How to Start a Neobank
Author: Jennifer Smith
Last updated May 12
Contents
Introduction
The world of finance has been taking some big leaps ever since the beginning of the 21st century. With the advent of fintech in the last decade, we saw banking and financial services being revolutionized to an unimaginable extent. Where once you had to physically visit a traditional bank and wait in a long queue just to perform a simple transaction, you can do that and much more now with only a few taps on your phone.
And despite the efforts to digitalize financial services by conventional banks, we are seeing a huge public shift towards digital banks, or what are more commonly known as neobanks. Neobanks offer almost all financial services as traditional banks but without a physical location. There are ATMs where you can perform a wide range of transactions, deposit, withdraw or transfer funds but you cannot physically visit a neobank branch, simply because they do not exist!
This type of banking has been getting very popular in recent times due to the convenience and freedom they offer. Neobanks are especially great for everyday transactions where you want to avoid the hassle of using your traditional bank’s services.
But what if someone wants to start their own neobank? How do you do it and where do you begin?
In this guide, we are going to discuss in detail how you can start and build your own neobank from scratch. From digital banking systems to regulatory compliance, we’re going to discuss it all, so stay with us till the end!
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Successful Neobank Launch with Velmie
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Starting a Neobank with a Banking-as-a-Service (BaaS) Partner
What is BaaS?
First and foremost, let’s have an introduction to Banking-as-a-Services or BaaS. Banking-as-a-Service (BaaS) is the secret sauce that allows neobanks to go from mere concepts to actual launch in a fraction of the time it requires to set up actual traditional banks. With BaaS, you don’t need to worry about the whole complexity of building a full banking infrastructure or acquiring a banking license. Instead, what you can do is utilize already existing infrastructure, regulatory frameworks as well as pre-built banking capabilities from licensed banks that offer BaaS.
Overview of banking-as-a-service
Now let’s have an overview of what BaaS actually is! To understand it better, think of BaaS as a flexible banking solution that is offered by pre-established financial institutions. It empowers businesses, particularly financial technology or fintech startups, to embed financial services into their applications through Application Programming Interfaces or APIs. These APIs allow these companies to offer banking services that include account creation, payments, money transfers, as well as loans under their brand. On the other side, the BaaS provider handles the behind-the-scenes operations.
This model has led to the rise of many neobanks like Chime, Revolut, and Monzo. These companies didn't have to build a full-fledged banking infrastructure from scratch. Instead, they partnered with existing BaaS providers and focused all their efforts on creating a superior user experience and more than that, marketing their services to the right audience!
What we’re seeing today, in the financial landscape is that BaaS has effectively democratized the banking industry. Now, smaller players are able to compete with larger, well established banks by offering innovative services at comparatively lower costs!
How BaaS simplifies the launch of a neobank
BaaS greatly simplifies the launch process of a neobank. Without BaaS, launching a neobank would need an extensive investment in technology, security, as well as compliance. This process could potentially take years and what’s more is that it could require millions of dollars in capital! Thus, by partnering with a BaaS provider, you can bypass a majority of these hurdles and focus on what actually matters – creating a great customer experience and innovative services that have never been offered before!
Here are some ways BaaS simplifies the whole neobank launch process:
Pre-built infrastructure
BaaS providers already have the technology stack in place so you can integrate it quickly and focus more on your core business. This infrastructure can include everything ranging from core banking systems to payment gateways, fraud detection, and even KYC or Know Your Customer compliance.
Licensing and regulatory compliance
Navigating the complex web of financial regulations and acquiring a banking license is one of the biggest challenges that comes in the ways of launching a neobank. A BaaS partner, however, holds the required licenses and handles the heavy regulatory lifting, ensuring your neobank is compliant with all kinds of local and international regulations.
Faster go-to-market
With BaaS, you don’t have to build every single thing from scratch! Your time to market can be drastically reduced which means that you can start offering financial services much quicker as compared to if you had to build your own infrastructure.
Advantages of partnering with a BaaS provider
What are some real advantages of partnering with a BaaS provider? Let’s have a look!
Reduced time to market
Now let’s have an overview of what BaaS actually is! To understand it better, think of BaaS as a flexible banking solution that is offered by pre-established financial institutions. It empowers businesses, particularly financial technology or fintech startups, to embed financial services into their applications through Application Programming Interfaces or APIs. These APIs allow these companies to offer banking services that include account creation, payments, money transfers, as well as loans under their brand. On the other side, the BaaS provider handles the behind-the-scenes operations.
