Developing a Neobank from Scratch: Key Steps and Considerations

In recent years, the financial world has changed a lot due to new technology and shifting customer preferences. Neobanks have become a major player, providing a fresh approach to managing money. By 2024, they have already gained a large market share, especially among younger, tech-savvy people who value convenience, transparency, and new features. According to Statista, the number of neobank customers is expected to reach more than 39 million by 2025. Seems like a good time to consider creating one, don’t you think? 

However, developing a neobank from scratch is not an easy task. In this article, we will explain how to start a neobank, its benefits, and the key things you need to consider before its development.

What is a neobank?

Neobanks are financial technology companies that provide banking services exclusively through digital platforms, such as mobile apps and websites. These applications are designed to be simple, convenient, and accessible, especially for people who prefer managing their finances digitally. 

Neobanks operate entirely online without physical branches, so you don’t have to spend time on in-person visits. They usually offer core banking services such as checking and savings accounts, money transfers, and payment processing. However, they often differentiate themselves by offering features like:

• Instant account opening with KYC compliance; 
• Real-time spending insights; 
• Low or no fees;
• Integration with budgeting tools; 
• Cryptocurrency wallets;
• Peer-to-peer payment systems, etc.

Although neobanks have become especially popular in recent years, the first such bank, Simple, appeared in the US in 2009. After the launch of Atom Bank in the UK in 2014, this financial sector began to grow rapidly in Europe. Now, in 2024, neobanks have firmly integrated into the global banking sector and continue to expand. According to research, the total value of transactions through neobanks is expected to grow at an average annual rate of 13.15%, with the total amount projected to reach $10.44 trillion by 2028.

Neobanks have gained popularity because they use technology to cut costs, improve user experience, and quickly adapt to changing customer needs. This allows them to offer better prices than traditional and digital banks, as well as new products that are especially attractive to younger, tech-savvy customers and entrepreneurs.

How do neobanks work?

Unlike traditional banks, neobanks don’t necessarily need a full banking license to operate, though this depends on the regulations of the country they are based in. Instead, they may use payment or financial certifications and partner with licensed banks to offer a broad range of services and ensure regulatory compliance. 

However, as neobanks grow and scale, they may eventually decide to obtain their own credit/banking license in order to have more flexibility and control over their operations. The license also indicates that the bank is trustworthy and verified by the authorities, which will raise the credibility for the users. So, If you aim to expand in the banking sector, obtaining a license is worth considering. Though the process is costly and time-consuming, the benefits can outweigh the challenges by enhancing credibility, enabling a wider range of services, and opening doors to new markets.

Some of the prominent neobank examples include:

• Current: a US-based neobank that focuses on providing features like no hidden fees, early direct deposit, and budgeting tools through its mobile app.
• Aspiration: an eco-friendly and socially responsible neobank. It lets you choose how much you want to pay for banking services and offers investment options that support positive causes.
• Chime: a popular neobank in the US that provides fee-free banking services, including no overdraft fees, early direct deposit, and automatic savings features.
• Monzo: a UK-based neobank renowned for its user-friendly app, budgeting tools, and transparency. Monzo offers personal and business accounts with features tailored to modern banking needs.
• Revolut: a UK neobank that offers a wide range of financial services, including currency exchange, global money transfers, and cryptocurrency trading. It’s known for its broad functionality and global reach.
• N26: a German neobank that operates across Europe and the US. It offers a modern app for managing your money, with no hidden fees and features that work internationally.
• Varo: a US-based neobank offering no-fee banking services, with features such as early direct deposit, high-yield savings accounts, and financial education tools.
• Monobank: a leading neobank in Ukraine that offers digital banking services with a focus on simplicity and customer experience and provides features like instant transfers and spending analytics.

Benefits of neobanks

There are several benefits to using neobanks that make them an appealing choice for many customers. While we’ve already touched on some of their advantages, let’s delve deeper into these benefits to understand why they stand out in the banking sector.

• Convenience: Neobanks operate entirely online, allowing you to manage your finances anytime, anywhere, through a mobile app or website. This makes banking as simple as using your smartphone.
• Lower fees: Neobanks often have fewer fees compared to traditional banks. Many offer accounts with no maintenance fees, no overdraft charges, and lower foreign transaction fees, saving you money.
• Technology-driven solutions: Neobanks prioritize intuitive designs and leverage the latest technology to provide innovative services, such as instant payments, virtual cards, and automated savings. This makes banking faster and more efficient.
• Fast account setup: Opening an account with a neobank is usually quick and easy. You can sign up and start banking in minutes without the need for extensive paperwork or a visit to a physical branch.
• Accessibility: Neobanks often have fewer barriers to entry compared to traditional banks. Many offer no minimum balance requirements, making banking more accessible to a broader audience, including younger consumers and those without established credit histories.
• Transparent pricing: Neobanks are clear about their fees, making it easy to see what you’re being charged for and helping you avoid unexpected costs.

