While failure isn’t a goal, institutional collapses and business failures will always happen and can bring with them valuable lessons. Studying the history of bank failures reveals the causes, warning signs, and consequences of financial instability, helping us design better safeguards for both traditional and modern financial institutions. As the industry adapts to new technologies, customer demands, and regulations it’s even more important to not take risk for granted. The more you know, the more you can plan to mitigate that risk. 

Neobanks and fintechs are digitally native and often less regulated than traditional banks, but they’re still vulnerable to similar risks:

• Lack of capital reserves (many operate with thinner margins).
• Cybersecurity and tech failures.
• Reliance on third parties (e.g., partner banks or cloud services).
• Aggressive growth without proper risk controls.
• Weak compliance or governance frameworks.

Studying traditional bank failures can help:

• Develop smarter oversight for digital-first models.
• Adapt risk frameworks to include tech-specific risks (e.g., API failure, data breaches).
• Avoid overconfidence. Some fintechs operate as if innovation alone insulates them from failure, but history shows that financial risk doesn’t disappear just because it looks different.

So, why do banks fail? Let’s start there and work our way to how it applies to the fintech industry as a whole. 

Why do banks fail? What does it mean for the industry? 

A traditional bank failure occurs when a bank becomes insolvent: it can no longer meet its obligations to depositors or creditors because it has insufficient assets. When this happens, regulators (typically a central bank or financial supervisory authority) step in to close the bank and either: liquidate it, sell off its assets to pay off depositors and creditors, or facilitate a takeover by arranging for a healthier bank to acquire the failed institution.

Similarly, a neobank failure occurs when a digital-only bank, typically operating without physical branches, can no longer meet its obligations or sustain operations due to financial, regulatory, or technical problems.

A fintech failure can have more variables and is more common, it involves the collapse or shutdown of a financial technology company due to factors like poor business models, compliance issues, funding shortages, or tech vulnerabilities.

What was the biggest bank failure?

The biggest bank failure in U.S. history was Washington Mutual (WaMu), which collapsed on September 25, 2008, with $307 billion in assets. Why banks fail is often complex, but in this case it failed due to excessive exposure to risky subprime mortgages and was seized by the FDIC, which sold most of its assets to JPMorgan Chase. Globally, one of the most notable and recent collapses was Credit Suisse in 2023, which had over $500 billion in assets. Though not a traditional failure as we have discussed thus far, it was taken over by UBS in a government-brokered deal after years of scandals and a sudden loss of confidence. While WaMu remains the largest U.S. bank failure, Credit Suisse’s collapse marked one of the most significant global banking crises in recent history and provided valuable lessons across the financial industry. 

Sometimes these kinds of large bank failures are the result of larger social and economic issues. Have you ever wondered why banks failed during the Great Depression? This massive crisis was the end result of multiple economic issues, but the main point for our article is that it caused thousands of people to withdraw their money at the same time, which the banks did not have the cash to back up. On top of that, they had made risky loans that couldn’t be paid back, and without government protections like deposit insurance back then, it all spiraled into panic and collapse.

Examples of major bank failures and their causes 

1. Insolvency

Definition: The bank’s liabilities exceed its assets.

Causes:

• Poor loan underwriting (e.g., giving loans to borrowers who can’t repay)
• Excessive exposure to risky assets (e.g., subprime mortgages in 2008)
• Sudden devaluation of assets (e.g., bonds losing value due to rising interest rates)

Example:

• Washington Mutual (2008) – Collapsed due to exposure to risky mortgages and massive loan defaults.

2. Liquidity Crisis

Definition: The bank has enough assets but not enough liquid cash to meet withdrawal demands.

Causes:

• Bank run (customers withdraw money en masse)
• Lack of access to short-term funding (e.g., interbank loans dry up)
• Mismanagement of maturity mismatches (short-term liabilities, long-term assets)

Example:

• Silicon Valley Bank (2023) – Couldn’t cover withdrawals after selling long-term bonds at a loss, leading to a run.

3. Fraud or Mismanagement

Definition: Failure caused by internal wrongdoing or incompetence.

Causes:

• Embezzlement or falsified financials
• Excessive risk-taking without controls
• Governance failures

Example:

• Barings Bank (1995) – Brought down by a rogue trader, Nick Leeson, who made unauthorized and catastrophic derivatives trades.

Protections against bank failures

Banks:

• Deposit Insurance: Government-backed schemes (e.g., FDIC in the U.S.) insure deposits up to a limit, protecting customers if the bank fails.
• Capital Requirements: Regulations ensure banks maintain enough capital to absorb losses.
• Stress Testing & Audits: Regular testing and supervision help catch risks early.

Neobanks:

• Partner Bank Protections: Most neobanks hold customer funds in insured, regulated partner banks, so deposits are covered by traditional protections.
• Regulatory Licensing: Some neobanks operate under banking licenses, making them subject to similar oversight.
• Tech Risk Controls: Strong cybersecurity and data protection policies help prevent operational failure.

Fintechs:

• Third-Party Safeguards: Many fintechs use licensed banks or payment processors for transactions and funds storage, adding a layer of security.
• Regulatory Compliance: Growing fintech regulation (e.g., KYC, AML rules) helps reduce fraud and systemic risk.
• User Agreements & Escrow Models: Some fintechs isolate client funds in segregated accounts to reduce loss risk during failure.

What happens when a bank fails?

Banks:
Traditional banks are taken over by regulators (like the FDIC in the U.S.), who may liquidate the bank or arrange a takeover. Depositors are protected up to insured limits, and operations may temporarily halt or be transferred.