This model has led to the rise of many neobanks like Chime, Revolut, and Monzo. These companies didn't have to build a full-fledged banking infrastructure from scratch. Instead, they partnered with existing BaaS providers and focused all their efforts on creating a superior user experience and more than that, marketing their services to the right audience!
What we’re seeing today, in the financial landscape is that BaaS has effectively democratized the banking industry. Now, smaller players are able to compete with larger, well established banks by offering innovative services at comparatively lower costs!
Access to pre-built banking features
Offering banking services to people involves a lot more than just opening accounts or issuing credit/debit cards. Today’s modern customers expect their financial service provider to offer a wide range of features ranging from mobile deposits and peer-to-peer payments to detailed spending analytics and even budgeting tools! Developing these features from scratch can be very time consuming as well as costly.
BaaS providers offer access to a collection of pre-built banking features that can include:
Instant account creation
New users on the platform can open accounts in seconds.
Fraud detection and prevention
Advanced algorithms that are designed to monitor transactions for suspicious activity.
Card issuance
Virtual and physical debit or credit cards can be issued in minutes!
Regulatory compliance support
We all know that financial services are highly regulated (as they should be) and failing to comply with these regulations can result in some major fines and moreover, reputational damage! BaaS providers play a vital role in ensuring that your neobank is in complete compliance with regulations such as GDPR, AML or Anti-Money Laundering, and KYC requirements.
This support is even more important if you’re planning to expand your operations to multiple countries, given the fact that each region can have different legal regulatory frameworks. BaaS providers also usually have expertise in global regulations so you can rest assured that you can operate across borders without getting held down by compliance challenges.
Obtaining a Powerful Digital Banking System for Sustainable Growth
Importance of a robust core banking system
A core banking system or CBS is the backbone of your neobank. It processes all banking transactions, handles customer data, manages accounts, and does a tone more! And because of that, a weak or outdated core banking system can lead to various problems such as slow transactions, poor customer experience, and even worse – security vulnerabilities! You wouldn’t want that now, would you?
Foundation for operations, security, and scalability
Let us put it straight – the core banking system is responsible for handling almost all day-to-day operations ranging from customer onboarding to deposits and withdrawals, and from loans to payments! It also makes sure that all these operations are secure and compliant with finance industry regulations. For your neobank to work and succeed in the long run, you need a core banking system that is scalable as well as secure!
Let’s have a deeper look at why a strong CBS is vital:
Security
The CBS manages sensitive customer data and transaction details, making it a prime target for cyberattacks. A well-built, robust system offers multi-layered security measures such as encryption and real-time fraud monitoring to ensure safety!
Scalability
As your customer base grows, your CBS should be able to handle increased transaction volumes without compromising performance in any way. This is why scalability is very important when it comes to supporting long-term growth!
Operations
A CBS allows you to streamline operations so you have enhanced efficiency and reduced operational costs!
Key features to look for in a core banking system
Picking a core banking system is one of the most important decisions you’ll have to make when starting a neobank. So how do you choose one? Here is a list of features you must consider.
Scalability and flexibility
First and most importantly, the system you choose should be scalable and flexible. Whether you start with a small user base or plan for rapid growth, the system should ideally be able to handle increasing transaction volumes, customer accounts, as well as complex banking products that you might introduce in the future. A scalable system, in turn, ensures that you can expand without any kind of disruptions!
API-driven architecture for easy integration
Secondly, the system you choose should have an API-driven architecture! APIs or Application Programming Interfaces are the building blocks of modern software. When we look at the context of neobanking, an API-driven core banking system will allow you to integrate with third-party services, fintech platforms, and payment gateways very easily when needed. What this does is that it enables your neobank to offer a wide range of services without having the need to develop everything in-house.
Real-Time processing and reporting capabilities
Thirdly, it should be able to process and report in real time! In today’s fast-paced world, customers expect real-time banking services at their fingertips. Whether it's checking their account balance, transferring funds, or receiving a notification for a transaction, real-time processing is very important when it comes to meeting these expectations.
