How to Start a Neobank in 2023: A Complete Guide

The pace of progress is unstoppable today, with all domains of human life transformed by technological innovation like blockchain and defi development services. Similar trends are observed in the global finance for several reasons: 

• People have got skeptical about the global financial system’s integrity after the 2008 crisis
• Consumers are going mobile and seek mobile-friendly financial services and products 
• The percentage of the unbanked population across the globe is still high, with large categories of users still having no access to conventional financing 

New digital-only banks emerged recently based on such transformation of the financial landscape and broader adoption of technology. They are referred to as Neobanks, digital banks, or challenger banks, sharing a single common feature of digital-only service provision. 

The service range of Neobanks is similar to that of usual banks, covering digital accounts, credit and debit cards, low-commission or fee-free transactions, loans, mobile payments, and currency exchanges. However, as they function beyond the traditional financial structures, their use is more accessible for unbanked populations. 

Here the 4IRE consulting team on Neobank development uncovers the ins and outs of such projects. Stay tuned to find out what it takes to launch your personal Neobank startup.

The pace of progress is unstoppable today, with all domains of human life transformed by technological innovation like blockchain and defi development services. Similar trends are observed in the global finance for several reasons: 

• People have got skeptical about the global financial system’s integrity after the 2008 crisis
• Consumers are going mobile and seek mobile-friendly financial services and products 
• The percentage of the unbanked population across the globe is still high, with large categories of users still having no access to conventional financing 

New digital-only banks emerged recently based on such transformation of the financial landscape and broader adoption of technology. They are referred to as Neobanks, digital banks, or challenger banks, sharing a single common feature of digital-only service provision. 

What is a Neobank? Famous Examples 

So, what is a Neobank? In simple words, it is a financial institution that performs the functions and renders services typical for the usual brick-and-mortar banks, but in the digital-only format. Neobanks run without any offline branches and leverage technologies that are more advanced than in most banks. A standard range of Neobanks’ services includes accounts for individual and corporate clients, credit and debit cards, mortgages, loans, deposits, and individual payments. 

The present-day differentiation of bank types has led to significant confusion about their differences and similarities. Here is a brief recap:

Traditional Banks are the physical banking establishments, government- or private-owned, serving the population with a range of conventional banking services, such as account opening, deposits and loans, credit and debit cards, and financial transactions. 

Digital Banks are backed by large financial institutions but rarely have offline offices and rely on online banking mostly. Most services are rendered via mobile or desktop apps. 

Neobanks fulfill the same functions as digital banks, but they are not backed by any large financial organizations like conventional and digital banking. Most of them are launched by private organizations and pursue the online-only model of service. 

Crypto Banks are blockchain-based institutions functioning beyond the regular scope of banking. Such banks are not necessarily tied to any fiat currency. Often Crypto Banks function on the edge between fiat banking and crypto world.

The spread of Neobanks is large-scale, with such institutions emerging all over the world and currently serving over 500 million users. The highest percentage of financial services’ adoption is observed in Asia and developing countries, with large numbers of unbanked or underbanked people. Here are a couple of famous Neobank examples. 

• Revolut – a UK-based Neobank launched in 2013 and currently serving 15+ million users. At present, the bank handles 100+ million transactions every month and provides services to individuals and businesses. 
• WeBank, Inc. – China’s first digital-only bank created in 2014. The bank is backed by Tencent and offers a wide variety of financial services to unbanked populations. 
• Alipay.
• Nubank.
• Chime.
• Wirex as an example of crypto/fiat crossover.

Overview of Neobank market size 

The Neobank sector has grown significantly since 2015, mainly due to the rise of demand for flexible and more accessible financial services among masses of the unbanked population. To date, there are over 400 Neobanks registered across the globe, serving 500+ million users in both developed and developing countries. Though such non-conventional banking services are popular in all parts of the world, the highest adoption levels for Neobank technology are observed in China (93%), India (50%), and Brazil (32%). So, businesses considering a Neobank launch have good chances to get a fair share of the rapidly developing market with accelerating growth and multiplying revenue streams. 

