There can be no denying that the traditional banking space is currently going through a major sea-change. Long gone are the days where you need to visit a local branch to open an account, hand over countless documents, and wait days, if not weeks on-end before your account is ready to use.
Instead, digital-only banks such as Revolut and N26 are now a real alternative to the status quo. Such entities allow you to open an account in minutes, receive real-time notifications on your spending habits, exchange currencies at industry-leading rates, and access first-rate customer service – of which is facilitated via a native mobile application.
Arguably, this is excellent news for a retail banking industry has been in great need of large-scale reform for some time now.
However, it is important to recognize that challenger banks are still a relatively new phenomenon. Ultimately, this beggars the question – How safe is your money in the event that the likes of Revolut or N26 were to fail?
We took the time to explore this somewhat uncomfortable question further.
The current state of play in the challenger banking scene
First and foremost, it is important to recognize that terminology is absolutely key in the challenger banking arena. Why? Well, in theory, many of the key players leading the industry are not actually banks. Sure, they offer a number of key services that you would expect from your local bank, such as current accounts, debit cards, ATM withdrawals, and in some cases – the ability to earn interest in the form of a separate savings account. In fact, the only thing yet to reach the grasp of challenger banks is that of credit-related products such as personal loans, first-time buyer mortgages, or credit cards.
However, in the grand scheme of things, this doesn’t make them a bank per-say. In fact, the likes of Revolut have been crystal clear about this since the company was incorporated in 2015. That was until late 2018 when the FinTech platform announced that it had acquired a European Banking License. This is fundamental for a number of reasons, especially with respect to the safety of customer funds.
Nevertheless, the Revolut community is still being kept in waiting regarding the specifics of the Banking License, not least with respect to the European Deposit Protection scheme. Even this is potentially in jeopardy now, as it was recently reported that Revolut is at risk of losing its European Banking License. Specifically, this is in direct relation to Nikolay Storonsky’s – Revolut chief executive, alleged ties to the Kremlin-controlled Gazprom – an institution that has remained on the EU sanctions list since 2014.
Putting Banking Licenses to one side momentarily, Revolut and its challenger bank peers are acquiring new customers at an alarming rate.
While Revolut boasts more than 4 million customers, the likes of N26 and Monzo possess a customer base of 2 million and 850,000 respectively. The reality is, such significant customer numbers means one thing – challenger banks, which are not really banks, are sitting on billions of dollars of customer assets.
How safe is your money at a challenger bank?
In order to understand the risks of holding your money with a challenger bank, it is highly relevant to take a quick look at the state of play in the traditional baking scene. In the UK, for example, high street banks are part of the Financial Services Compensation Scheme (FSCS). This ensures that in the event the bank collapsed, customer bank deposits would be protected by up to £85,000.
Over IN the US, the FSCS-equivalent is known as the Federal Deposit Insurance Corporation (FDIC), and it protects bank deposits by up to $250,000. At a European level, the Deposit Guarantee Scheme protects customer deposits by up to €100,000. Globally, many other deposit schemes remain in existence.
So how do challenger banks compare?
Well, in the case of Revolut, this is somewhat tricky. While the challenger bank did in fact have its European Banking License approved in late 2018, the ratification process has not yet been finalized. Until then, the European Deposit Guarantee Scheme does not apply.
Moreover, although Revolut is headquartered in the UK, it does not fall under the remit of the FSCS. As such, even taking into account the fact that customer funds would be made available prior to creditors in the event of a collapse, in theory, there is no guarantee that your money is safe.
On the other hand, a number of other challenger banks do in fact fall under the FSCS scheme. This includes the likes of Monzo, Starling, and Atom Bank. In the case of N26, the digital-only banking application falls under the German bank deposit scheme.
Who would foot the bill in the event of a challenger bank collapse?
If the challenger bank that you store your money with does fall under a deposit protection scheme, then it is true that your funds would be safe – at least up to the amount that the respective scheme covers.
However, it is also important to remember that in the grand scheme of things, if a government was required to honour one the aforementioned deposit schemes due to a challenger banking collapse, it could lead to catastrophic consequences.
In effect, it is ultimately the taxpayer that covers the cost in the long-run, and this is something that must not be forgotten in the case of loss-making challenging banks.
For example, although Revolut increased revenues five-fold last year, it still reported record losses of £14.8 million. N26 is also in the same boat. The German-based digital bank is still yet to post a profit, even though it commands a £2.8 billion market valuation. And Monzo? The UK-based challenger bank is also yet to make a profit. With a pre-tax loss of £33.1 million last year, this is up from £7.9 million from the year prior.
In summary, it is clear to see why challenger banks have shot to fame in recent years. Not only do they allow you to access everyday banking services at the click of a button, but in reality, they offer a real-world alternative to the status quo.
However, it is imperative that regulators keep a watchful eye. Not only do they need to ensure that customer funds are safe in the event of a collapse, but it must feel satisfied that ongoing losses are not an early warning sign of things to come.