BankingExplainer

What is a neobank, and is your money safe in one?

By Tokenova Editorial Desk

Neobanks live on your phone instead of the high street. Some hold a full banking licence; others are apps built on top of somebody else's bank. That difference decides how your money is protected.

9 sources ↓
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Quick answer

A neobank is a company that offers bank-style accounts mainly through a smartphone app, without branches⁠[1]. Some are fully licensed banks; others are tech firms that hold your money through a partner bank or as e-money. Which one it is decides whether deposit insurance protects you⁠[4].

Key points

  • "Neobank" is a marketing word, not a legal category: the licence behind the app is what matters.
  • Some neobanks are fully authorised banks and their deposits are protected like any other bank's.
  • Others are e-money or payment firms, or app companies that hold your money at a partner bank.
  • Deposit insurance protects you if an insured bank fails, not if a non-bank app company fails.
  • Before you open an account, look up the firm on the regulator's register and find the name of the licensed entity.
On this page
  1. What does the word "neobank" actually mean?
  2. Which kinds of companies call themselves neobanks?
  3. How does a new company become a licensed bank?
  4. Is money in a neobank protected?
  5. How do neobanks differ from traditional banks day to day?
  6. What should you check before opening a neobank account?
  7. Can a neobank fail?
  8. FAQ
  9. Sources

#What does the word "neobank" actually mean?

A neobank (sometimes called a challenger bank or digital bank) is a company that offers everyday banking, such as a current account, a debit card and money transfers, mainly through a phone app instead of branches. The Basel Committee, the global group of bank supervisors, describes neo-banks as firms that use technology heavily to offer retail banking services mainly through a smartphone app and an internet-based platform⁠[1]. The same report notes that new entrants are not weighed down by old IT systems, so they can build modern apps faster and more cheaply.

The key thing for a beginner is that neobank is not a type of licence. No law grants a "neobank licence". Behind every app sits a legal entity that holds a specific permission: a full banking licence, an e-money licence, a payment licence, or none at all because a partner bank does the regulated part. Our short neobank glossary entry gives the one-paragraph version.

#Which kinds of companies call themselves neobanks?

In practice you meet three main set-ups. The app on your screen can look identical in all three, which is why so many people are surprised when they find out what was underneath.

Three common set-ups behind a neobank app
Set-upWho holds your moneyHow it is protected if the firm fails
Licensed digital bankThe neobank itself, as a bank depositDeposit insurance up to the national limit, e.g. £120,000 in the UK⁠[2]
App on a partner bankA licensed partner bank, often in a pooled accountDeposit insurance covers the partner bank failing, not the app company failing⁠[3]
E-money or payment firmThe firm, which must safeguard customer moneyNo deposit insurance; safeguarding should return most money, but it can be slow and partial⁠[4]

Rules differ by country. Always check the regulator's register for the exact legal entity named in the app's terms.

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#How does a new company become a licensed bank?

Getting a banking licence is slow and demanding because a bank looks after other people's money. In the UK, the Prudential Regulation Authority (PRA) decides whether to authorise a new bank, but only with the consent of the Financial Conduct Authority (FCA)⁠[5]. Many start-ups first enter mobilisation, a restricted licence during which a new bank may accept no more than £50,000 of deposits in total and which should last no longer than 12 months⁠[6].

In the euro area, the European Central Bank makes the final decision to grant or withdraw a banking licence⁠[7]. Its 2018 guide for fintech applicants says fintech banks must be held to the same standards as all other credit institutions: enough capital, sound governance and risk management, and managers who pass a fit-and-proper test⁠[8]. In other words, a licensed neobank is held to the same rules as a traditional bank.

A typical path from app idea to full bank (UK example)

  1. Pre-application

    The founders talk to the regulators and prepare a business plan, capital plan and risk framework.

  2. Authorisation with restriction

    The PRA, with FCA consent, authorises the bank with limits; total deposits are capped at £50,000 during mobilisation⁠[6].

  3. Mobilisation

    The bank raises investment, hires staff and builds IT systems, for up to about 12 months.

  4. Full trading

    Once the regulator lifts the restriction, the bank can take deposits from the public without the cap.

#Is money in a neobank protected?

It depends on the set-up. If the neobank is itself a licensed bank, deposits are protected by the country's deposit insurance scheme. In the UK the Financial Services Compensation Scheme (FSCS) covers up to £120,000 per person, per authorised firm, from 1 December 2025⁠[2]. In the US, the FDIC covers $250,000 per depositor, per insured bank, for each account ownership category⁠[9]. Read how deposit insurance works for the details.

If the app is an e-money or payment firm, the FCA warns that your money is not protected by the FSCS if the firm goes out of business. Instead the firm must keep customer money separate (safeguarding), and you should get most of it back, but it can take time and may not be the full amount⁠[4]. If the app is a front end for a partner bank, US regulators point out that deposit insurance does not protect against losses caused by the failure of the non-bank third party⁠[3].

