Are Neobanks Protected by the Financial Services Compensation Scheme
Neobanks may or may not be covered by the FSCS depending on their banking license. This article explains the difference between e-money and bank accounts, how to verify protection, and tips to keep your savings safe across multiple accounts.
Understanding the Financial Services Compensation Scheme
The Financial Services Compensation Scheme (FSCS) is the UK's deposit protection scheme. It covers eligible deposits up to £85,000 per person per banking license if a bank fails. This protection applies to a wide range of accounts including current accounts, savings accounts, and cash ISAs. However, not all financial products are protected, investments and e-money are treated differently.
What is the FSCS?
Established in 2001, the FSCS protects consumers when authorised financial services firms fail. For bank deposits, it pays out up to £85,000 per eligible person per institution. The limit applies per banking license, so if you have multiple accounts with the same bank, they are aggregated. Joint accounts have separate coverage of £170,000.
Who is covered?
The FSCS covers individuals and small businesses (with turnover up to £6.5 million) that have deposits with FCA-authorised banks and building societies. It is a UK-specific scheme. For readers outside the UK, similar protections exist such as the FDIC in the US (up to $250,000), the CDIC in Canada (up to CAD 100,000), and the EDIS in the EU (up to €100,000). Always check your local deposit insurance arrangement.
How Neobanks Fit into FSCS Coverage
Neobanks are digital-first financial institutions without physical branches. Their FSCS protection depends entirely on their licensing structure. There are two main models:
Direct Banking License vs. Partner Bank Model
Some neobanks hold their own full banking license (e.g., Monzo, Starling Bank, Chase UK). These are directly regulated by the FCA and their deposits are covered by the FSCS up to £85,000. Other neobanks operate through a partner bank (e.g., Revolut uses Barclays in the UK for some services, or Monese uses Possibilly). In these cases, your money is held in a segregated client account at the partner bank, and you are covered by the partner bank's FSCS protection (up to £85,000 per person across all accounts at that partner bank). However, you need to identify which bank is holding your deposit. Also, some neobanks are e-money institutions rather than banks; their protection differs.
E-Money vs. Bank Accounts
E-money institutions (EMIs) like Revolut (in its UK e-money license) or Wise do not hold deposits in the same way as banks. When you add money to an e-money account, you are purchasing e-money, which is not a deposit. EMIs are required to safeguard client funds in a separate bank account or invest in low-risk assets. If the EMI fails, you have a claim against the safeguarded funds, but this is not FSCS protection. The funds may be distributed among all clients, and if there is a shortfall, you may not get back the full amount. Some EMIs hold funds with partner banks that are FSCS-covered, but the protection may not extend directly to you as the end customer, it depends on the specific arrangement. Always read the terms or check with the provider.
Checking Your Neobank's Protection Status
Look for FSCS or Equivalent
Regulated neobanks will display their FSCS registration on their website or app. You can also check the FCA register. For non-UK readers, look for your local deposit insurance logo. If a neobank claims to be 'FSCS protected', verify whether it holds a full banking license or partners with a bank. For EMIs, the wording may say 'client funds are safeguarded', this is not the same as FSCS coverage.
Understand What's Protected
FSCS covers only deposits in bank accounts. It does not cover investment losses, crypto assets, or losses due to poor investment advice. If your neobank offers investment products or crypto trading, those are separate and not protected by FSCS. Also, the £85,000 limit is per person per banking license. If you have accounts with two neobanks that use the same underlying partner bank, your total deposits at that bank are combined for the limit.
Practical Tips for Savers
- Check the license type: Before depositing large sums, confirm whether the neobank is a bank or an e-money institution. Look for 'Authorised by the Prudential Regulation Authority' (bank) vs 'Authorised by the Financial Conduct Authority' (EMI).
- Spread deposits across different banking licenses: To stay within the £85,000 limit, keep deposits under the cap at each neobank. If a neobank uses a partner bank, find out which bank and consider your total exposure to that bank.
- Beware of e-money limits: E-money institutions often have lower protection levels. For example, if a neobank is an EMI, your funds are safeguarded but not FSCS-insured. Consider keeping only small day-to-day balances in e-money accounts and larger savings in FSCS-covered bank accounts.
- Read the fine print: Terms and conditions will state whether your account is a bank account or e-money. Also check the safeguarding arrangement and any limits.
- Consider multiple providers: You can use multiple neobanks with different licenses to increase total coverage, as each license provides up to £85,000 protection (for banks) or separate safeguarding pools (for EMIs).
Conclusion
Neobanks can be a convenient way to manage money, but protection varies. Only neobanks with a full UK banking license or those that deposit your money with an FSCS-covered partner bank offer the same deposit insurance as traditional banks. E-money institutions provide safeguarding, not FSCS coverage. Always verify the protection status before depositing significant amounts. For peace of mind, spread your deposits across multiple banking licenses and keep within the £85,000 limit per license. When in doubt, ask the provider directly for written confirmation.