Neobanks vs. digital banks

At this point, you might think that “neobank” and “digital bank” are the same thing, as these terms can be used interchangeably. However, let’s not get confused here – they are not similar. 

Digital banks can be either traditional banks that have moved to online services or entirely new banks that operate exclusively online. Unlike neobanks, which may not require a full banking license, digital banks must have a complete banking license and offer the same range of services as traditional banks, including loans, investments, and insurance.

As a result, their operations differ. For example, while both neobanks and digital banks offer account openings, the process can vary. Digital banks typically require guarantees from prospective customers, which involve completing forms, providing income information, and undergoing identity verification. In contrast, neobanks often offer instant account openings with no income requirements.

What about the profit?

Neobanks, like traditional and digital banks, need to generate revenue to sustain their operations and grow their business. However, their revenue models often differ from those of traditional banks. Here are some of the primary ways of how do neobanks make money:

• Interchange fees: When you use a neobank’s debit or credit card for purchases, the store’s bank pays a small fee to the neobank. For instance, if you use a Revolut card to buy coffee, Revolut earns a tiny fee from the coffee shop’s bank. Although the fee per transaction is small, it can add up significantly with a large customer base.
• Account fees: Some neobanks charge customers monthly fees for premium accounts that offer additional features such as higher interest rates on savings, access to exclusive financial products, or perks like travel insurance and priority customer support. For example, Chime offers a basic free account but also has a Chime Spending Account with added benefits that might involve a fee.
• Lending services: Neobanks often provide loans or credit cards and make money from interest and fees, typically at competitive rates compared to traditional banks. Varo, for example, offers personal loans and earns from the interest paid by customers on these loans.
• Referral and partnership programs: Neobanks frequently partner with other financial services providers, such as investment platforms, insurance companies, or budgeting apps. N26, for example, might refer customers to insurance providers or investment platforms, earning a commission for each referral.
• International transactions: When you use your neobank account to make international payments or purchases in a foreign currency, there might be fees. This way, Revolut charges fees for currency exchange if you exceed certain limits, earning revenue from these transactions.
• Exchange fees: Neobanks may charge fees for converting currencies or trading cryptocurrencies. Revolut also charges a fee for exchanging currencies beyond a certain limit or for trading cryptocurrencies like Bitcoin.

Things you need to consider before starting a neobank

Starting a neobank involves navigating a complex web of financial regulations, technological challenges, and market competition. Therefore, before embarking on neobank app development, there are certain things you need to consider.

Regulatory compliance

Regulatory compliance is essential when launching a neobank. Unlike other fintech ventures, neobanks operate in a highly regulated environment where the rules vary by country. Following these regulations is crucial not just for legal reasons but also for the success and credibility of your neobank. Ignoring them can result in heavy fines, legal trouble, or even the closure of your business.

Here are some laws and standards that regulate the banking and FinTech industries that you must follow:

• Anti-Money Laundering (AML) Policy: AML policies are designed to prevent and detect money laundering activities, which involve disguising the origins of illegally obtained money. These policies require financial institutions to monitor transactions, report suspicious activities, and maintain records to comply with regulations.
• Know Your Customer (KYC): KYC regulations require financial institutions to verify the identity of their customers to prevent fraud and money laundering. This process involves collecting and verifying personal information, such as identification documents and proof of address, to ensure that customers are who they claim to be.
• Payment Card Industry Data Security Standard (PCI DSS): PCI DSS is a set of security standards designed to protect card payment information. It applies to all entities that handle credit card transactions and requires them to implement measures to secure cardholder data, including encryption, secure storage, and regular security assessments.
• General Data Protection Regulation (GDPR): GDPR is a regulation in the European Union that governs how personal data is collected, stored, and processed. It aims to protect the privacy and rights of individuals by requiring organizations to obtain consent for data processing, ensure data security, and provide individuals with access to their data.

Navigating the regulatory requirements can be challenging, especially for startups with limited resources. Therefore, It’s crucial to consult with legal experts who specialize in financial regulations to navigate the complexities. They can help ensure that your neobank meets all regulatory requirements from the onset, thus avoiding potential legal issues that could arise in the future.

Identify your niche and conduct market research 

Before starting market research, you need to define your niche. This could mean focusing on specific groups like freelancers, students, or underserved communities or offering unique features like savings tools or investment options.

