Digital banks vs traditional banks

What is the difference between a neobank and a bank?

"Neobank", "digital bank" and "challenger bank" describe a style of service: accounts opened and run through a phone app, usually with no branches. They do not describe a legal status. Behind the label you will find one of two very different set-ups:

• An app-only bank with its own license. Legally it is a bank, supervised like any other, and your deposits are bank deposits.
• A technology company with a partner bank. The app designs the product and handles customers, but the money is held at one or more licensed banks under a contract. The FDIC notes that such non-bank companies arrange for customer funds to be placed in insured bank accounts, but the non-bank itself is never FDIC-insured.

A traditional bank with branches and a mobile app is, legally, the same kind of institution as an app-only bank. So the useful comparison is not "app versus branch" but "bank versus non-bank". Our overview of what fintech is covers the wider picture.

How do they compare side by side?

The table compares what matters if something goes wrong. Features such as fees, interest and app design vary from firm to firm, so compare those on each provider's own fee schedule.

What does FDIC insurance cover and not cover?

The FDIC insures deposits, such as checking and savings accounts, money market deposit accounts and certificates of deposit, up to $250,000 per depositor, per FDIC-insured bank, for each account ownership category. It does not cover stocks, bonds, mutual funds, annuities, Treasury securities or crypto-assets, even if you bought them through your bank's app.

Two limits catch people out. Insurance applies only if the institution holding the deposit is an FDIC-insured bank. And it protects against that bank failing, not against an app company failing or losing track of who owns what.

What happened when a fintech middleman failed?

In 2024, Synapse, a company that connected non-bank apps with partner banks, filed for bankruptcy. In a September 2024 statement, CFPB Director Rohit Chopra said tens of thousands of customers had their funds frozen for months, because the banks could not reconcile the records needed to return money to end users. He said the firm appeared to have failed to track customer balances properly.

The episode showed the gap in the chain: the money may sit at an insured bank, but if nobody can prove which customer owns which dollars, getting it back is slow. The FDIC proposed rules requiring banks to keep records of end users and their balances for such custodial accounts, with daily reconciliation and access to records if the non-bank goes bankrupt.

How do you check a digital bank before opening an account?

1. Find the legal name of the bank. It appears in the app's terms or website footer. If the provider is not itself a bank, it should name its partner bank or banks.

2. Look it up in FDIC BankFind. The FDIC tells consumers to confirm the bank is FDIC-insured using its BankFind search tool. Outside the US, use your regulator's register, as in how to check if a platform is registered.

3. Ask how and when money is deposited. The FDIC suggests confirming that funds will be deposited at an insured bank, how and when that happens, and at which bank.

4. Check what you are buying. Savings, investments and stablecoin balances inside the same app can have completely different protection.

5. Secure the account. Turn on two-factor authentication from day one.

What mistakes do people make choosing a digital bank?

• Reading "FDIC-insured" in an ad and stopping there. Find out which bank is insured and whether your money actually sits there.
• Keeping a large balance in a payment app wallet. In 2023 the CFPB warned that funds stored on popular payment apps may lack deposit insurance and suggested moving balances to insured accounts.
• Doubling up at one partner bank. Two apps can use the same partner bank, and the limit applies per bank.
• Treating investment or crypto features as deposits. They are not covered by deposit insurance.
• Having no backup account. If one provider freezes access, a second account at a different bank keeps bills paid.