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How to Start an Online Bank from Scratch?

How to Start an Online Bank from Scratch?
Alex Malyshev
How to Start an Online Bank from Scratch?

The prospect of starting an online bank from the ground up is scary because we always imagine how much it will cost to get every small facet in the right place. 

But when working with online banks, you don’t need to worry about building offices and vaults. All you need is a valid license, top-notch funding, proper planning, and timely execution to build a bank that customers will want to use. 

In this article, we’ll go through a step-by-step breakdown of how to build a digital bank.

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A quick overview of digital banking

According to research by Insider Intelligence, 18% of the US population (48 million people) will start banking exclusively with digital banks by 2024. Data from Research and Markets shows that the global neo-banking CAGR will increase by 45% in 2025.

How to Start an Online Bank from Scratch?

Source: Research and Markets

In the global neobanking market, enterprise applications account for over 52% of the global revenue, which is about 47.4 billion USD. This signifies a lot of promise for digital banking.

As the trend continues to sway towards contactless banking, fintech companies will rely more on personalization, data analysis, and deep learning to improve their services and remain competitive. Some banks will have to deliver the banking experience as an ecosystem of value-laden products and services.

Also, banks will collect biometric data from their consumers to provide more secure services. These technologies could replace SIM cards, token drives, and pin codes.

What you should know when starting a digital bank

Banking is a tightly regulated sector that maintains a high bar of entry for prospective entrepreneurs. Before you create a digital bank, you need to understand how the industry works and the key considerations to bear in mind. 

Funding

You need money to start a digital retail bank — a lot of money. And this is the first barrier to entry for anybody venturing into banking services. 

Before you kickstart your project, ensure to secure a reliable source of funding. Regulators will have to evaluate your capital potential before granting you a license to build a bank.

Common sources of funding for digital banks include angel investors, venture capital, borrowed funds, deposits, and shareholders’ money.

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Customers 

Once you’ve sorted the funding, you still need to figure out the prospective customers for your neobank. Conduct extensive research to determine the user demographics from which you can predict the customer’s journey with your potential product.

Internal administration

Dedicate enough time to define roles within the team. Start with administrative tasks and work your way down to risk management. Address the following questions: 

  • Who must I have on the team? 
  • How many managers do I need?
  • Who will become part of the board?
  • Who will handle all risks and conflicts?

Answering these questions will help you establish a clear-cut hierarchy within your organization.

Technology stack

You’ll need to factor in technology considerations for online banking in the early stages. Before finalizing your development ideas and assembling a team, confirm that your company has the required technology stack to build a secure banking infrastructure. 

Don’t forget to determine if your team understands compliance regulations within the banking sector. If not, consider outsourcing the development process to certified digital banking platform providers.

Essential features

Since your digital bank will not have any physical branches, you must build features to replicate the feeling of a “traditional” bank online. Some key components of a standard digital bank in 2022 include:

  • Personal finance manager
  • Mobile banking
  • Digital wallet
  • Automated payments
  • Discounts and loyalty programs
  • Alerts and push notifications
  • Automated savings.

You can take advantage of digital banking technology to add more features to your mobile banking platform or pay attention to the features of popular neobanks like Revolut.

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Monetization

Regardless of the purpose of creating the bank, you owe your investors and board members a duty to make returns on their investment. 

That said, you must figure out ways to generate income from the core banking software. The following monetization models can work for your digital banking platform:

  1. Premium membership with advanced features like travel insurance, better saving rates, and VIP treatment.
  2. Interest on every transaction and loan payment.
  3. Commissions on every transaction, which is the primary source of income for most neobanks. 

Note: Some young banks use the zero-commission play to attract users, but this strategy is not sustainable in the long run.

How to start an online bank?

When you build an online bank, you need to follow a systematic approach to ensure it meets all industry requirements. 

Follow these steps to learn how to start an online bank:

Identify the target audience

Before you start a digital bank, conduct in-depth market research to find out who will use the bank. 

  • Is the target demo young people or senior citizens?
  • Should the bank’s core operations focus on loans and credit?

Understanding the banking platform’s potential users will help you develop user personas from which developers and designers can build a market-relevant product. 

Also, you must understand that only 25% of the global population (1.9 billion people) uses any form of digital banking. Since many people still distrust branchless banks, you can only convince them to use your platform by creating awareness and showing transparency.

Design the platform

Now that you have a concrete persona to model your banking software, you can hand over your concepts to UI/UX designers. 

With their understanding of user experience and interfaces, these designers will build wireframes and prototypes to replicate the user roadmap. As a result, you can visualize the app and make suggestions before it goes into development.

Apply for licensing

Sometimes, owners prefer to obtain the license for their product before they start building it, but this process is never straightforward. 