Support for multiple currencies and cross-border transactions
And last but not the least, your system should be able to support different currencies and cross-border transactions! With the financial industry becoming more and more globalized, supporting multiple currencies and cross-border transactions is no longer optional, it’s a necessity that must be met! Even if you’re initially focusing on a local market with your neobank, having a core banking system that can handle a wide range of currencies will help you to expand internationally when the need arises!
Evaluating core banking providers
Core banking providers can vary widely in terms of efficiency, productivity, and overall performance! And as discussed earlier, choosing the right provider can make or break your neobank! Here how you should evaluate core banking systems before choosing them!
Criteria for selecting a core system
We have created a thorough checklist of all the criteria you should consider while evaluating core banking systems. Here they are:
Scalability
Can the core banking system handle millions of users as your neobank grows in the coming times?
Security
Does it meet all industry standards for data encryption, fraud detection, as well as cybersecurity?
Customizability or flexibility
Can the core banking system handle millions of users as your neobank grows in the coming times?
Support
Does the provider offer 24/7 customer support, and do they have any experience working with neobanks?
Compliance
Is the system compliant with the important local and international regulations, the likes of GDPR and PSD2?
Overview of top core banking systems in the market
Without a doubt, choosing the right core banking system is a decision that requires a ton of consideration! Many leading providers in the market offer comprehensive, scalable, as well as secure platforms customized to the needs of neobanks. Let’s have a look at some of the most well reputed and prominent core banking systems and what makes them stand out from their competition!
One of the global leaders in banking software, first up we have Temenos! Temenos offers a very flexible and scalable core banking system that is used by both neobanks as well as traditional banks. It has a cloud-native platform which is highly customizable and allows financial institutions to customize it to their specific needs. Amazingly, Temenos also supports multi-currency operations as well as cross-border transactions which makes it ideal for neobanks that are moving with global ambitions!
Is an evolutive, configurable, fast and easy to integrate SaaS Core Banking Platform and application modules. They help financial institutions across EMEA to build and run banking solutions faster (months instead of years), cheaper (3-5x running cost reduction), better (new version every 2 months, high level of configuration/automation), without compromising on stability and security (99.99% availability, ISO 27001, audited by Tier 1 banks).
Offers all-in-one core banking software platform for next-generation finance. Velmie provides a suite of products to build engaging and future-proof solutions for banks and fintechs.
Velmie empowers financial institutions with cutting-edge tech solutions providing great customer experiences, ultimate performance, and extreme scalability. The modular cloud-native digital banking platform allows building very unique fintech solutions across the world. With the partner ecosystem and API orchestration layer, our clients have quick access to payment services from market-leading companies. Velmie carefully maintains security on different levels including the infrastructure, software development practices and the company itself.
Next up we have Finacle by Infosys! Known for its comprehensive feature set, Finacle gives us a robust core banking system that is focused majorly on scalability and flexibility. The best part is that Finacle’s API-driven architecture allows easy integration with third-party services so neobanks can offer a wide range of banking products to their valued customers!
Lastly, we have Mambu! Its cloud-based core banking platform is especially designed with agility in mind. It allows for rapid iteration that enables neobanks to launch new products and services swiftly. Mambu’s modular architecture also allows businesses to pick and choose the specific features they need which reduces complexity as well as additional costs!
Future-Proofing your core banking system
As your neobank grows, the demands of your customers and as a result, your demands on your core banking system will definitely increase. To ensure long-term success, you must choose a system that can grow with your business and more importantly, with the financial industry’s constantly changing landscape!
Ensuring the system can scale with growth
Scalability is not just about handling more transactions or customers at a time, it’s also about expanding your product offerings and entering new markets with time! A future-proof core banking system should ideally allow you to add new features as well as services to your arsenal as customer demands evolve. For example, you might start by offering simple checking accounts and debit cards, but as your neobank grows, you may want to introduce savings accounts, loans, or even investment products!
In addition to that, a scalable system will also allow you to expand globally! If you start in one region but plan to offer services in multiple countries, your core banking system should be able to support multi-currency transactions, comply with international regulations, and provide localized customer experiences for the best future of your neobank!
Importance of regular updates and feature enhancements
The financial industry is evolving rapidly with new regulations, technologies, as well as customer expectations! To stay competitive, your core banking system must be updated regularly to ensure it can handle the newest security threats, comply with new regulations, and offer innovative features that customers will love!