The last five years have become a period of rapid alternative banking development. In part, such trends are explained by the growing disappointment of users with conventional banking complexities, resulting in a search for simpler, less expensive solutions. Besides, massive numbers of the unbanked population get access to finance via Neobanks, thus further fostering this DeFi niche. 

As of 2020, the Neobank market accounted for $31+ billion, and the CAGR of this industry is around 42%. With such rapid growth, the Neobank sector’s capitalization is expected to exceed $377 billion, a more than tenfold increase within less than seven years.

Features of Neobanks 

An essential feature of Neobanks one should consider first is the absence of physical offices and branches. Such banks function in the digital-only or app-only format, making such financial institutions more cost-efficient and optimally structured. As a result of spending less money on office rent and salaries of numerous office staff, Neobanks can deliver financial services at a lower cost, with their clients incurring lower fees and commissions. 

Second, all Neobanks utilize innovative financial technology, such as innovative payments processing, convenient mobile apps, flexible back office solutions (including KYC, AML and transaction monitoring), real-time balance and transaction status updates that power their apps and platforms. As a result, the financial services become faster, securer, and more accessible to populations on the go. Everything can be done in a couple of clicks, with users undergoing simplified verification procedures and enjoying intuitive, easily navigable interfaces of their Neobanks. 

Third, you need to keep in mind that though there is a word “bank” in the term “Neobank,” technically, many of them are not banks per se. Many Neobanks don’t even hold banking licenses required for such type of activity. It doesn’t mean that non-licensed Neobanks are scams or frauds; the only concern you might have about this is that central national authorities do not regulate such institutions. Thus, your affairs with that institution are more of a private contract nature. 

Overall, Neobanks are currently not meant to substitute the banking system altogether. Instead, they are an alternative for people seeking quick, affordable, and flexible solutions for commission-free or cheap transactions and personal/business accounts with low maintenance fees. The standard set of services rendered by Neobanks includes: 

• Cards issuance (plastic, virtual)
• Savings features
• Credit
• Conversion fiat/ crypto
• Cross-border payments including in crypto
• Budgeting assistance 

Because Neobanks are not licensed in most cases, they cannot provide insurance for the clients’ deposits and can’t give credits and loans to the population. However, some Neobanks have closed this gap by partnering with traditional banks for insurance and credit guarantee provision. Thus, clients of such financial establishments should first check all the available documentation to see their protection and guarantees. 

As a result of added flexibility and lower commissions, Neobanks are known to achieve some unique benefits currently unattainable for traditional banks:

• 24/7 access to the entire service range 
• Ability to create a multi-currency account in no time
• Ability to conduct operations at any time, from any place, on the go 
• Open technical infrastructure enabling hassle-free, plug-and-play user experiences 
• Customer-oriented services and UI/UX 
• Full financial visibility (all your credit cards and accounts all in one place)
• No fees for spending or transferring money abroad
• High-level protection from card fraud and identity theft and more. 

Strategy for Neobank development 

Once you’ve decided to launch a Neobank, you need to develop a detailed plan and strategy first. A recommended path for strategizing for a new financial product is determining a problem and working out a value proposition to address that problem. For instance, you notice high transborder transaction fees in your region and come up with an optimal solution that reduces fees and creates optimal, safe transaction services for clients. Describe in detail what value your company will bring to clients and approach the development of your Neobank’s technical specifications with these projected functions in mind. 

Determination of the problem your Neobank will solve is impossible without understanding your clients’ needs and issues. To comprehend them well, you need to develop a customer profile, thus matching your unique USP with the clients’ pains and gains. 

Next comes the development of a minimum viable product (MVP) and its field testing. Dedicate exceptional attention to testing your business model at this early stage of Neobank development. It will disclose the idea’s vulnerabilities and inconsistencies to address early in the development cycle. Test the idea against operational, financial, and commercial aspects of Neobank’s operation to see how well it matches the market demand and client requirements. Once these criteria are considered and field-tested, your business model transforms into a business plan that can go further through the software development pipeline.

Neobank development step by step 

By this stage, you should already have: 

• A target operating model.
• A plan of compliance with the national financial regulations (a full banking license, a FinTech-only license, or the partnership model).
• A clear vision of your Neobank’s processes and activities.

