Are Digital Banks Safe?

Positives

• All banking can be done on a mobile app
• protection for users’ deposits through the Financial Services Compensation Scheme (FSCS)
• better accessibility for those living in remote areas
• Digital Banks often have lower costs than traditional banks due to their lower overhead costs

Potential Concerns

• No physical branches, so all communication is done by telephone, chat or email.

What are Digital Banks?

Digital banks, also known as neobanks or challenger banks, are financial institutions that operate exclusively online or through mobile apps, without physical branches. They offer a range of banking services such as savings accounts, current accounts, payment processing, and sometimes lending products.

Digital Banks Safe – The Details

Regulation

Digital banks are usually regulated financial institutions and are subject to the same regulatory requirements as traditional banks. Depending on the jurisdiction in which they operate, digital banks are typically regulated by the relevant financial authorities, such as the Financial Conduct Authority (FCA) in the UK or the Federal Deposit Insurance Corporation (FDIC) in the United States. However, it is good to check if that is the case before setting up an account with a digital bank.

Protection/Insurances

Digital banks typically offer similar protections and insurance as traditional banks. It’s best to check before signing up whether a digital bank has a protection scheme.

Additionally, some digital banks may be subsidiaries of other banks.

In the UK, the protection scheme is called the Financial Services Compensation Scheme (FSCS), while in the United States, the scheme is run by the Federal Deposit Insurance Corporation (FDIC). These schemes safeguard customers’ deposits up to a certain limit in the event of bank insolvency.

Risks

There are some risks associated with digital banks, including:

• Cybersecurity: Digital banks are vulnerable to cybersecurity threats such as hacking, data breaches, and phishing attacks, which could compromise customers’ personal and financial information.
• Operational Risks: Technical glitches, system outages, or disruptions in service may occur, impacting access to accounts and transactions.
• Regulatory Risks: Changes in regulations or compliance requirements could affect the operations and services offered by digital banks.
• Limited Services: Some digital banks may have limited product offerings compared to traditional banks, potentially restricting access to certain financial products or services.
• Dependence on Technology: Digital banks rely heavily on technology, so technical failures or vulnerabilities could pose risks to the security and functionality of the platform.

Security and Personal Data

Digital banks typically employ advanced encryption protocols, multi-factor authentication, and other robust security measures to safeguard customers’ information and transactions.

Resources:

Financial Times:

https://www.ft.com/digital-banking

Youtube:

British Digital Bank Monzo hits profitability

https://www.cnbc.com/2023/05/31/british-digital-bank-monzo-hits-profitability-for-first-time.html

Summary – Are Digital Banks legit?

Digital Banks are legitimate financial institutions that are regulated by the appropriate financial authorities in the jurisdictions where they operate. They must comply with the same regulatory requirements and standards as traditional banks, ensuring consumer protection, financial stability, and compliance with anti-money laundering laws and other regulations.