Do online ‘neobanks’ protect our money like ordinary French banks?

Internet-only financial services operate in a different way to traditional banks, and so does the way in which their customers’ funds are guaranteed

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Reader question: Are the same protection mechanisms applied to money deposited in ‘neobanks’ as to funds in ordinary French bank accounts?

Neobanks, or internet-only banks, are financial service companies which operate exclusively online and do not have physical branches.

Although these companies, which include Nickel, Aumax and Qonto, cannot necessarily be classed as ‘banks’ in the traditional sense, customers’ money is normally still protected.

France’s Autorité de contrôle prudentiel et de résolution (ACPR) bank regulator rejects the term ‘neobank’, as it suggests that these companies are banking institutions (établissements de crédit) approved by it or another equivalent authority.

“This was the historic status of banks,” the ACPR’s head of authorisations Geoffroy Goffinet told Le Monde. “The approval process carried out by the ACPR takes time – at least 12 months – and is demanding.”

Because these financial services are not subject to the same controls as traditional banks, it can often be much quicker to set up an account and move money about.

How are customers protected by neobanks?

Some neobanks, such as Younited and Memo Bank, have been granted ACPR authorisation, and their customers’ funds are protected by the Fonds de garantie des dépôts et de résolution (FGDR) deposit insurance which covers traditional banks.

This means that if the bank fails each of its depositors will be covered up to the value of €100,000.

Payment and electronic money institutions

Other companies are established under the title of payment or electronic money institutions (établissements de monnaie électronique), so while they are not included in the FGDR protection, there are other measures in place to cover depositor money.

These payment services do not normally hold all of the money that their customers deposit themselves, but keep it in a holding account at a traditional bank, meaning that if the company failed, the funds in the physical bank account would be protected under the FGDR.

Agents and distributors

However, other firms such as Lydia, Pixpay and Kard are not payment service institutions but simple ‘agents’ or ‘distributors’ of payment service institutions.

These are not covered by the FGDR but “the payment service on which they depend will be and will carry out all the necessary verifications,” said Yves Eonnet, the president of financial services technology company Skaleet.

The ACPR therefore encourages customers to check which payment services or electronic money company an agent is linked to using Banque de France’s Regafi register before opening an account.

“If we’re talking about an agent, the register will enable you to ensure that it really is connected to a payment services company. However, this is not possible for distributors [such as Kard or Pixpay], which are not declared to the ACPR by electronic money institutions,” Mr Goffinet said.

Cyril Chiche, the cofounder of Lydia, which is an agent, told Le Monde that: “We are continually controlled by our partner electronic money institution the SFPMEI.”

“Our status ensures good security for the customer as we work with high quality partners in all of our activities. But this multiplication becomes financially punitive. We have therefore begun the process of becoming a payment service institution.”

“Fintechs need to get going quickly in order to test out their model and control costs. Their status as agent or as payment service provider responds directly to these concerns,” said Alain Clot, the president of France Fintech.

“And it is possible to evolve later on if needs be.”

“The granting of the établissement de crédit title is not a marker of security for the customer as regulation will protect them in all cases,” said Geoffroy Guigou, the director-general of Younited Credit. “But it does constitute a marker of success for the fintech company.”

What about other popular services like Revolut, Monzo and Transferwise?

Revolut is a British company which employs an easy-to-use phone app where customers can manage their finances.

Although it has applied for a UK banking licence, it is not yet protected by the UK’s Financial Services Compensation Scheme (FSCS). However, it holds customers’ money in a traditional ‘ring-fenced’ bank account, meaning that it is covered in the same way as the payment services and electronic money institutions detailed above.

In the EU, Revolut possesses a banking licence in Lithuania, and so funds are protected by the Bank of Lithuania.

TransferWise is also a UK company which makes it easier for customers to manage their money wherever they are in the world.

It is fully authorised under the Financial Conduct Authority in the UK and under the National Bank of Belgium in the EU, and so customers’ money is protected.

Monzo is a regulated bank, and so depositor funds are covered by the FSCS.

Read more:Brexit and Britons in France: Consider a neobank account

German internet-only bank taken to court over confiscating funds

German neobank N26 [with many clients in France] is being taken to court by former customers who are accusing it of having abruptly closed their accounts and confiscating their money.

“We have never seen a bank block money in such a totally random and unjustified way, money that belongs to people who need it for their daily lives,” said Emma Léoty, the Choisez et Associés lawyer in charge of the case.

The ACPR has also demanded an explanation from N26, which has stated that accounts are closed if suspected of fraud or money laundering, and that only 3% of affected customers have not yet recovered their money.

The case will be heard on April 12 in Nanterre.

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