Are your neobank deposits safe? what to know

Neobanks: a financial revolution with a caveat

Digital banking has reshaped how millions manage their money, largely thanks to the rise of neobanks. These financial institutions operate exclusively through mobile apps, without physical branches. While offering convenience and innovation, navigating the regulatory landscape of neobanks is crucial for safeguarding your deposits. A seemingly simple shift in a neobank's operational details can have significant implications for your financial security.

Licensing and deposit protection: the core of security

Understanding a neobank’s license is paramount. In Europe, two primary license types exist: a full banking license and an electronic money (e-money) license. A full banking license allows the entity to take deposits, offer loans, and is subject to comprehensive banking supervision. These banks are typically covered by the Deposit Guarantee Scheme (DGS) of their country, usually up to €100,000 per depositor. E-money licenses permit account and payment services but don't involve traditional deposit-taking. While funds are held in segregated accounts, the protection isn't always the same, and a DGS may not exist.

The risks of changing jurisdictions

Neobanks sometimes change their registered country to access better regulations or expand markets. While the European Union has a framework to harmonize supervision, a change in jurisdiction can alter the administrative process for claiming funds. For example, a move from a Lithuanian license to a German license would mean claims are handled by the German Deposit Guarantee Scheme, requiring different procedures and paperwork. This shift can be easily overlooked, impacting your ability to recover funds in case of issues.

License type changes: a more complex scenario

A shift in license type presents a more intricate risk. A neobank transitioning from an e-money entity (EDE) to a full banking license improves protection, subjecting it to traditional deposit guarantee mechanisms. However, the reverse – moving from a full license to an e-money license – is concerning. Funds would be held in segregated accounts at traditional banks, but without the same legal guarantee in the event of the fintech's insolvency. Furthermore, the services offered change significantly, limiting e-money entities to payments and electronic money, excluding lending and interest-bearing deposits.

Protecting your money: proactive steps

To mitigate these risks, always verify a neobank’s license type before depositing funds. Prioritize institutions with full banking licenses and recognized DGS coverage. Diversifying your accounts across multiple banks or neobanks is another prudent strategy, especially for larger sums.

Stay informed: regulatory changes are key

Constant monitoring of regulatory communications and terms of service is indispensable. Pay close attention to any announcements regarding license changes or supervision shifts. Staying informed allows you to proactively adjust your financial strategy and ensure your deposits remain secure. Ignoring these updates can leave your savings vulnerable.