neobanks, because they are their own payment processor. However, many of the others we listed, like Current, Revolut, and SoFi, are Fintech companies only; this means your money actually passes through an additional layer between you and the bank you didn’t know you were using. So, when you swipe your Revolut card, the chip first contacts the app, then the payment processor, and then interacts with the bank. While there is nothing illegal about this transaction, the more entities your information has to pass through when you spend your money, the more chances there are for failure, and the fallout can be massive.

The Fall of Yotta

There is no better way for us to illustrate this than by telling you a scam that has already got millions of Americans. In 2020, a neobank called Yotta came online, promising high-yield savings accounts to anyone who wanted to open one. As we mentioned above, Yotta was not a payment processor and did not hold any of these funds. Rather, they used a third-party payment processor, Synapse, which moved the money into and out of a variety of banks, the most well-known being Evolve Bank and Trust.

In May 2024, Synapse went under, and suddenly, all the users of Yotta could no longer access their funds in the various banks. Although Yotta said all funds were FDIC insured, what they failed to explain is that it is the bank balances that are insured, not Yotta itself. And this brought up another problem, because Synapse was only using one single account at each bank for all of their users, even those beyond Yotta, so when Synapse went under, there was no way to know whose money was whose.

Now, of course, you’re probably wondering why the Yotta app maker couldn’t just go to the banks and show them user accounts. And this is because Yotta had trusted Synapse with all of this information—in fact, they didn’t even know where their customer’s money was. They were only an app front—not a bank, and not a payment processor.

Unfortunately, Yotta users are still without their funds, and because this falls into a legal and financial gray area (because the banks didn’t fail, so FDIC insurance doesn’t kick in), the government has done very little to help Americans recover their over 95 million in lost funds.

Are Neobanks Real Banks?

In short, no. Neobanks are fintech apps that perform banking functions; however, the apps themselves don’t have the license or insurance needed to become a bank.

Are Neobanks FDIC Insured?

No. Neobanks can say that balances deposited are FDIC insured, because they use banks with this insurance. But it is important to know that if the neobank goes under, your money is not insured in the same way it would be if it were deposited directly with a bank.

Are Neobanks Dangerous?

Overall, neobanks are not dangerous—they are not active scams that will immediately evaporate your money. Rather, they are banking and investment options with a high failure rate and multiple points of failure, which are difficult to plan for. We recommend using neobanks with the knowledge of what you are using and proceeding with utmost caution.

Should I Still Use a Neobank?

We understand that in this day and age, it is impossible to move away from apps like Venmo and CashApp—they are simply a part of life. That being said, we recommend not storing any money in any of these accounts. Sure, attach them to your card so you can pitch in for the group dinner, but store all of your balances elsewhere—because you never know when something like what happened to Yotta could hit your favorite neobank.

Please note that we strongly advise against using neobank savings accounts, like the one Yotta promoted to convince users to invest. These accounts may be high reward, but they are high risk as well, and as we mentioned above, we don’t recommend keeping your money stored in these apps, which have multiple failure points.