Consumers increasingly demand more accessible and user-friendly financial services, leading to the emergence of neobanks. While not all of the over 400 such institutions worldwide are successful, the growth of this sector is significant. In 2023, the total market value of neobanks increased by 45%, reaching nearly $100 billion.

 

Read an overview from Lawrange experts with up-to-date information on neobanks as of the beginning of 2024. What are these institutions? What advantages does the owner of such a business gain? What is offered to customers? How to open your own neobank in 2024?

 

What is a Neobank?

A neobank (a digital bank, online bank, or fintech bank) is a fintech company that provides digital banking services through desktop and mobile apps. Unlike a traditional bank, such an institution operates entirely online.

 

FYI! Often, registration in a neobank can be completed from anywhere with a reliable Wi-Fi connection. The client simply needs to prepare identification documents, plus possibly some additional documents, if required.

 

Among the advantages of digital banks:

 

  • Accessibility of financial services. Those who cannot open a bank account in a physical branch can do so remotely at any time and from anywhere. Some neobanks do not check banking history.
  • Quality and inexpensive service. Since digital banks do not need to maintain physical branches, they can offer customers lower fees and rates.
  • Convenient personalized functionality. Clients are offered intuitive interfaces and tools for personalized financial management. In some cases, recommended solutions using AI are prepared for users, freeing them from the need to monitor every transaction.
  • 24/7 operation without weekends and holidays. Neobank services can be used regardless of the time of day. Moreover, an app is available on a smartphone, which is always at hand.

 

Why Open a Neobank?

Before delving into how to create a neobank, it is worth answering the question “Why?”. Firstly, because the timing is quite favorable now. Pioneers of digital banking have already gained the trust of customers. Most people have embraced new technologies and are ready to use them, including for managing their finances.

 

Secondly, a fintech bank can be tailored to a specific target audience, such as small businesses, freelancers, or e-commerce platform owners. Thirdly, a digital bank is a less costly project than a traditional bank. The savings on renting premises for branches, purchasing equipment, and hiring numerous staff alone are significant.

 

Examples of Successful Digital Banks

In the top leaders of 2023, experts include Azlo, Ally, Varo, Simple, Axos, Chime, N26, Atom Bank, Good Money, Revolut, Starling Bank, and Monzo. We want to highlight the star of European banking, Bunq (Netherlands). Let’s take a closer look at several examples.

 

Revolut

A neobank based in the United Kingdom. Founded in 2015, it has grown at a staggering pace. It now has over 35 million users and over 500,000 business clients, served by around 6,000 employees. Revolut’s main mission is to simplify everything related to money. Clients are offered debit cards, virtual cards, currency exchange, Apple Pay, and accounts for trading stocks and cryptocurrencies. Revolut processes up to 250 million transactions per month.

 

Chime

The company Chime was founded in 2013 in San Francisco, USA. It offers its neobanking services through Bancorp Bank, NA, and Stride Bank, NA, both of which are members of the FDIC (Federal Deposit Insurance Corporation). The internet bank Chime serves 14.5 million customers. In addition to free mobile banking, Chime offers free overdraft protection up to $200 and free access to over 60,000 ATMs.

 

N26

This German giant was founded in 2013 to make capital management simpler, safer, and more convenient for customers. Two years later, N26 launched its first product, and eight years later, it became one of Europe’s leading digital banks responsible for processing transactions worth over $100 billion annually. Today, the company serves more than eight million customers in 24 markets, including its native Berlin, as well as Barcelona, Madrid, Vienna, Milan, São Paulo, and Paris.

 

Starling

The brainchild of entrepreneur and fintech legend Anne Boden, Starling is the first bank in the UK founded by a woman. Obtaining its banking license in 2014, Starling began providing customers with new ways to spend, save, and manage their money, offering personal current accounts, joint accounts, and business accounts. Starling has always operated solely in digital format and remains branchless to this day. Despite Boden stepping down as CEO in the summer of 2023, Starling remains a strong player in the UK financial services market.

 

Bunq

The second-largest neobank in Europe. Bunq founder Ali Niknam reported a net profit of €53.1 million in 2023. With over 11 million users and deposits exceeding €7 billion, Bunq has applied for a British license as part of its global expansion (for the second time). This online bank positions itself as the “first AI-based bank in Europe.”

