Many digital banking apps are not banks in the legal sense. They operate through a partnership with a chartered institution, and that arrangement determines what they can and cannot do.
A charter is what permits deposit-taking
Accepting deposits from the public is a licensed activity. The licence comes with capital requirements, supervisory examination and a set of obligations that are expensive to meet.
Obtaining a charter takes years and a large capital commitment before a single customer is served, which is incompatible with the way a software company grows.
Partnering removes that barrier. The licensed bank holds the deposits and carries the regulatory obligations, while the app builds the product on top.
The division of labour follows the licence
The partner bank provides the account of record, the routing infrastructure and the deposit insurance relationship. It is the entity where the money legally sits.
The app provides onboarding, the interface, fraud tooling, support and everything the customer perceives as the product. It also owns the customer relationship and the brand.
Revenue is split, usually through a share of interchange on card spending and a share of the interest earned on deposit balances held at the partner.
Deposit insurance passes through the partner
Because the deposits sit at the chartered bank, insurance coverage is provided at that bank rather than at the app. This is described as pass-through coverage.
Coverage depends on the records correctly identifying which customer owns which portion of a pooled account, which places a real obligation on the app's bookkeeping.
It also means a customer with money at two apps that share the same partner bank may be counted once for coverage limits rather than twice.
The middle layer creates a failure point
Between the app and the bank there is often a third company providing the connecting infrastructure. Ledgers are maintained on both sides and must agree.
When the reconciliation between those ledgers breaks, customers can lose access to funds that unquestionably exist somewhere, because nobody can prove whose they are.
That risk is operational rather than a matter of solvency, and it is not what deposit insurance is designed to address.
Supervision has tightened around the model
Regulators have increasingly treated the partner bank as responsible for what the app does, since the bank holds the licence that made the arrangement possible.
That has pushed partner banks to demand stronger controls, clearer record-keeping and tighter limits on which products the app may offer.
The commercial effect is that partnerships have become harder to obtain and more expensive to maintain, which favours larger and better-capitalised apps.