How to Start a Neobank?

Neobanks are popular substitutions for traditional banks. Businesses create neobanking solutions for retail and corporate clients. For both these groups, the software solution should be agile, simple, and comfortable to use. This article is about how to start a neobank of your own, what should you know before you launch the neobank and how much do you need to do this. Our company develops retail and corporate solutions of its own. So, if you want to see the product features of a modern successful core for a neobank service, read more on our digital retail banking software page.

What is a neobank?

To check if we are on the same page, let’s define what neobank is. When you are building your neobank, it means your product has no physical branches. It offers access through a mobile app, and (or) online banking. Neobanks enable customers to manage their finances directly, order new products, and receive support 24/7 with just a few taps irrespective of where they are. Neobanks and challenger banks tend to offer lower fees than their competitors because they save on banking, overhead, and branch costs. So, when someone launches a neobanking start-up, it means optioning the aggressive scaling. The competitive edge is to funnel money into blitz marketing, offline and online user acquisition, and tempting price plans for newcomers.

Ways to set up a neobank

Source: Exton Consulting

As FinTech startups, neobanks need to offer an entirely new level of banking services to stand out and succeed. Every process and operation needs to be 100% digital and accessible on a smartphone or online without delay. Getting to that point requires a powerful core digital banking system, a highly dedicated team, a strong vision, and modern tech components, such as artificial intelligence, risk assessment tools, and fraud detection. There are three main ways how to build a neobank:

Building an independent neobank

Independent neobanks that start from scratch need to get a virtual bank license to conduct business. After that, the neobank can operate without physical branches and offices. In most cases, independent solutions are centered on specific services rather than full-scale banking products. They bet on excellent customer service and a user-oriented experience to win customers through personalized experiences and attractive returns. 

Revolut, for example, has made it incredibly easy to join – anyone can open an account in less than 60 seconds with free secondary accounts that hold money in one of 30 currencies. You can then use a Revolut card to spend any of your currencies, making it a whole lot easier to travel and spend abroad. Revolut will automatically convert your primary currency at the interbank FX rate without fees to make up the difference when you tap your card, saving money on every transaction. 

Check out our post on how to start a neobank like Revolut.

Overview of live neobanks worldwide

Source: Exton Consulting

Building your own neobank from scratch or launching on a prebuilt solution?

Starting the neobank is about money. Backing our calculations on the number of clients our SDK.finance team has been in touch with, you need $5 million and more to set up a neobank, design the frontend and create a marketing funnel. If you have a great idea of how to cut the costs on clients’ acquisition and remarketing, you still face 2-3 years of software product development. Someone may grasp your idea, launch a neobank and go to the market far quicker than you. However, that is not the biggest issue.

When you decide to build your neobank from scratch, you hire a development team and fund them for the next three years. For a simple calculation, go to your regional IT vacancies aggregator, pick up the average salary per month for the developer and multiply it by 12. Then, multiply this amount by 20 or 30 for the number of developers working daily on your solution. So, you commit yourself to 3 years of production without a dollar of revenue, cause how will you provide P2P or comply with KYC requirements when you have no platform to onboard your clients?

We believe there is a shortcut for those willing to create a neobank. You can buy a core banking solution for your neobank for business or for clients. Many software development companies work on the best solutions opened for integrations with top-class vendors in KYC, CRM, and AI/ML niches. You can benefit from the product designed like the best neobanks of the market and muscle it up with your monetization idea, while it is still hot.

Neobanking software is more flexible, allowing banks to add and expand functions faster than traditional systems. Digital banks rely on the advanced process automation, web-based services, and APIs to provide banks and customers with a high level of cost-effectiveness, security, and flexibility. Neobanking startups now work on banking solutions that track customers’ journeys, generate real-time data streams, and accelerate critical analysis for better decision-making.

Open a subsidiary of a traditional bank

New technologies, customer preferences, and device changes constantly put pressure on traditional banks. Incumbents understand that they need to keep up with the times to retain their customers. However, rapid change is usually impossible due to the growing gap between the current level of technology and their large-scale enterprise systems. One solution is to create a spin-off neobank where the parent bank assumes the regulatory requirements. On the one hand, the parent company undertakes new risks, but on the other, the subsidiary can provide a broader range of banking and lending products, such as car loans, mortgages, etc. So, you open a neobank for the existing audience of your company.

One of the best examples of a subsidiary neobank is the Hello Bank! by BNP Paribas. With 3 million customers in several European countries, its broad user base has access to easy savings, preferential loans, and appealing cashback for purchases in various stores. In addition to traditional services, the bank also provides brokerage and insurance tools.