 

How Neobanks Make Money

Primarily, neobanks do not charge account maintenance fees but generate income from interbank fees imposed on merchants when customers use debit or credit cards to make purchases. The amount varies depending on the card network (e.g., Visa or Mastercard) and the type of transaction. Fintech banks receive a portion of these fees. Consequently, every time customers use their cards for payment, the neobank earns money.

 

Additionally, internet banks charge fees for money transfers and ATM withdrawals. However, this type of financial institution is still evolving, so implementing new ideas for earning is a very real prospect.

 

Revenue Sources in the Neobanking Sector

A significant source of income can be servicing business clients. Most neobanks do not provide loans, which helps reduce expenses and limit risks. However, some internet banks still offer loans and credit cards, adding interest income from these products. Additional income can be considered for premium account services – access to financial planning tools or extended account features. For example, Chime and Revolut offer premium services in exchange for a monthly subscription fee.

 

Another monetization strategy for neobanks is collaborating with other financial companies or fintech startups, offering customers joint products or services. In certain cases, thanks to this partnership and/or recommendations, they can receive referral rewards or commissions.

 

FYI! As we remember, digital banks operate without physical branches and with fewer employees on staff, which leads to reduced overhead costs and allows them to be more efficient. Therefore, relying on interbank fees as the main part of income is feasible.

 

Neobank Business Models

It is often said that there are two business models for digital banks. If you are considering how to open neobanking, it will be crucial which model you choose.

 

  1. Full-service neobank (full-cycle online bank) is an independent financial institution with a banking license. Example: Varo company.
  2. Neobank operating with partners. It does not have its own banking license and must connect to BaaS* and a partner bank. Example: Chime.

 

*Note: BaaS (Banking as a Service) – rented banking infrastructure. Usually, it includes payment processing, card issuance, limit management system, compliance, reporting, information security measures, etc.

 

Financial Stability and Profitability of Neobanks

Neobanking is a High-Risk business category. However, internet banks operating under the second of the business models listed above have less risk. They ensure financial stability and “immunity” to a wide range of vulnerabilities through partnerships with traditional banks or other financial institutions, particularly for deposit insurance, access to payment systems, etc. However, close ties with partners are also a weakness. Therefore, the first of the described models wins in terms of independence.

 

FYI! In general, the main risks for neobanks include financial crimes, fraud, chargebacks, legal costs, fines, and other sanctions from law enforcement and regulatory authorities, and the need to compensate customers. Fintech banks are more susceptible than traditional financial institutions to risks associated with money laundering and terrorist financing. Any involvement, even unintentional, in such activities damages reputation irreparably and can lead to customer distrust or even license withdrawal.

 

Main Functionality of Neobanks

Customers of digital banks are offered the following basic capabilities:

 

  • Remote registration and account opening using biometric data.
  • Virtual and physical cards.
  • Payments via IBAN, transfers between cards.
  • Deposit and loan applications.
  • Account management and limit customization.
  • 24/7 online support.
  • Various promotions, referral programs, and so forth.

 

Neobanking solutions are designed for both individuals and corporate clients. Moreover, such solutions are usually more flexible and convenient than those traditional banks offer.

Order a consultation

 

Secure Transactions and Data Storage

Areas with potential risks for neobanks include customer authentication, threats of hacking, and data breaches. Typically, digital banks establish a cybersecurity center to assess the state of the entire IT infrastructure of the institution and to respond promptly to threats. Among other things, it’s crucial to secure the server where all customer information is stored. In addition to human specialists to solve these tasks, artificial intelligence and machine learning are widely used today.

 

Account Opening

The primary goal of any customer in a neobank is to open an account and obtain a card for it. It is through their account that customers interact with financial flows, particularly depositing and withdrawing funds. If you’re considering how to open a neobank, it’s essential to think about cards. Often, internet banks now offer users not only the opportunity to open an account and receive a virtual card but also the option to get a physical debit and credit card.

 

Basic Financial Operations

Customers often expect neobanks to allow them to transfer money to an account/card by details, pay bills and taxes, and make deposits or withdrawals. Additionally, currency conversion can also be considered among routine operations.