Neobanks:
Since neobanks often partner with traditional banks to hold customer funds, a failure typically affects the app or service interface. If the underlying partner bank is stable, customer funds may remain safe, but access and services can be disrupted.

Fintechs:
Fintech failures usually result in service shutdowns or acquisitions. If they directly hold or manage money without proper safeguards, users may lose access to funds or data. Regulatory gaps can complicate recovery and protection.

Valuable lessons in failure:

Poor customer experiences erode loyalty

We’ve studied why banks fail and why fintechs fail, but let’s dive into more tangible lessons that can be applied today. Customer loyalty is the lifeblood of any financial institution, yet many neobanks and fintechs falter by prioritizing rapid growth over consistent, high-quality experiences. A 2023 Bain & Company survey highlighted that while neobanks often score higher Net Promoter Scores (NPS) than traditional banks due to their modern interfaces and low fees, they struggle to maintain loyalty when service failures occur. Customers expect seamless, reliable access to their funds, and any disruption can shatter trust, especially without physical branches to fall back on.

Some users have criticized neobanks like Mercury, Wise, and Relay for overpromising and underdelivering. Whether due to regulatory compliance, fraud detection errors, or poor communication, these empty marketing slogans can alienate customers and fuel negative word-of-mouth. For instance, frozen accounts due to “fake positives” from imperfect fraud prevention algorithms have been reported across neobanks, further damaging trust.

These failures often stem from inadequate customer support infrastructure. Neobanks aiming to minimize costs may skimp on robust support channels, like telephone assistance for urgent issues, leaving customers stranded during crises. To build loyalty, fintechs must invest in transparent communication, proactive issue resolution, and human-centered support systems, ensuring customers feel valued even when things go wrong.

Building on shaky platforms and poor management create compounding issues 

Many neobanks and fintechs fail due to outdated or poorly managed platforms that can’t scale with demand or comply with regulations. Legacy systems, even in digital-first institutions, create bottlenecks, leading to slow feature rollouts, system outages, or security vulnerabilities. A 2023 McKinsey report noted that traditional banks release new features every four to six months, while fintechs and neobanks average every two to four weeks. However, some neobanks, constrained by technical debt or mismanaged IT architecture, lose this speed advantage, frustrating customers who expect rapid innovation.

Management missteps exacerbate these issues, which is common reason why banks fail and why fintechs can struggle. For example, Revolut faced scrutiny when it disabled its automated anti-money laundering (AML) system for several months in 2018, and later, in 2024, the European Central Bank identified deficiencies in its financial crime controls. Similarly, N26 in Germany had its customer onboarding capped by regulators for years due to AML breaches, stunting growth. These cases highlight how weak governance and failure to prioritize compliance can cripple operations. Additionally, overreliance on outsourced teams. McKinsey suggests risks increase when 70% or more of transformation staff are external, which can lead to unclear priorities and fragmented execution.

Poor data management also undermines platforms. Many fintechs struggle to consolidate disparate data sources, lacking a Single Source of Truth (SSOT), which hampers AI-driven personalization and risk assessment. Without robust platforms and disciplined management, neobanks risk outages, regulatory fines, or loss of customer trust, all of which can be fatal in a competitive market.

How fintechs and neobanks can learn from failure: and succeed 

1. Risk management: The majority of the fintechs and neobanks fail due to bad risk management or financial risk underestimation. Apply risk frameworks from the very onset of your idea like sufficient capital reserve, credit risk models, and contingency plans.
   
   
2. Compliance and regulation: Financial regulations (e.g., AML, KYC) non-compliance can lead to legal trouble and customer loss of trust. Prioritize being compliant with the regulators and engaging them at an early point in time to assure compliance with regulatory needs of all kinds.
   
   
3. Customer trust: Unethical transparency or below-optimal customer care can lead to reputation loss and customer loss. Build customer trust through clear communication, transparency regarding fees, and adequate customer care. Why banks fail has many variables, but they tend to excel in generations of customer trust.
   
   
4. Sustainable plans: Aggressive growth without a sustainable business model tends to result in operational problems. Prioritize profitable, scalable growth and proper infrastructure to manage increased demand without overextension.
   
   
5. Cybersecurity and infrastructure: Several fintechs and neobanks have failed because of data breaches, system downtime, or technical weaknesses. Invest in state-of-the-art cybersecurity solutions and regularly update technology to provide secure and reliable services.
   
   
6. Diversified revenue streams: Excessive dependence on a single revenue stream (e.g., transaction fees) can subject fintechs to market volatilities. Diversify income streams by considering subscription models, partnerships, and paid offerings.
   
   
7. Early stress testing: Not stress testing puts fintechs at risk during economic downtrends. Stress test operations in various conditions (e.g., economic decline, sudden withdrawal of cash) at regular intervals in order to be viable.

De-risk your own fintech or neobank vision 

Do you want to mitigate your own risks or even learn from past mistakes? Knowing why banks fail can lead us to understand that no idea is completely fool proof, but there are opportunities to be found in the challenges.

Social media and articles usually highlight the big wins and shiny success stories, but what about the times things didn’t go as planned? There’s a lot of value to be found in sharing in this kind of honest and collective learning. Don’t overlook one of our earlier webinars: Honest Fail Stories from Fintech Across the Globe. It’ll take you on a deep dive of honest mistakes, lessons learned, and practical takeaways from people who’ve been through it all.

If you’re ready to get to work and are excited about an idea, know there are ways to de-risk innovative ideas before you build. Our product discovery module Spark can help you build a more solid foundation for your next big thing.