What protections are in place for customers at digital banks?

Revolut has a banking licence in Lithuania, an emoney licence in the UK, operates in Ireland on a freedom of services basis and intends to be a member of the putative European Deposit Insurance Scheme (EDIS), which would protect depositors up to €100,000.

But what does this all mean to your average user of Revolut and other digital banks? And how does the regulatory structure serve Irish depositors when it comes to ebanks?

Since arriving in Ireland three years ago, Revolut has exploded in popularity. Nifty tools, such as allowing you to ramp up your savings every time you buy a flat white, or enabling you to split a bill with ease with your phone when out with friends, or not charging you a fortune when you take out money during a weekend in Belfast, means the fintech start-up has quickly built up a significant base here.

A spokesman for Revolut tells us that it now has almost 300,000 customers in Ireland, a phenomenal take-up from a standing start in 2016. To put this in context, there are about 4.3 million debit cards in use in Ireland, which indicates that the UK-based start-up now has a 7 per cent share of the debit card market.

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While the financial crisis has imprinted the importance of deposit protection schemes on our brains when looking for a bank for our money, the protections offered to consumers with emoney institutions like Revolut, Facebook and Google, are a lot less clear.

Regulation

It’s a legitimate concern – one that has exercised many users of the digital money service if you consider the questions and answers section on Revolut’s site, where customers have posted questions on everything from deposit guarantee schemes to the order of creditors in the event of insolvency.

Revolut says it takes the safety and security of customers money “incredibly seriously” and has outlined the protections in place for consumers.

So what safeguards are in place?

Last December, Revolut received a licence from the European Central Bank to operate as a specialised bank in Lithuania. This means that deposits with Revolut – in Lithuania – are protected by the local deposit protection scheme (DPS), of up to €100,000 each.

If Revolut opted to passport this licence to Ireland, then its customers here would benefit from the DPS. But it doesn’t appear to have any plans to do so.

Next up is the company’s claim that customers will be able to benefit from the EDIS “in the future”.

But as it also points out on its website, “this scheme is not currently in place”. The EDIS is still very much a pipe dream and there is no firm timeline on when this will actually come to fruition.

If Irish customers cannot rely on a DPS to cover their money, what protections can they fall back on?

Revolut is authorised in the UK by the FCA under the Electronic Money Regulations 2011, and according to the Central Bank of Ireland, is passporting its services into Ireland on a freedom of services basis.

In line with these regulations, Irish customers’ money must be kept in a segregated account in a tier-one institution (Lloyds in the case of Revolut) and Revolut has no access to this money. If it becomes insolvent, customers would be able to claim this money back from the bank.

According to the FCA, depositors will get their funds back in priority to all other creditors. So Irish customers can take comfort from this.

“Unless all the emoney or payment services clients are paid back in full no other creditors will receive any of the safeguarded funds,” a spokesman for the regulator told me.

Exceptions

But be warned: there are some exceptions. If, for some reason, an emoney company didn’t safeguard 100 per cent of its clients’ funds, and there was a shortfall in the event of insolvency – then the FCA says depositors would have to get in line and lodge an “unsecured claim against the general assets of the failed firm”.

This could also arise in the event that the costs of distribution of these safeguarded funds exceeding the funds available.

Brexit will impact Revolut’s ability to passport into the Irish market and it remains to be seen whether the company uses its emoney licence in Lithuania as a springboard into the market here, or seeks a licence in Ireland.

Also be aware that if you’ve been putting your money into litecoin or bitcoin with Revolut, these transactions won’t be safeguarded under the emoney regulations.

What would happen if the bank holding these segregated accounts goes bust?

The UK’s Financial Services Compensation Scheme (FSCS) covers deposits of up to £85,000 (€99,000), and as a regulated emoney institution, customers of Revolut may be entitled to this compensation too, a spokesman for the FSCS says. There is a caveat – the FSCS says it cannot say for definite if this is the case or not, and would only be able to do so in the event of an actual default.

Digital banks have transformed financial services but consumers need to be aware of the potential pitfalls should they fail.