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I'm thinking of moving my money to an online banking/transfer services. After an online search, I selected Transferwise for some reasons.

While I was reading their docs, I found this:

If something were to happen to one of the banks we store your money in (like Barclays or JP Morgan Chase), then your money wouldn’t be protected. We wouldn’t be able to give your money back in that situation.

Banks are protected usually by insurance companies, so if my bank goes bust, the insurance company will recover my money. So, why Transferwise wouldn't give its customers their money back if any of the banks they are using went bust?

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Let us take the united states as an example.

If you put 250K into a bank account then FDIC, which is the Federal Deposit Insurance Corporation, will make you whole if the bank fails. The premiums are paid into the FDIC by the bank, those fees come from the money they make lending your deposits. If you have more than 250K in the bank account then the excess isn't protected.

Now there are ways to get more protection. If you are married each person can put 250K into their account, plus they can have a joint account with another 250K. You can also spread your money across multiple banks.

Transferwise doesn't set up individual accounts for you in these banks. They commingle money from multiple customers in those bank account. But if the bank fails some or all of the money is gone.

Why is it gone? The FDIC protection for a business account is also 250K. But Transferwise has to have millions of dollars stored in the bank. If they had to store $10,000,000 in the United states they would need to put the money into 40 banks. They can't make 40 savings accounts in one bank to get around the limit. To protect more than 250K they would need to spread the money to other banks.

They explain that they aren't a bank and they don't offer the same protection:

Traditional banks are required to put customers' money in a financial protection scheme. This is because they make profit by lending and risking customers' money, and need to insure it up to a certain amount in case something goes wrong.

TransferWise isn't a bank. We don't lend your money or make high-risk investments with it. So, we don't insure it in a financial protection scheme.

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  • Thanks for your clarification, but still it's not clear. Why banks that Transferwise use are not doing the same with the money of the Transferwise customers? .. If I have money in bank X through Transferwise and you have also money but directly by dealing with the bank, why your money is protected but my money not?
    – Minions
    Dec 23, 2020 at 23:43
  • I added more information
    – mhoran_psprep
    Dec 23, 2020 at 23:59
  • Thanks! now it's clear. BTW, since you have good background of such service, do you recommend using it for long time? I mean keeping > 10k euro in my account?
    – Minions
    Dec 24, 2020 at 0:26
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    Why would you ever do that? They are a TRANSFER service, not a bnak.
    – TomTom
    Dec 24, 2020 at 0:44
  • @TomTom 1) I am living in France and soon I'll move to Canada. I need to transfer my money there but I don't have a Canadian account. At the same time, I need to close my French account before leaving. 2) I don't know if I will stay in Canada more than 2 years, so I don't want to move my money there and to convert them to CAD, and then later return them back to Euro.
    – Minions
    Dec 24, 2020 at 11:00

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