Worked example

Worked example: how much of £130,000 is protected?

Imagine you keep £130,000 in a UK neobank account. The amounts below use the FSCS limit in force from 1 December 2025 and were computed with code.

Neobank is a UK-authorised bank: protected amount
£120,000
Neobank is a UK-authorised bank: unprotected amount
£10,000
App is an e-money firm: FSCS-protected amount
£0 (money is safeguarded instead, not insured)

#How do neobanks differ from traditional banks day to day?

The biggest visible difference is the channel: no branches, sign-up on a phone, and features such as instant spending notifications and in-app card freezing. Under the surface, a young neobank usually runs on a newer core banking system, the software that keeps the ledger of who owns what, while many older banks still run systems built decades ago. Neobanks also tend to offer a narrower range of products, especially lending. For a side-by-side view, see neobank vs traditional bank.

Like every bank or payment firm, a neobank must check who you are before opening an account. This is called know-your-customer, explained in KYC explained. If an app asks for a photo of your ID and a selfie video, that is the KYC step, not a sign that something is wrong.

Common beginner mistakes with neobanks

  • Assuming every banking app is a bank

    The word bank in an advert is not proof. Check the register for the legal entity and its permissions.

  • Treating e-money balances like insured savings

    E-money is safeguarded, not covered by deposit insurance, so large long-term balances carry more risk if the firm fails.

  • Forgetting that limits apply per bank, not per app

    If two apps use the same partner bank, or two brands share one banking licence, your balances may count towards a single insurance limit.

  • Ignoring how to reach a human

    Before you rely on an app-only provider, find out how it handles fraud reports and complaints, and which ombudsman or regulator you can escalate to.

#What should you check before opening a neobank account?

  1. Find the legal entity name in the app's terms and look it up on the regulator's public register (for example the FCA register in the UK)⁠[4].
  2. Check which permission it holds: bank, e-money institution or payment institution.
  3. If it uses a partner bank, write down the partner bank's name and how your money is held.
  4. Work out whether your balance stays under the deposit insurance limit at that bank.
  5. Read how fraud, disputes and account freezes are handled; see authorised push payment fraud for one common scam.

#Can a neobank fail?

Yes. Any bank or financial firm can fail, whether it has branches or not. Supervisors watch licensed banks closely, and deposit insurance exists precisely because failures happen. The useful question is not whether a neobank can fail but what would happen to your money if it did, and that answer comes straight from the licence table above. Learning is a fintech app a bank walks through the checks in more depth.

The bottom line

A neobank is a way of delivering banking through an app, not a legal status. The licence behind the app decides whether your money is an insured bank deposit, safeguarded e-money or a balance held through a partner bank. Check the register, find the legal entity and keep insured balances under the limit, and the app itself becomes far less mysterious.

Frequently asked questions

Is a neobank the same as an online bank?

Mostly, yes, in everyday language. Both work without branches. The real question for any of them is whether the company holds a banking licence or relies on a partner bank or an e-money licence.

Are neobanks regulated?

The licensed entity behind the app is regulated, but the rules depend on the licence. A licensed digital bank meets the same capital and governance standards as other banks⁠[8]; an e-money firm follows safeguarding rules instead⁠[4].

Is my money insured if the neobank app shuts down?

Only if the money is a deposit at an insured bank and that bank fails. Deposit insurance does not cover the failure of a non-bank app company⁠[3].

Why do some neobanks take months to become full banks?

In the UK, many start in mobilisation, a restricted licence with a £50,000 total deposit cap that should last no more than 12 months⁠[6].

Sources

  1. Sound Practices: Implications of fintech developments for banks and bank supervisors — Basel Committee on Banking Supervision (BIS), 2018 Primary
  2. FSCS welcomes higher deposit protection limit of £120,000 — Financial Services Compensation Scheme, 2025 Primary
  3. Joint Statement on Banks' Arrangements with Third Parties to Deliver Bank Deposit Products and Services — Board of Governors of the Federal Reserve System, FDIC and OCC, 2024 Primary
  4. Using payment service providers — Financial Conduct Authority, 2026 Primary
  5. How banks are authorised in the UK (Quarterly Bulletin 2019 Q3) — Bank of England, 2019 Primary
  6. Mobilisation — New Bank Start-up Unit — Bank of England (Prudential Regulation Authority) Primary
  7. ECB publishes for consultation draft guides to bank licensing and fintech bank licensing — European Central Bank — Banking Supervision, 2017 Primary
  8. Guide to assessments of fintech credit institution licence applications (March 2018) — European Central Bank — Banking Supervision, 2018 Primary
  9. Understanding Deposit Insurance — Federal Deposit Insurance Corporation, 2024 Primary

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