Why Your Money May Not Be Safe in a Digital Bank, Even If It's NDIC-Insured

Like the U.S's Federal Deposit Insurance Corporation (FDIC) that guarantees deposits on accounts up to $250,000 per depositor, per insured bank, for each account ownership category, The Nigeria Deposit Insurance Corporation (NDIC) guarantees deposits in Nigerian banks up to ₦500,000 per depositor, per insured bank for individual accounts and ₦1 million per depositor, per insured bank for for corporate accounts.

These insurance policies apply to nearly all Deposit Money Banks (DMBs) in Nigeria, offering a safety net for depositors in case of bank failure. Similarly, Members of cooperative societies in Nigeria often rely on internal risk management practices and governance, offering comparable protection for members' deposits.

The NDIC policies means if you have less than N500,000 in a savings account or N1,000,000 in a corporate account, you don't have to live in constant worry because your money should be secure in the bank. However, many Digital Banks, Neobanks and Fintech companies are not technically NDIC-insured which is why many consumers are losing their money when something happens to the platform.

Here's the thing: If traditional bank fails, the NDIC steps in to protect depositors' funds. However, if similar issue happens to a digital bank or a fintech co mpany that relies on another bank's infrastructure to offer banking services to it customers, the situation is more complex. As the linked/relied upon bank haven't failed, it'll be difficult for regulators (NDIC) to assist affected users.

What digital banks and fintechs will not tell you is that; they're not directly insured by regulator. They're partially tapping from their infrastructural bank's insurance which does not fully protect it consumer when failure or compromise happens.

Many people believed that their money in digital banks and fintech platforms was "as safe as money in the bank." However, this assumption has proven to be oversimplified. While NDIC insurance does apply to many fintech-linked accounts, it's important to understand its limitations.

NDIC insurance is designed to make depositors of a failed bank whole, not to address issues with linked third-party platforms. So, if a non-bank fintech company implodes, the path to recovering customers' funds becomes much more complicated.

If a bank fails (like Heritage Bank) and the fintech platform maintains accurate records, customers can typically collect their insured deposits without much delay. However, when a non-bank fintech company fails, especially one with poor record-keeping, the recovery process becomes more complicated and uncertain. Unfortunately, consumers have limited ways to evaluate how well fintechs manage accounts that claim to offer NDIC insurance, which introduces a significant level of risk when relying on these platforms.

How to Protect your Cash Savings

To protect your cash savings, it’s essential to take some precautionary steps when using digital banks and fintech platforms. First, always verify that your funds are NDIC-insured, as this provides protection up to N500,000 per depositor, per bank in case of institutional failure.

You can check the NDIC’s list of insured institutions to ensure your bank or platform is covered. This simple check can save you a lot of trouble in the event of a bank collapse. Some examples of NDIC-Insured Digital Banks and Fintechs are Kuda Bank, OPAY and Moniepoint.

Secondly, understand where you're placing your money by researching how the institution generates revenue. Be cautious of platforms offering unusually high returns without a clear explanation of their business model. Offers that seem too good to be true often come with hidden risks, so make sure you know exactly how these platforms operate and whether they’re sustainable.

Furthermore, it’s important to read the fine print on your saving or current accounts; you need to pay close attention to fees, account minimums, and any withdrawal or transfer restrictions that may apply. Keeping an eye on these details will help you avoid unexpected surprises, such as extra charges or limited access to your money when you need it most.

In conclusion, diversify your savings by spreading your funds across different accounts and institutions to reduce risk. Monitoring your accounts regularly for unauthorized transactions and ensuring regulatory compliance is crucial as well. While digital banks offer convenience, they don't always provide the same level of trust and safety as traditional banks, making it important to stay vigilant.