Ensuring Security and Vendor Independence
The risks of vendor lock-In
Vendor lock-in happens when a company becomes totally dependent on a specific vendor for technology or services. This ultimately makes it difficult as well as costly to switch to another provider when needed! In the context of neobanks, this can be very problematic, as switching core banking systems or BaaS providers is usually very complex as well as time-consuming.
Potential pitfalls of being tied to a single vendor
Vendor lock-in can be especially problematic for a neobank for a wide range of reasons! While partnering with a core banking system or BaaS provider does offer a ton of convenience and a quicker time to market, there are definitely some risks if your neobank becomes too dependent on a singular vendor. Let’s have a look at some key pitfalls:
Cost escalation
Once you’re locked into a vendor’s ecosystem, switching providers becomes a very costly and time-consuming process. This gives the vendor significant pricing power. They can increase fees for continued use of their platform which will leave you with little negotiating power, as moving to a new vendor could disrupt your entire operation or even lead to issues with compliance!
Limited flexibility
As your neobank grows and evolves, you might need to introduce new features, integrate with third-party platforms, or even adopt new technologies. A vendor’s system may not always be adaptable to your changing needs. If their technology becomes too outdated, your ability to grow will be very limited!
Challenges in switching providers
Switching from one vendor to another is a complex process that can disrupt business operations and even negatively affect your customers if not handled properly. Some of the most significant challenges in this regard include:
Data migration
Transferring all your neobank’s customer data, transaction histories, and compliance records from one system to another can be a very time-consuming and technically challenging procedure. Any mistakes during migration can lead to data loss, downtime, or even compromised security, which is something you definitely don’t want.
Re-integration
In addition to that, when you switch vendors, you’ll likely need to rebuild or reconfigure the integrations you had with third-party services (e.g., payment processors, fintech APIs, or other platforms). This can slow down your operations and lead to severe technical headaches if not handled properly.
Advantages of obtaining full source code
Given the potential risks that are associated with vendor lock-in, obtaining full source code from your provider can be quite a game-changer! By owning the source code for your neobank’s core systems, you gain greater control over your technology, security, as well as long-term business strategy.
full control over your software
When you have full access to the source code of your neobank’s core banking system or BaaS platform, you’re no longer bound to a third party. This level of control allows you to make changes, introduce new features, and even respond to customer feedback more quickly and more efficiently!
In addition to that, full control over the software means that you can customize it to your specific business needs. Whether you’re building features for a niche customer base or expanding into new geographical markets, having the flexibility to modify your system gives you an unmatched freedom to innovate and create!
Flexibility to customize and innovate
Innovation is exactly what makes neobanks attractive to millions of modern consumers. Unlike traditional banks that are slow when it comes to innovation, neobanks can rapidly iterate and improve their product and service offerings based on the feedback of their customers. However, it is important that you have the flexibility to customize your technology!
With access to full source code, your development team can:
Customize the eser experience
You can build a highly customized front-end that matches your brand and offers a unique experience fine-tuned for your target market.
Optimize performance
Secondly, if you encounter performance issues, having access to the code means that you can address issues more quickly and efficiently rather than waiting for your vendor to release an update that will solve your problem!
Integrate seamlessly with other platforms
And lastly, when you have the source code, you’re in full control of how your neobank integrates with other financial products, services, or fintech apps. This allows you to create a seamless ecosystem for your customers!
Enhanced security through code ownership
In today’s digital banking world, security is one of the most critical concerns. Neobanks, like any financial institution, are the prime targets for cyberattacks. While vendors usually offer sturdy security measures, owning your source code provides an additional layer of security as well as peace of mind. When you have access to the source code, you can:
Perform regular security audits
through owning code, you have the ability to conduct internal security audits and vulnerability assessments whenever you want! This will help in ensuring that your neobank remains compliant with all security regulations and is protected from emerging threats!
React quickly to threats
When a vulnerability is identified, your team can patch it immediately instead of waiting for the vendor to release a fix. This speed can be pivotal when it comes to protecting your neobank and its customers from dangerous cyberattacks.
Implement custom security protocols
While vendors offer generic security protocols, having your own code allows you to implement security measures that are specifically tailored to your neobank’s operations.
