Are Neobanks Safe? Key Facts About Their Security and Oversight

Digital-only banks, known as neobanks, have gained popularity for their convenience and low fees. However, many people wonder if these online financial institutions are as safe as traditional banks, especially when it comes to protecting their money and personal information.

While neobanks operate differently from brick-and-mortar banks, various safeguards exist to protect customers. Understanding their regulation, deposit insurance, and security measures can help determine their reliability.

Regulatory Oversight

Neobanks do not have physical branches, but they are still subject to financial regulations designed to ensure stability and consumer protection. Many operate in partnership with chartered banks, meaning they must follow the same regulatory requirements, including capital adequacy standards, anti-money laundering (AML) rules, and consumer protection laws.

In the United States, neobanks that provide banking services through a partner institution fall under federal regulators such as the Office of the Comptroller of the Currency (OCC) and the Federal Reserve. These agencies enforce compliance with laws like the Bank Secrecy Act (BSA), which requires financial institutions to monitor transactions for suspicious activity. The Consumer Financial Protection Bureau (CFPB) also oversees how neobanks handle customer accounts, ensuring fair treatment and transparency.

Some neobanks obtain their own banking charters, placing them directly under federal and state regulators. For example, Varo Bank became the first consumer-focused neobank to receive a national bank charter from the OCC, allowing it to operate independently. Neobanks with charters must meet stricter capital and liquidity requirements than those relying on third-party banks.

Deposit Insurance Coverage

A major concern for customers is whether their money is protected if a neobank fails. Many digital-only banks do not hold deposits directly but instead partner with federally insured banks that provide protection. In the United States, this typically means coverage through the Federal Deposit Insurance Corporation (FDIC), which insures deposits up to $250,000 per depositor, per insured bank, per ownership category.

Customers should verify which bank holds their deposits and confirm FDIC insurance. Neobanks usually disclose this information on their websites, but customers can also check the FDIC’s BankFind tool. Some neobanks use a “sweep account” structure, distributing funds across multiple FDIC-insured banks to extend coverage beyond the $250,000 limit.

Neobanks with their own banking charters are directly insured by the FDIC if they meet the agency’s requirements. However, some fintech companies offer banking-like services without actually holding deposits in an insured institution. Customers should confirm whether a financial app provides FDIC protection before depositing funds.

Data Privacy Laws

Neobanks handle large amounts of personal and financial data, making compliance with privacy regulations essential. In the United States, the Gramm-Leach-Bliley Act (GLBA) requires financial institutions to inform customers about data-sharing practices and implement security measures against unauthorized access. The law also includes the Safeguards Rule, which mandates security programs to protect sensitive data.

Many states have introduced stricter privacy regulations. The California Consumer Privacy Act (CCPA) grants consumers the right to know what data is collected, request deletion of personal information, and opt out of data sales. Similar laws in Virginia and Colorado impose additional requirements.

Internationally, neobanks serving customers in the European Union must follow the General Data Protection Regulation (GDPR), which requires explicit customer consent for data collection, mandates prompt reporting of security breaches, and grants individuals the right to access and correct their data. Non-compliance can result in fines of up to €20 million or 4% of a company’s global revenue.

Fraud Prevention Methods

Neobanks rely on digital infrastructure, making them targets for fraud, including account takeovers and identity theft. To combat these threats, they use artificial intelligence (AI) and machine learning to analyze transaction patterns in real time. These systems flag unusual behavior, such as large withdrawals or logins from unrecognized devices, prompting additional authentication steps. Many also use behavioral biometrics, tracking typing speed, mouse movements, and other user interactions to detect fraud attempts.

Multi-factor authentication (MFA) adds another layer of security. Instead of relying solely on passwords, MFA requires additional verification, such as biometric scans, one-time passcodes, or hardware security keys. Some neobanks have adopted passwordless authentication, where customers log in using biometric data or cryptographic authentication methods, reducing the risk of credential-based attacks.

Real-time transaction alerts and customizable spending limits further enhance security. Customers receive instant notifications for every transaction, allowing them to quickly spot unauthorized activity. Some neobanks offer virtual card numbers for online purchases, which can expire after a single use or a set time period, preventing fraudsters from reusing stolen card details.