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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, costs, and future considerations of this thriving fintech model.
Neobanks are fully digital banks without physical branch locations. Customers interact completely through mobile applications or websites, allowing banking to take place without upheaval.
Neobanks utilize cloud-native infrastructure, open APIs, AI-driven insights, and blockchain integrations in order to deliver banking services in a timeframe and cost that was not possible before they were available.
Where traditional banks often rely on old-world systems and a made up, extensive physical branch network to serve customers, neobanks focus on:
For example:
The global neobank market size anticipates growth to over $500 billion by 2030, at an estimated CAGR of more than 50%. This growth is fueled by younger customers who are seeking mobile-first financial service options, while at the same time avoiding traditional banking services.
Some reasons why the startup community is moving quickly into neobank development:
As an example, Nubank in Brazil has grown into a leading fintech company serving historically underserved and unbanked populations with its low-cost digital banking.
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.
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.
Regulatory compliance is the foundation of succeeding in neobanking. The neobanking space offers two regulatory models prominent in the industry.
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.
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.
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.
Your neobank’s tech stack needs to be secure, scalable, and modular. At a minimum, your neobanking tech stack should include the following:
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.
If you want to be competitive with existing banks, your neobank should have:
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.
Instead of recreating the wheel, use existing fintech API integration to speed development.
Integrating with any of these services allows companies to scale quickly without much investment in development, or just offer more services.
Trust is the core component of banking. To successfully gain customers' trust for returning clients should:
Every transaction should use end-to-end encryption.
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.
Although the opportunities are tremendous for entrepreneurs, there are several things that they will need to overcome:
The future looks bright for neobanks, due to:
Example:
Nubank continues to offer cryptocurrency and insurance services, and Revolt is launching a financial super app.
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!
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