How to secure full source code from your vendor
Obtaining full source code access from a vendor isn’t always a straightforward process. It requires clear negotiations as well as careful contract management. Here’s how to approach the process.
Negotiating source code access in contracts
First of all, it is important that you negotiate source code access in your contracts with your provider. This can be challenging given the fact that most vendors prefer to keep proprietary code under their own control. But sometimes, some vendors can offer solutions such as source code escrow, a kind of arrangement where the source code is actually held by a third party and released to you only under specific conditions, such as the vendor going out of business or failing to meet obligations as mentioned in the contract.
Understanding intellectual property rights
Without a doubt, intellectual property (IP) is a valuable asset in the fintech industry. Ensuring that you have full rights to your neobank’s technology is very important for protecting your business interests. If your contract with a vendor doesn’t properly outline the IP rights, you could face some serious challenges in the future!
Exclusive IP rights
First of all, make sure you negotiate for exclusive rights to any custom code or features that your neobank develops in partnership with the vendor. This will help ensure that your neobank can operate independently and that no other company can copy your innovations!
Patent considerations
If your neobank is developing proprietary technology or processes, consider patenting them as soon as you can. This adds an additional layer of protection and can be a very valuable asset in attracting investors!
Managing and maintaining your source code
Once you’ve secured access to the source code, managing it properly should be your number one priority. Without the right management processes, you could entirely lose the benefits of having full control over your technology.
Building an in-house development team
You’ll have to assemble a strong in-house development team to effectively manage and enhance the source code! This team should have expertise in not just banking technology but cybersecurity, and most importantly, software development.
Here are some key considerations for building your in-house development team:
Hiring experienced developers
Look for developers with experience in the financial services industry. They should be able to understand the regulatory environment as well as the unique security challenges that come with digital banking!
Ongoing training
The world of fintech is constantly changing, so it’s important to invest in regular training to keep your development team up to date with the latest technologies and security practices.
Best practices for source code management
Effective source code management is very important to ensure smooth operation of your neobank. Here are some best practices to follow:
Version control
Use version control software such as Git to track changes in the codebase. This will help prevent errors and make it easier to revert to previous versions if required!
Code reviews
In addition to that, implement regular code reviews to ensure that all code changes are properly vetted for quality and security. This can prevent bugs and vulnerabilities from entering and disruption the production process.
Documentation
And lastly, ensure that your codebase is well-documented at all times! This will make it easier for new developers to understand the system and greatly reduce the risk of errors.
Regular audits and security checks
Security is a continuous process which almost never ends! Conduct regular audits of your codebase to make sure that it remains as secure as possible as well as compliant with the latest regulations.
Third-party audits
In some cases, you can consider hiring an external security firm to conduct thorough periodic audits. A fresh set of eyes can always catch vulnerabilities that your internal team might miss!
Internal audits
Make sure to schedule regular security audits conducted by your in-house team. These audits should include penetration testing as well as vulnerability assessments.
Final Thoughts
Starting a neobank is an exciting venture that holds immense potential in today's ever-evolving financial landscape. The growth and popularity of digital-only banking signify a significant shift in consumer expectations—people seek convenience, innovation, and personalized financial services delivered seamlessly through technology. While the idea of creating a neobank may seem daunting, leveraging the right partnerships and technology solutions can make the process far more achievable.
By collaborating with a trusted Banking-as-a-Service (BaaS) provider, aspiring neobank founders can bypass many of the traditional obstacles that come with launching a financial institution. BaaS simplifies the complexities of infrastructure setup, licensing, and compliance, allowing entrepreneurs to focus on their core vision: offering a unique and customer-centric banking experience.
Equally important is the selection of a robust core banking system that ensures your neobank's operations run smoothly and efficiently. A scalable, API-driven system with real-time processing and multi-currency capabilities will provide a solid foundation for sustainable growth and global reach.
Success in the neobank space hinges on the ability to innovate, adapt, and meet the evolving demands of consumers. By prioritizing technology, regulatory readiness, and exceptional customer experience, you can establish a neobank that stands out in a competitive market.
As you embark on this journey, remember that building a neobank is not just about offering financial services—it’s about redefining how people interact with their money. With the right strategies, partners, and vision, you can create a digital banking experience that resonates with today’s tech-savvy generation and paves the way for the future of finance.
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