Recent events in financial markets – both in the US and in Europe – make people anxious. And it’s no surprise – nobody wants to lose money. Most of us remember the global financial crisis of 2008, when a bunch of bad decisions made by global players led to irreparable damage. A lot of people lost money – and it was not even their fault. Today a lot of people start to question the safety of their banks. Could these institutions survive a crisis and protect my money – or rather should I keep my savings in a jar? It’s a pressing question for many people, and it’s even more complicated now, as the global financial system has evolved dramatically since 2008.
One of the new things that is now around are neobanks. Is it safe to keep your money in the neobanks in a period of economical turmoil? Let’s have a closer look.
How do traditional banks operate?
To put it simple – most of the customer’s money is not physically in the bank. Bank takes deposits from customers – and then gives these deposits to other customers as loans. When the financial situation is stable, everything works just fine. However, unlike many other situations, panic can cause deadly circumstances. When a lot of people start to think that for some reason their money is not safe in the bank – they want to cash it out. And when a critical mass of people withdraws their funds – the bank runs out of assets and cannot fulfill its obligation to give money back. We’ve seen it happen several times.
The unfortunate reality is that a bad investment can put the funds of a bank's clients at risk. As a way to minimize the impact and risk on a clients’ deposits in case of a bank failure, since 2010 EU directives require all member countries to increase their deposit guarantee schemes up to 100 thousand Euros to protect customers' funds. It is worth noting that such an increase came just after the 2007-2009 crisis. However, under this scheme, if the bank fails, those who for one reason or another, have more than 100,000 Euros in their account will only receive up to 100,000 Euros in compensation. The rest of the funds may be compensated to the users after the repayment of other liabilities of the bank. If some funds remain, then it is possible to count on the repayment of the amounts above the previously paid 100,000 to the depositors as well.
Perhaps this may seem like an exaggerated apocalyptic scenario, but just remember the very recent case of Silicon Valley Bank, a bank that generated a lot of confidence among different Start-ups and solid Fintech companies, which then shockingly reported millions in losses after the SVB collapse.
What happens to my money in neobanks?
At the same time, neobanks (otherwise known as Payment and Electronic Money Institutions) cannot access their customers' funds. This provides maximum security for its users who seek assurance that their finances are managed with care and transparency. Moreover, regulatory bodies expect these new financial institutions to have a reserve fund equivalent to the amount of money stored by all clients combined. Consequently, neobanks must report their balance sheets to the regulators on a daily basis. This verifies that the amount of money held by Electronic Money Institutions is equal to their clients' assets. There are sufficient asset reserves backing up customers’ e-money for them to feel secure in trusting and using those funds.
From this point of view a neobank offers an important alternative for those who prefer to have full control over their funds. Users of online banking services have their assets safeguarded in the account in which they deposited them, and no one else can use those funds.
Please keep in mind, that this information only applies to neobanks regulated by European standards.
Not only do neobanks offer secure funds, they also provide users with reduced costs when accessing and utilizing an account. In many cases a client can obtain a financial product without any charge, depending on the type of product and fulfilling some conditions, of course. If there is any type of commission, it is very likely to be lower than what is found in traditional banking for one very simple reason: neobanks operate entirely online, which greatly reduces the operating costs.
With online and mobile banking people can make the same money transfers they used to make at traditional banks but at even lower costs. additionally, thanks to agreements between new financial institutions and the most recognized payment processing corporations, users can receive payment cards to perform the most basic and necessary operations, such as withdrawing money from ATMs or paying in physical and digital stores.
The transparency of the products offered by neobanks is a refreshing bright spot in contrast to the hidden conditions that often are associated with traditional banks. What exactly are we talking about? Well, in general terms, when clients, both individuals and companies, go to a traditional bank they find many documents and physical contracts that hide rates and commissions in the small print. On the other hand, new online banking services, by their nature, mostly present the most complete and simplified information possible. It is difficult for a Fintech company, that operates online to hide anything from its clients, since they can easily and freely access all the information about the financial products with a swipe of their finger.
Therefore, it is no coincidence that there are currently more than 570 e-money institutions registered in Europe, a number that number will likely continue to grow over the next few years. What can users expect from these relatively new market players? Well, the neobanks will certainly seek to continually improve their services in real time, with technological innovation as their main, competitive advantage.