 

Push Notifications

One factor contributing to the comfort of neobank customers is receiving timely information about fund deposits and withdrawals, as well as other important events related to their accounts. You can ensure this through push notifications. On the other hand, these notifications can also be used for marketing purposes, such as sending out news and promotions.

 

Additional Neobank Features

Additional products in the context of neobanks include deposits, savings, and investment accounts. Also, institutions offer “exclusive” features to attract consumers. For example,  overdraft protection.

 

Personalization and Use of AI Algorithms

AI and adaptive ML have ceased to be a competitive advantage. Instead, they should now be considered among the most important tools for a neobank’s survival in the market. In particular, they achieve the highest level of customization of offerings for clients (responses to support chat questions, building individual analytics, and so on).

 

QR Code Payments

UPI QR code (quick response code), like creating active links, is a convenient tool for instant bill payments. The QR code and link can be easily sent via email, chatbot, SMS, or messenger. This is often suitable for entrepreneurs who need to create invoices for clients. As a result, a QR code generator in a bank can be seen as one of the ways to attract/increase the loyalty of business clients.

 

Information Panels

As we mentioned before, customers of any financial institution strive to be informed about what’s happening with their accounts. In addition to push notifications, informational panels in the app are used for this purpose. On them, you can see:

 

  • The total balance on the card.
  • Recent transactions.
  • Payment limits.
  • Income and expense graphs.

 

FYI! Information panels should not be overloaded with data. Also, advertising is not always appropriate there.

 

Integration with Other Fintech Services

Neobanks collaborate with providers of relevant solutions to offer additional functionality to clients and ensure the automation of various business processes. This includes card issuers, currency exchanges, and software providers for AML and KYC. Neobanks can also make agreements with intermediaries providing package solutions.

 

Laws Regulating the Banking and Fintech Industry

Legal regulation of FinTech and neobanking includes the following areas:

 

  1. Personal data protection. Regulatory bodies can impose sanctions on companies for failure to comply with proper risk management and standards regarding the security of customer data. One of the benchmarks in this regard is the General Data Protection Regulation (GDPR).
  2. AML & KYC rules – combating money laundering and “Know Your Customer.” Governments are increasingly serious about the threats of money laundering and terrorism financing. They also recognize that people can use FinTech for tax evasion. Each client (individual or corporate) must be verified to ensure they are who they claim to be. Currently, both international AML and KYC standards and local rules in each jurisdiction are in effect. For the EU, the 6AMLD directive is currently relevant.
  3. Use of electronic signatures eIDAS. European eIDAS rules were introduced in 2014, and Electronic Identification Rules have been in effect in the UK since 2016. They establish standards for identifying and implementing various levels of electronic signatures (SES, AES, and QES).
  4. Security of payment card industry data. The benchmark here is the Payment Card Industry Data Security Standard (PCI DSS).
  5. Regulation of DeFi (decentralized finance). This refers to the growing sector of the fintech industry, where regulation still needs refinement. Cryptocurrencies and smart contracts largely let you avoid existing KYC rules, but regulators are likely to make changes soon.

 

The Role of Regulation in the Neobanking Sphere

Fintech startups are major targets for cybercriminals, financial fraudsters, and individuals seeking to launder money and evade taxes. Legal regulation sets the rules of the game, where digital banks are maximally interested in not assisting, willingly or unwittingly, criminals.

 

In addition, regulators oversee compliance with rules regarding consumer data protection and risk management (credit, market, operational). Among the standards from regulators are also requirements for capital and liquidity.

 

Compliance with Legislation and Licensing

We mentioned that a neobank can operate with and without a banking license (i.e., under the auspices of a partner – a traditional bank or another financial institution). Having a banking license contributes to increasing trust from clients. Such a license lets you offer clients deposits, issue loans, conduct currency operations, and more.

 

FYI! In some jurisdictions, obtaining a banking license is a lengthy and complex process that can take not months but years. Moreover, the cost of such a license is very high.

 

What options can save money and time besides partnering with a traditional bank? First of all, to provide payment services, you can obtain not a “classic” banking license but another type of license. Examples include:

 

  • Electronic Money Institution (EMI) license. With it, you can create IBANs and issue electronic money, but you cannot issue loans or fully manage client funds (you need a bank partner for this). There may also be restrictions on the maximum amount in the electronic wallet and on certain transactions.
  • Payment Institution (PI) license. With it, you can provide clients with account top-ups in other systems and banks, cash withdrawals, and currency transactions, but you cannot open wallets or store client funds.

