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How to Start a Neobank?

Aug, 26, 2021
Alex Malyshev

The convenience, user-friendliness, and lower costs of neobanks are compelling millions of consumers to switch away from traditional banks. The branchless, digital-only approach that relies on modern technology enables neobanks to roll out game-changing products in a fraction of the time it takes standard banks. 

What is a neobank?

A neobank is a digital-only bank without physical branches, accessible entirely with a mobile app and 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 often offer lower fees than the competition because they save on banking, overhead, and branch costs. The competitively priced, direct service appeals to tech-savvy customers, underbanked groups, and businesses with changing needs. 

A ready-to-go software to start a neobank

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Neobank vs. traditional bank

Compared with traditional banks that can provide online services but usually rely on their physical branches, neobanks are digital financial institutions. For conventional banks, customer support is personal, which also means slower speeds. For example, a traditional bank’s mortgage application may take a long time because it involves a lot of paperwork, branch meetings, document submissions, and so on. The same process is faster and more convenient for neobanks because heavy tasks are avoided – credit history checking is automated, and registration forms are prefilled to save time. 

Neobanks often operate under different financial licenses. The type of license or lack thereof determines what services they can provide to customers. For example, some new neobanks offer deposit insurance, while others do not. Traditional banks, on the other hand, have full banking licenses. Partly for that reason, neobanks have lower fees than traditional banks. Neobanks’ pricing is very transparent, and customers don’t need to worry about any hidden fees. Traditional banks may charge various monthly and transaction fees that add up quickly.

Neobanking software is more flexible, allowing banks to add and expand functions faster than traditional systems. Digital banks rely on advanced process automation, web-based services, and APIs to provide banks and customers with a high level of cost-effectiveness, security, and flexibility. Modern banking solutions support a fully digital customer journey, generate real-time data streams, and accelerate critical analysis for better decision-making.

Source: Exton Consulting

Ways to set up a neobank

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 to build a neobank:

  • 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. 

Find out how to start a neobank like Revolut here.

Overview of live neobanks worldwide

Source: Exton Consulting

  • 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.

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.

  • A subsidiary of a technology 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 tech-savvy competitors because they cannot match the reductions in prices of financial services.

One of the most popular neobanks in China, MYBank by Alibaba, caters to 35 million users and SMEs. The neobank focuses on small personal loans and business credit. 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 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 in two formats: 

Learn more about SDK.finance software solution for neobanks here.

SDK.finance software solution for neobanks

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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. 

A ready-to-go software to start a neobank

Learn more about SDK.finance banking software

Learn more

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.

References:

  1. Neobanks. Shifting from growth to profitability. Exton Research 2021
  2. A new landscape: Challenger banking report, KPMG 2018
  3. Neobanking 2.0: Global Deep Dive, MEDICI 2020
  4. Global Neobank Report. RFi Research 2020
  5. What neobanks are, how they work and the top neobanks in the US & world in 2021. Insider Intelligence
  6. Traditional and challenger banks in the UK: comparison in terms of customer value. Sara Santos 2018
  7. Neobanks and the next banking revolution. PWC
  8. Neo And Challenger Bank Market: Global Industry Perspective, Comprehensive Analysis, And Forecast. Zion Market Research 2019
  9. Digital banks are racking up users, but will they ever make money? Quartz 2019
  10. What Is a Neobank? The Balance 2021
  11. Why Are Banks Shuttering Branches? The St. Louis Fed 
  12. New research shows UK neobanks near 20 million customers. UKTN 2020
  13. U.K. Digital-Only Banks on Track to Triple Customers to 35 Million in the Next 12 Months. Accenture 2019
  14. Neobanking: What Comms Challenges Come With Digitising Finance? Commetric 2021
  15. NeoBanks: Core Players, Business Model & Development Peculiarities 2021
  16. Neobanks: Everything You Need to Know. Finextra 2021

FAQ

What is a neobank?

A neobank is a digital-only bank without physical branches, accessible entirely with a mobile app and 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 often offer lower fees than the competition because they save on banking, overhead, and branch costs. The competitively priced, direct service appeals to tech-savvy customers, underbanked groups, and businesses with changing needs. 

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.

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. 

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