Build a neobank as a subsidiary of a tech company

The latest participants in the financial market are the new influential banks developed by the tech giants such as Google, Apple, Amazon, and Baidu. Besides enormous client bases, these companies excel in the digital world and have virtually unlimited resources. They can easily lower their prices and capture new markets, making it difficult for ordinary banks to deal with with tech-savvy competitors because they cannot match the reductions in prices of financial services. However, there is a chance. While these tech giants create neobanks from scratch, you can bring up a simple but highly profitable idea and mussel it up with a prebuilt banking core you integrate into your challenger bank.

One of the most popular neobanks in China, MYBank by Alibaba, caters to 35 million users and SMEs. The bank focuses on small personal loans and business credits. In less than three minutes, anyone can apply for a loan on a smartphone and wait less than one second to receive approval with zero human intervention.

Neobank development: from idea to strategy

Despite catering to millions of customers, most neobanks are struggling to achieve high profitability or generally stable economic profit. Long-term low financial performance can squeeze neobanks out, increasing the threat of traditional banks. Both the old and the new parties have sufficient opportunities to gain a competitive position in the market. Still, neobanks can develop faster than conventional banks without bureaucracy and legacy software infrastructure in the way. 

Source: PWC

Neobanks must always focus on user experience, extract value from data, reduce operating costs, and increase efficiency. Existing weaknesses tend to be offset over time, which is very complex for traditional banks operating in the same system for many years and are very slow to change.

As with any business, neobanks need to find and cater to their audience. Given the distinct advantages of neobanking, these include the underbanked or those not yet served by banks, the younger generations, migrants, freelancers, and SMEs that have always lacked access to the financial and lending tools used by large companies.

What to consider before opening a digital bank?

It is hard to overstate the importance of technology for a digital bank. Starting from scratch requires significant investments and involves a great deal of uncertainty but provides unmatched control and flexibility over the platform. Partnering with an experienced technology provider offers a ready-made basis for establishing financial products and services without the need for large capital investments. 

Core banking software vendor SDK.finance provides a ready-to-go technological solution to start a neobank in the shortest amount of time. It takes about 2 years to develop software from scratch. SDK.finance solution reduces the time to market to several months.

SDK.finance platform is available for purchase as software with the source code license, which gives you independence from the vendor

Learn more about SDK.finance software solution for neobanks.

Why are UK consumers turning to neobanks?

Source: RFi Research

The financial industry is highly regulated to protect consumers as well as businesses. The regulatory environment needs to be researched and thoroughly evaluated for every country of operation as the ability to ensure deposits, for example, can be a decisive factor for consumers. 

Aside from envisioning the neobank that will keep customers engaged and satisfied, it’s important to consider unique features and offerings because there’s a race to get a sufficient number of people to join. For a neobank to be profitable, it needs to build a large enough customer base, which means persuading a large number of customers to switch accounts from other providers. This is notoriously difficult as it takes a time most neobanks don’t have in abundance. 

Neobank business challenges

Blurred differentiators

Neobanks have tried to differentiate themselves by offering very distinctive features not widely available among their high-street competitors. Neobanks were one of the first to provide app-based functions such as card freezing and spending classification. These and many other functions are now becoming widespread throughout the industry. More and more traditional banks provide good online banking services on top of their physical presence, diminishing the differentiators and making the market more crowded. 

Racing against time

Neobanks clearly believe in a path to long-term profitability. Achieving this goal requires them to maintain agility and speed of innovation while actively pursuing new customers in an already crowded market with traditional banks rolling out their own neobanks. One solution is to sacrifice profitability to build a large customer base with competitive pricing, little to no ATM fees, and above-average savings interest. Although incumbents may lack the agility of new banks, they far surpass them in terms of the level of resources that can be invested in these initiatives.

Source: Insiderintelligence.com

Regulatory purgatory

Regulatory changes are undermining the unique value offerings of neobanks. Although highly beneficial for the industry as a whole, some regulatory initiatives diminish the first-mover advantages by forcing the competition to catch up. For example, Starling Bank’s API enabled external money management services to securely connect to the bank before the Open Banking initiative launched in 2018. On the other end of the spectrum, bureaucratic processes geared towards traditional banking are still hindering progress with long paper trails and blanket requirements that do not apply to neobanking. 

How to prevent a neobank failure 

To reach profitability, neobanks need to find a way to stay ahead by continuing to innovate. They need to relentlessly identify, build, and introduce new features that customers want. The technical infrastructure needs to continue to provide a platform that truly supports scalability and innovation and stay away from the legacy technology challenges that have encumbered the progress of traditional banks. 

Neobanks have immense potential, and the rising mobile and Internet penetration rates have created a suitable infrastructure for their booming development. The increase in the use and trust of artificial intelligence and blockchain will drive the growth of new banks and may lead to a fundamental change in the banking industry. However, pressure from competition and the mature banking industry is a serious challenge that should be dealt with cautiously.