Deposit protection is a legal protection scheme that covers customer deposits held at authorised banks if the bank fails. In the UK, you may have heard of it called the Financial Services Compensation Scheme (FSCS) which will protect deposits up to £120,000 per person, per authorised institution.
In the EU, the national Deposit Guarantee Scheme (DGS) is the protection scheme, and it currently covers up to €100,000 in each authorised bank, within each country in the EU. In the United States, it is provided by the Federal Deposit Insurance Corporation (FDIC).
The specific coverage limits vary by jurisdiction, but the structure is broadly similar: deposits held at licensed banks are protected up to a capped amount per person, per institution.These exist to protect ordinary savers from losing money if a financial institution becomes insolvent. In simple terms, if a bank collapses and cannot repay its customers, deposit insurance schemes reimburse eligible depositors up to a specified limit.
The key point is that deposit insurance applies to banks because banks take deposits and use them to lend. Since banks lend customer deposits as part of their business model, there is structural risk. exists to maintain public confidence and financial stability in that system. These deposit protection schemes exist to protect customers. But you need to be slightly wary of how much you put into an account, especially where more than one bank is part of a group.
For example, Halifax is part of Lloyds Banking Group in the UK. So, you might think if you have £120,000 in a Halifax account and £120,000 in a Lloyds Bank account, you would be protected up to £240,000. But this isn’t correct. You are only protected up to £120,000 across the group, so this is important to understand. While banks don’t regularly go bust, it has happened. So, you need to be aware of which institutions are part of the same group so you can protect your deposits effectively.
Electronic Money Institutions (EMIs) operate differently
An EMI is not authorised to take deposits in the same way a bank does. Instead, it issues electronic money and provides payment services. Because EMIs are not deposit-taking institutions, deposit insurance schemes generally do not apply to balances held with them.
So, instead of being covered by the deposit protection schemes, EMIs are required to safeguard customer funds.
This safeguarding means customer money must be kept separate from the company’s own operating funds. Typically, the funds are placed in segregated accounts at authorised banks, or invested in secure, low-risk instruments. The purpose of safeguarding is to ensure that if the EMI fails, customer funds are protected from claims by the company’s creditors and can be returned to customers.
Safeguarding is not the same as a deposit protection scheme
Deposit protection schemes guarantee repayment up to a defined limit if a bank fails. Safeguarding is a structural protection mechanism designed to ring-fence customer funds, but it does not operate as a government-backed compensation scheme in the same way.
For consumers, the practical difference is this:
If you hold money in a bank account, that money may be covered by a national deposit protection scheme up to a limit.
If you hold money in an EMI account, the money is safeguarded rather than insured under a deposit protection scheme.
This does not automatically make EMI accounts unsafe. Many widely used digital payment and multi-currency platforms operate under EMI licences and are heavily regulated. But the legal framework behind how your money is protected is different to a bank.
Understanding that distinction is particularly important for expats or internationally mobile individuals who may hold large balances temporarily when transferring funds between countries.
In summary, deposit protection schemes guarantee cover for deposits held at banks through a compensation scheme if the bank fails. EMIs do not usually provide deposit guarantees, but they must safeguard customer funds through segregation and regulatory oversight. If you feel uncomfortable with one, then you’re best to choose the other method of safeguarding your funds.
To find out which multi-currency account would work well for you, please see our multi-currency comparison table.