Now we come to the practical part of Neobank development – your financial institution’s actual coding and software engineering. At this phase of Neobank creation, you need to clarify the following milestones with your development team: 

1. Technical specifications of your project’s front-end (UI, functionality).
2. The back-end technical infrastructure (admin panel, user profile management, asset management, transactions, etc.).
3. The technical realization of front-end and back-end integration with the help of relevant middleware.
4. Potential business applications of the technical infrastructure.

Creating a well-functioning back-end is the critical task of Neobank development. It comprises the core of your banking app and regulates all processes conducted by clients and administrators within the system. Existing core banking solutions for banks, such as Mambu, Temenos, or IBM, are pretty popular among traditional banking institutions, but they are often too costly for startups on a budget. Thus, it’s preferable to stick to custom development solutions fitting your startup scale but allowing further scaling as your business grows. 

Front-end is also a critical element of Neobank development as it contributes to user satisfaction and shapes positive customer experiences. Handy payment gateways, intuitive interfaces with minimal input from the user, mobile and online banking channels all shape positive user acceptance and heighten customer loyalty to your product. 

Finally, the development of the API layer is vital for any Neobank’s functioning as APIs unite your platform’s internal processes and services with external applications. Neobanks don’t function as separate, isolated systems; most of them thrive due to effective cooperation with other financial actors and the provision of multi-agency services. Thus, having a third-party API layer allows a Neobank to set up partnerships with other market participants, such as allowing transactions of funds to other providers, collaborating with external card issuers, partnering with physical banks for credit loans and insurance coverage, and the like. 

Ensure to discuss all these technical aspects with your development team so that your expectations are clear and the development process runs smoothly. You can always adjust something in the process. However, it’s still better to be on the same page with software engineers so that you receive the expected Neobank product with relevant functionality and a set of features.  

Reasons for Neobank failure 

Once the strategy is ready, and a team is set up, you might think that your Neobank project is doomed to success. However, it’s frequently not the case as your Neobank can face several challenges, which sometimes even lead to the project’s failure. The reasons why your project may fail or under-deliver include: 

• Financial issues 

The primary purpose of a Neobank is to generate revenue for its creator, so many clients expect incredible returns in the first years, if not months, of their project’s operation. In fact, a financial project like Neobank needs time for maturing and winning its loyal customer base to generate stable revenue streams. Even digital banks with a name in the industry have experienced financial problems, such as a lack of investment or insufficient investor funds at critical project stages. So, it’s better to have a detailed financial plan to avoid such emergencies.

• Regulatory problems

Though representing an alternative to conventional finance, Neobanks should still comply with regulations of their relevant jurisdiction. Neobanks should implement rigorous security measures, conduct user authentication, and hold continuous financial monitoring, which requires extra resources and technical features.  

• Stringent competition 

The Neobank industry is still in the germinal stage of development, with the 2020s being a momentum for its acceleration. However, Neobanks started emerging over two decades ago, and there are a handful of strong national and international market players in most regions today. New Neobanks may find it challenging to differentiate their business USP and win a share of the existing customer base. 

• Vague expectations 

A lot of problems with Neobank project implementation comes from the vagueness of requirements or confusion regarding the project’s strategy, values, and goals. If there is disagreement in the client’s board of directors or team responsible for Neobank development, the project may stagnate until a consensus is achieved. 

• Expensive software development 

Software costs are mounting year by year, especially in the trending blockchain and DeFi industry. Thus, clients wishing to join this niche and reap the benefits of the emerging DeFi market need to spend substantial money on software development. At times, the development process gets interrupted if the development budget exceeds the initially agreed one and the client lacks funds for its completion. To avoid such a situation, you need to stipulate all costs and expenditures in a contract with your software development provider, preventing hidden costs and budgetary vagueness.

How we can help

Once you’ve made up your mind to set up a Neobank, it’s time to find a reliable, experienced software developer for the task. The 4IRE team of fintech developers and software engineers is at your service, offering 10+ years of DeFi expertise and an extensive tech stack for smooth and cost-effective Neobank development. Our experts have dozens of successfully finalized DeFi and FinTech projects, able to design custom solutions in line with your individual business needs. Contact us today to discuss the project and get a quote; you may be just a footstep away from an innovative, user-friendly, and lucrative Neobank.