Are neobanks safe?

If you’re considering switching to a neobank, or just hoping to learn more about how they work, one question is probably weighing heavily on your mind: are they safe? 

If you’ve only ever dealt with traditional banks, it’s perfectly reasonable to wonder. After all, the big banks’ reputations are propped up by thousands of employees and years of experience. Neobanks don’t have that kind of foundation in place.

Nonetheless, they’ve gone to great lengths to keep your money safe and your mind at ease. Below, we look at the regulations that apply to neobanks and the security measures they use to protect their systems.

While neobanks’ business models might differ dramatically from those of traditional banks, they’re subject to the same laws and regulations that apply to other financial institutions. These include:

1. Authorised Deposit-taking Institution (ADI) licence

If you’ve been following the news in the fintech space, you might have noticed the term ‘ADI’ thrown around quite a bit. This refers to the Authorised Deposit-taking Institution licence an organisation needs before it’s allowed to conduct any banking activities.

ADI licences are issued by APRA, and getting one is no easy task. That’s why many up-and-coming fintechs that are still in the process of applying for their licence will avoid calling themselves a bank — not just anyone can lay claim to that term.

2. Australian Financial Services (AFS) licence

Another licence that neobanks will need to have under their belt is an AFS licence. This is issued by ASIC, and is required of all Australian companies that provide financial services - think brokers, accountants and financial comparison websites. 

AFS licensees are held to strict standards when it comes to things like conduct, training, managerial competence, risk management, and quality of resources.

3. Financial Claims Scheme (FCS)

Under the FCS, deposits of up to $250,000 are protected by the government in the unlikely event that a bank, building society or credit union goes under. That means if you’re with a fully licenced neobank - one with an ADI - your savings are just as safe as if they were with one of the big four.

Just keep in mind that the $250,000 limit on deposits extends to money you might have in other banks operated by the same parent organisation. So let’s say you’re with Up Bank. Since it’s owned by Bendigo Bank, you’ll only be protected up to $250,000 for the money you have across both. If you have more, it’s best to leave it with another organisation.

4. Banking Code of Practice

If an organisation offers banking products - think bank accounts, term deposits and credit cards - it’s subject to the Banking Code of Practice, an exhaustive list of standards which all members of the Australian banking industry must adhere to.

Neobanks might lack the large cyber security teams typical of the big banks, but that’s not to say they haven’t invested a lot of money and resources into ensuring their security protocols are up to industry standard. One big advantage neobanks have over other banks is that they aren’t reliant on old legacy systems, and can focus on security at the outset when designing and building their apps.

Beyond that, they’ll employ many of the same security measures used by other banks, such as biometrics and two-factor authentication. Of course, it falls on individual customers to make use of these, and take all the usual steps to keep their banking details safe from prying eyes.

So while many Australians might have mixed feelings about switching over to a 100% digital bank, the neobanks that are set to hit the scene have taken great pains to ensure their services are safe and trustworthy. If you’re ready to make the switch, be sure to visit our neobank comparison page for a look at what’s out there.