How to Create a Neobanking App from Scratch

The arena of finance is undergoing a significant transformation, especially with neobanks that are causing disruption to traditional banking. Neobanks are entirely digital-first, mobile-first financial institutions, unlike banks that have a physical presence, which emphasize the user experience, affordability, and accessibility.

With global players like Revolut, Chime, Monzo, and N26 gaining more users and more funding than ever, interest in learning how to build a neobank from scratch has never been higher.

In this blog, we will take a look at what constitutes a neobank, then we will share the steps necessary to build it, as well as regulatory and technical requirements, key obstacles.

How to Create a Neobank from Scratch?

To develop a competitive neobank, you must turn your vision of the business into a real bank by navigating regulatory requirements, building a tech stack to support a scalable business, and instilling trust in customers. It requires a 5-step process.

Define the Niche and Value Proposition of the Neobank

The neobank space is becoming crowded. Therefore, differentiation is critical to succeed. You will need to create a defensible niche and establish how the neobank will provide value.

For example, Chime went for low-income people who had not been earning interest in bank accounts for years. Revolut offers more travelers and freelancers with multi-currency accounts and instant currency exchanges. Monzo emphasized strong budgeting and transparency.

You might want to target SMEs, gig workers, students, international migrants, or crypto enthusiasts.

Select the Appropriate Regulatory Model

Regulatory compliance is the foundation of succeeding in neobanking. The neobanking space offers two regulatory models prominent in the industry.

Banking-as-a-Service (BaaS) Partnership:

Partner with a banking institution that has a banking license, meanwhile offering services under their regulation.

Example: Chime and The Bancorp Bank.

Advantage: Faster to market, lower upfront cost.

Disadvantage: You will be dependent on a bank and its licensing and agility.

Obtain Your Own Banking License:

Apply directly for a banking license in your intended country or region.

Example: N26 operates on its own banking license in Europe.

The advantages are complete autonomy and a better credibility factor.

The disadvantages are that it will take historical resources (years), lots of money, and significant regulatory subject matter knowledge.

Complying with According to Regulations:

USA: Will comply with rules such as FDIC insurance, OCC Examination, and AML/KYC regulations.

Europe: Comes with PSD2 and GDPR transfer capabilities.

Asia: Countries like Singapore and India have new digital bank licensing frameworks.

Select a Technology Stack

Your neobank’s tech stack needs to be secure, scalable, and modular. At a minimum, your neobanking tech stack should include the following:

• Core Banking System (CBS): API forward platforms are typically like Mambu, Temenos, or Finacle.
• Payments & Cards: You’ll need to have a processor option available, like Visa, Mastercard, or the new wave of fintech options like Marqeta.
• Cloud: AWS, Google Cloud, or Azure to host the service with the ability to scale.
• Security Systems: AML/KYC, AI-driven fraud detection, biometrics, and more.
• Mobile UX/UI: All of the digital account opening will be mobile first, sleek and crisp application experience is key to obtaining user adoption.

Pro Tip:

As you build your platform, build with microservices and APIs in mind so you can stay agile and easily integrate with fintech partners.

Build Features for A Neobank

If you want to be competitive with existing banks, your neobank should have:

• Great Digital Onboarding: KYC/AML and any other requirements will be automated in the process, and hopefully, using AI or biometric value add.
• Multi-Currency Accounts: This is particularly useful for travelers and freelancers.
• Transfers in Real Time between Peers: Transfers of cash can take place without delay.
• Tools for Budgeting & Expense Tracking: Allows users to save and manage money.
• Options for Crypto & Investment: More and more popular as a method for diversification.
• Lending & BNPL (Buy Now, Pay Later): Monetization opportunities.
• AI Chatbots for Customer Support: Personalized all-hours support.

Example:

One of the unique features of Revolut is the "Vault" feature that permits savings to happen by rounding up on purchases and saving the difference.

Partner with Third-Party Fintech Services

Instead of recreating the wheel, use existing fintech API integration to speed development.

• Plaid: Data aggregation for financials.
• Stripe Treasury: Payment solutions in embedded finance.
• Alloy: Identity verification and fraud detection.
• Trulioo: Enable global identity verification wherever your customers operate.

Integrating with any of these services allows companies to scale quickly without much investment in development, or just offer more services.

Prioritizing Security & Trust

Trust is the core component of banking. To successfully gain customers' trust for returning clients should:

Every transaction should use end-to-end encryption.

• Authentication should use a multi-factor (MFA) and biometric-style login for the customer.
• Comply, AML, GDPR, PCI-DSS, and SOC 2 for transactions.
• Embedding a layer of real-time fraud detection and verification of transparency with blockchain-based ledgers.

Example:

Starling Bank is focused on developing highly advanced AI features specifically to detect fraud on their platform and send alerts to the customer on suspicious behavior as it occurs.

Challenges in Neobank Development

Although the opportunities are tremendous for entrepreneurs, there are several things that they will need to overcome:

• Regulatory hurdles: Gaining a banking license is lengthy and expensive.
• Intense competition: Nubank and Revolut are currently aggressively competing in certain key regions.
• Customer acquisition costs: Since it takes a long time and a lot of marketing expenses to build trust, acquiring customers is costly.
• Profitability: Many neobanks have a significant number of users, but their performance is poor, and monetizing customers is a struggle.
• Protect against default loans: Neobanks often partner with a NBFC for operational purposes. When NBFCs face loan defaults, this disrupts the operational efficiency of neobanks. A credit protection insurance can easily protect neobanks from this.

Conclusion

Launching a neobank from scratch is a very extensive opportunity for fintechs and entrepreneurs, but, unlike regular, standardized products, these highly specialized products need to achieve some delicate and finely balanced compliance with regulation, and robust infrastructure to allow customers to develop trust in these bank products.

Narrowing in on your niche, seizing the explosive growth of APIs, designing specifically for safety/security, and using AI and blockchain technology will enable you to build a viable neobank that can compete with Chime, Revolut, and Monzo.

Interested in launching your own neobank? Team up with experienced fintech professionals for neobank app development and build out your next breakout today!