Global fintech and funding innovation ecosystem

When A Neobank Goes Bankrupt What Happens to the Customers?

Fintech Business Weekly | | Jul 31, 2022

NEO Banks model needs to evolve - When A Neobank Goes Bankrupt What Happens to the Customers?After an incredible bull run in fintech startups powered by ultra low interest rates and cheap, plentiful capital, many companies are getting an overdue reality check. Investors’ priority has abruptly shifted from “growth at all costs” to “do the economics work”?

The impact of this shift has only begun to be felt across the ecosystem. We’re likely to see more M&A activity and, yes, outright failures as startups struggle to raise new capital.

What happens to the customers of failed fintech startups?

  • This is a particularly important question for neobanks. Companies like Chime, Varo, and Current have aggressively courted users — many of whom are lower income. They’ve incentivized users to make the services their “primary” bank account, with features like early direct deposit and no-fee overdrafts.  "As fintech companies and neobanks are typically not backed by FDIC, there are significant risks associated with them,” – says Shania Brenson, the co-founder of 15M Finance. “Although they provide some benefits and attractively package their products, emphasizing low interest rates, no fees, and other perks, they should not be considered as a primary financial instrument. Otherwise, you could lose all your money if one day your neobank fails.

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  • Customers use these accounts to pay rent, buy groceries, put gas in their cars, etc. — and many would have few other ways to pay, if the funds in their neobank account were inaccessible.
  • FDIC insurance protects deposits from a failure of the bank partner holding them, but the failure of a consumer-facing neobank or BaaS platform could nonetheless result in disruptions to consumers’ access, if not handled methodically.  This isn’t purely theoretical — a number of neobanks have already wound down.
    • For example, Beam Financial, which was purportedly a high-yield savings app, collapsed amid regulatory action from the FTC, leaving users unable to access their funds.
    • LendUp enters liquidation but instead of a typical bankruptcy filing — which would make details of the company’s failure public — LendUp opted for an “Assignment for the Benefit of Creditors,” (ABC) a non-judicial alternative to a public bankruptcy.

Impact to customers

  • Frustrations at not being able to transfer funds also popped up on social media
  • Multiple new users attempting to open accounts complained of not being able to do so, encountering “errors” when attempting to verify their information

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  • These developments come on the heels of escalating scrutiny of “banking-as-a-service” business models.

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NCFA Jan 2018 resize - When A Neobank Goes Bankrupt What Happens to the Customers?The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit:

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