For instance, if you target freelancers, your neobank might include features like automated tax savings, invoicing tools, and flexible spending accounts. Understanding their needs and problems is key.

Next, check out your competition. Analyze other neobanks within your niche, focusing on their strengths and weaknesses. Explore their marketing strategies, customer engagement, and feature sets. This will help you create a competitive application and secure a strong position in the market.

Find the best BaaS provider

Banking-as-a-Service (BaaS) is a model that allows businesses to offer banking services through third-party providers. This is crucial for neobanks, especially those without a banking license. A reliable BaaS provider can facilitate account management, payment processing, compliance, and more. Research and compare different BaaS providers based on their offerings, costs, and integration capabilities.

You can consider these key criteria to choose a BaaS provider: 

• Compliance and regulation. Ensure the provider adheres to local and international regulations, protecting your business from legal pitfalls. Look for providers with a robust compliance framework.
• Scalability. As your customer base grows, your BaaS provider should be able to scale alongside you. Evaluate whether their infrastructure can handle increased demand without compromising service quality.
• Customization. Different neobanks have varied target demographics. A provider that allows customization in terms of features and branding will help you stand out in a crowded market.
• Integration capabilities. Your BaaS provider should offer seamless integration with other financial technologies, such as payment gateways and risk management tools. This ensures a smooth user experience and operational efficiency.
• Support and reliability. Opt for a provider with a strong support system. Downtime or service interruptions can damage your reputation, so choose a partner that guarantees high availability.

Developing a neobank from scratch: key steps

Developing a neobank is quite similar to creating other types of applications. Let’s take a closer look at the key steps involved in how to start a neobank:

Step 1: Obtaining a license in the country of registration

The first step in starting a neobank is obtaining the necessary licenses in the country where you plan to operate. This process ensures that your neobank complies with local financial regulations and can legally offer banking services.

• Selection of a legal team: Hire a legal team with expertise in the FinTech and banking sectors. They will guide you through the licensing process, ensuring that your neobank meets all regulatory requirements.
• Certification of the neobank’s managers: Most regulators will require that the key managers of your neobank, such as the CEO and CFO, be certified or qualified to run a financial institution. Your legal team can assist with preparing the necessary documentation to prove the competency of your leadership team.
• Prepare a business plan: You’ll need to create a comprehensive business plan outlining your neobank’s structure, services, and growth strategy. This plan must be submitted to the financial regulator for approval. It should clearly demonstrate how your neobank will operate, manage risks, and remain compliant with local laws.

By completing this step, you lay the foundation for your neobank’s legal and operational framework, ensuring that you can move forward with confidence.

Step 2: Gather your development team or choose a reliable IT vendor

Your development team is the backbone of your neobank. You have two primary choices: build an in-house team or partner with a reliable IT vendor. 

Building an in-house team provides better control and unity. You can handpick developers, UX/UI designers, and product managers who align with your vision. However, this route requires significant investment in recruitment, training, and ongoing support. It’s essential to find individuals who not only possess the technical skills but also have a good knowledge of the FinTech industry and compliance standards. 

Hiring an established IT vendor can be a smart choice. Vendors often bring extensive FinTech experience, pre-built solutions, and expertise in compliance. This approach can save time and resources, but it’s crucial to select a vendor who understands your vision and has a proven track record.

To make the right choice, conduct thorough research. Consider the following factors:

• Ensure the vendor has experience in the FinTech industry: Look for a vendor who has a proven track record in financial technology. This experience means they are familiar with industry-specific challenges and requirements.
• Check customer feedback and reviews: Read reviews and testimonials from other clients to gauge the vendor’s reliability, quality of work, and customer service. Positive feedback indicates a good reputation, while negative reviews can reveal potential issues.
• Assess their technological expertise: Make sure the vendor has the technical skills and knowledge needed for your project. This includes familiarity with the latest technologies, tools, and programming languages relevant to your needs.
• Review their communication and project management skills: Effective communication and strong project management are crucial for a smooth development process. Ensure the vendor has a clear and efficient approach to managing projects and keeps you informed throughout.
• Confirm their knowledge of security and compliance standards: In the FinTech industry, security and regulatory compliance are critical. Verify that the vendor is well-versed in industry standards and regulations to ensure your project meets all security and compliance requirements.

Step 3: Create the design of your future application

Design is more than just aesthetics; it’s about creating a seamless user experience. The goal is to make banking intuitive and enjoyable. Here are some essential points to consider:

• User-centric approach: Start by understanding your target audience. Conduct surveys or focus groups to gather insights on what users expect from a banking app. Incorporate features like budgeting tools, transaction categorizations, and personalized financial advice.
• Wireframes and prototypes: Create wireframes to map out the app’s layout and flow. Tools like Figma or Adobe XD can help visualize your ideas. Once your wireframes are ready, develop prototypes to test navigation and functionality before diving into detailed design.
• Branding: Your neobank should have a strong brand identity. Choose color palettes, typography, and logo designs that resonate with your target market. A friendly, approachable brand voice can enhance user engagement.