Here are three license categories for digital banks:

  • Full banking licenses for general banking activities.
  • International banking licenses, which allow only offshore banking operations.
  • Non-banking financial institution (NBFI) licenses for companies that provide financial services but without the same regulatory scrutiny as full-scale banks.
  • Acting under the licenses from existing traditional banks. As banks are well-regulated, any  entity (a digital bank, in this case) that they partner with falls under their purview. 

Some regulatory bodies can only license your product if you have a working prototype or proof of concept, while others just give you a license before you start creating anything. To avoid any issues, work with an expert consultant in the banking technology sector for guidance.

US agencies involved in the licensing and monitoring process for digital banks include the Federal Reserve Board of Governors and the Federal Deposit Insurance Corporation (FDIC).

Build the neobank

Once the licensing and design stages are in order, you can start building your digital bank. At this stage, you should know whether to outsource the product development process to experts or hire an in-house team of developers.

You can also supervise the development stage by suggesting the tech stack, cloud integrations, payment services, and APIs they should add to the banking platform. 

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Test for flaws

When the developers complete their work, get the quality assurance team to test the app for flaws, logical consistency, and compliance. 

Why is this necessary?

In 2021, St. George Bank entered crisis mode when customers went into outrage over glitches in their transaction history. As it turned out, this glitch resulted from a minor flaw in the software. 

Although the company fixed the problem eventually, this singular incident has tarnished its reputation forever. In essence, don’t skip test days.

Deploy the platform

When the QA experts send the bug report and other necessary documentation, you should forward them to developers to implement the changes. Afterward, the team can deploy the core banking platform for beta testing before making further changes and releasing the alpha version.

Update and scale

The development life cycle of a digital banking app does not end after you launch it; you still need to maintain it and provide support. 

For cloud-based banking platforms, the vendor often handles maintenance and updates — and you can scale at will. But for locally-hosted banking infrastructure, you will need to entrust the maintenance to seasoned DevOps engineers and system architects.

How much does it cost to start a digital bank?

The cost of building an online banking system varies according to your chosen route. If you want to buy a ready-made solution for a vendor, you will not pay as much as someone building the entire architecture from scratch.

Is it better to build a bank from scratch or get a ready solution?

If you have a large team of experts available to you, then you can build your core banking solution from scratch. In this case, you’ll have to spend around 500 000 USD to 1 million USD to buy APIs, pay your staff, apply for licenses, and pay server fees.

But if you buy an off-the-shelf banking solution, you won’t have to pay all these administrative wages and service fees. Instead, you can ask for custom adjustments to get a bespoke solution that meets your initial requirements.

This ready-made solution will cost you around 250 000 USD to 500 000 USD to purchase and integrate into your banking ecosystem.

A digital banking solution directly from a vendor

At SDK.finance, we provide white label digital banking software for commercial use that is deployed on premise and comes with the source code license.

We believe that this is an ultimate approach to save quite a load of time and resources for software development. You get a fully functional piece of core bank software that can be extended and customized according to your business requirements by your own in-house team. Being built by our team of seasoned experts in fintech software development with 15+ years of experience (and quite a lot of mistakes along the way that we learned from), the resulting product is reliable, secure and future-proof (and continuously improved). 

Conclusion

Building a digital bank requires proper planning, execution, and attention to the minutest details. But first, you need to develop a concept, find the right audience, obtain the required licences, and get funding. You also need to choose the technology stack and monetization models to make the app profitable. And above all, you need to create a product development plan for your internal or external team of developers. 

Now that you know what it will cost to build a digital bank, start working on a budget and funding source right away.

References

  • How to Start a Neobank [Detailed Estimate] | Code&Care 
  • Digital Banking in the Middle East and Asia – Codebase Technologies 
  • 3 Steps to Start a Neobank
  • How to build a digital bank 
  • https://skaleet.com/en/blog/9-steps-to-creating-a-digital-bank-from-scratch/ 
  • How To Build A Digital bank | The Startup 
  • Starting a Digital Bank – What Does it Take? 
  • How to build a digital bank 
How to Start an Online Bank from Scratch?

FAQ

What should I know when starting a digital bank?

Before you create a digital bank, you need to understand how the industry works and the key considerations to bear in mind:

Before you kickstart your project, ensure to secure a reliable source of funding. Regulators will have to evaluate your capital potential before granting you a license to build a bank.

Conduct extensive research to determine the user demographics from which you can predict the customer’s journey with your potential product.

Dedicate enough time to define roles within the team.

Before finalizing your development ideas and assembling a team, confirm that your company has the required technology stack to build a secure banking infrastructure.

Figure out ways to generate income from the core banking software. The following monetization models can work for your digital banking platform.

How much does it cost to start a digital bank?

The cost of building an online banking system varies according to your chosen route. If you want to buy a ready-made solution for a vendor, you will not pay as much as someone building the entire architecture from scratch.

You’ll have to spend around 500,000 USD to 1 million USD to buy APIs, pay your staff, apply for licenses, and pay server fees.

A ready-made solution will cost you around 250,000 USD to 500,000 USD.

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