Step 4: Develop the application

With the design in hand, it’s time to bring your neobank to life through development. Key considerations include:

• Technology stack: Choose the right technology stack that aligns with your goals. Popular choices for neobanks include React Native for a cross-platform mobile experience and Node.js for backend services.
• Agile methodology: Implement an agile development process to facilitate flexibility and continuous improvement. Regular sprints allow you to incorporate feedback and adjust features quickly.
• Integration with financial services: Work with APIs from established financial institutions to ensure you can provide essential services like payments, transfers, and account management. Look into fintech solutions that can streamline this integration.

Step 5: Ensure security and regulatory compliance

Security is paramount in the banking sector. Your neobank must comply with regulations to safeguard user data. Here’s how to approach this critical step:

• Data protection: Employ robust encryption methods for data storage and transmission. Use secure coding practices to protect against vulnerabilities.
• Multi-Factor Authentication (MFA): Implement MFA to add an extra layer of security. It’s a simple yet effective way to ensure that only the rightful account owner has access.
• Fraud detection systems: Utilize AI and machine learning algorithms to monitor transactions for suspicious activities. This real-time monitoring can help you mitigate fraud risks.
• Licensing: Depending on your jurisdiction, you may need to obtain a banking license. The application process can be rigorous, so it’s wise to consult legal experts familiar with financial regulations.
• Regular audits: Make sure your application aligns with the needed regulatory compliance. Establish a routine for compliance audits. This not only helps you stay compliant but also prepares you for any regulatory inquiries.

Step 6: QA testing

Once you have established a secure and compliant framework, the next step is to ensure that your platform functions flawlessly. Quality assurance (QA) testing is essential to identify and fix bugs before your neobank goes live.

Step 7: Deployment and further support

Well, it’s finally time to launch your neobank and make it available to the public. After the launch, monitor the app closely to ensure it’s working correctly. Keep track of performance, identify any issues, and make sure it handles user traffic efficiently.

Be prepared to assist users with any problems they may encounter by setting up support channels such as chat, email, or phone for technical issues, account questions, and other concerns.

Collect feedback from users to understand their experiences and needs. Use this feedback to make continuous improvements to your neobank. Finally, regularly update the app to fix bugs, add new features, and enhance performance, ensuring your neobank remains secure and user-friendly.

How much does it cost to start a neobank?

The overall neobank development cost can vary based on various factors such as:

• The scope and requirements of your project;
• Design complexity;
• Desired features;
• Tech stack;
• Development team’s hourly rate;
• Ongoing maintenance, etc.

Considering these factors, it’s best to consult with a trusted IT vendor to get a more accurate estimate based on your specific needs. 

Expert Opinion

As a specialist in developing neobank services, I’d like to point out several promising areas that could become the next significant steps in the evolution of neofinancial organizations:

1. Transportation logistics and finance: Neobanks could develop specialized financial products for companies in the transportation logistics sector. Implementing solutions for automating payments between participants in the supply chain, integrating with transportation management systems, and enabling instant international payments through SEPA and SWIFT could significantly speed up operations and reduce costs.

2. Insurance using neobank services: It is also worth noting that neobanks can include insurance products in their offerings. For example, neobanks could create automated insurance solutions for clients, offering customized insurance products through mobile apps and ATMs. This would create additional touchpoints with customers and increase user loyalty.

3. Real estate transactions: The development of neobanks in the real estate sector also holds great potential. Implementing digital mortgages, enabling utility bill payments through digital wallets, and utilizing asset tokenization in real estate transactions could drive growth for both neobanks and the real estate market as a whole.

Thus, neobanks could become a useful tool for expanding opportunities in these industries by creating new financial services based on digitalization and deep data analytics.

.Net developer at SoftTeco

Maksim Karpov

Conclusion

As demand for digital banking rises, neobanks have the chance to shake up traditional banking and provide innovative, customer-focused solutions. But succeeding in this field takes more than a good idea—it needs the right mix of technology, expertise, and strategic planning. Starting a neobank involves a major investment of time and money, but the potential rewards can be significant, especially if your neobank meets a market need and builds a loyal customer base.

SoftTeco provides comprehensive neobank development services to help you establish a strong presence in the fintech market. With our expertise and experience in working with diverse industries, we can develop tailored solutions in accordance with your current assets and desired goals.