 

How to Build a Neobank from Scratch

Pay attention to two main components:

 

  1. Legal Foundation
  2. IT System

 

Important! Our team is ready to assist with the first component. Lawrange specialists will analyze your project, suggest jurisdictions for company registration and licensing, and ensure the development of necessary contracts with partners.

 

Business Model Development

Creating a business plan is essential for a neobank project. Investors, government regulators, and partner banks require this document. A typical business plan includes the following information:

 

  • Market and target audience analysis.
  • Counterparties and partners.
  • Financial forecasts and marketing strategies.
  • Risk analysis, potential threats, and vulnerabilities.

 

Company Registration, Office Setup

In most jurisdictions, to apply for a license, it’s necessary to first register a legal entity and establish its substance – physical presence in the country. The company registration process for a neobank typically involves the following steps:

 

  1. Preparation of documents according to requirements.
  2. Obtaining a Certificate of Incorporation.
  3. Office rental, hiring staff.
  4. Opening a bank account.
  5. Authorization – obtaining a license from the regulator.

 

Licensing

Requirements for obtaining a license can vary greatly, depending on the license type and jurisdiction. In general, compliance with a set of rules is required, including those mentioned earlier, such as data protection, AML & KYC, and eIDAS. The regulator receives a fairly extensive package of documents, including a business plan, company founding documents, and various completed forms.

 

FYI! If you have already obtained a license in one country, in some cases, you may be able to undergo authorization in other countries through a simplified procedure. For example, for EU countries, passporting is provided. Having a license from one EU jurisdiction means you won’t have to repeat the licensing process in other countries. You just need to notify the regulator of the relevant activity.

Order a consultation

 

Preparing the IT System for Operation

In some countries, the IT platform must be ready before applying for a license (although sometimes the applicant is given a few months to launch). It can be configured independently or with the involvement of appropriate providers.

 

Setting up the IT system includes the following stages:

 

  1. Creating an MVP description – minimum viable product. This will answer whether the idea will work. You can also show neobank MVP to investors.
  2. Implementation of PoC – Proof of Concept. It verifies whether critical functions can indeed be implemented.
  3. MVP deployment. The app is launched in a test environment. Based on feedback from initial customers, information about errors can be obtained and adjustments made.
  4. Rollout – product launch. The development process does not stop. The product needs optimization, error correction, quality customer support, and improved marketing approaches.

 

Application Development

This involves two components:

 

  1. The core of the neobank, consisting of modules that provide users with all necessary operations.
  2. User interface.

 

In its basic form, a neobank app should offer clients sections such as accounts, payments, transaction history, notifications, credit/debit cards, tech support, etc. Creating a customer-centric interface is a crucial task, so it’s worth paying attention to competitors’ experiences and user feedback beforehand.

 

Testing the Application

It’s advisable to start testing the app during the development stage. Fixing errors at the earliest stage is much faster and easier than after building a large and cumbersome IT system. You can use automated tests, which simplifies the process. However, the tests should cover all possible use cases that may arise when clients interact with the application.

 

The following tests are usually conducted:

 

  • Integration tests
  • Regression tests
  • Penetration tests
  • Module tests
  • Security tests, and so on.

 

Launching the Application and Feedback

When the app is ready for users, it’s time to engage in active and vital work, rather than relaxing. This involves fine-tuning and identifying subtle errors.

 

It is essential to involve a marketer at this stage to encourage customers to rate, review, and comment on the application. Feedback is the most valuable source of information for project improvement.

 

Cost of Developing a Neobank

We’ve already answered how to register a neobank, develop the necessary app, and obtain licensing. However, the cost aspect remains unclear. It’s not advisable to broadly determine it. Your budget will depend on many variables: the chosen business model, project scale, target audience, jurisdiction of company registration, and license acquisition.

 

During the neobank launch, you’ll likely need to engage many specialists: developers, lawyers, marketers, accountants, financial analysts, etc. You’ll also need to pay for contractor services, hosting, and software subscription fees. Eventually, you’ll need a team of employees.

 

Important! For a preliminary analysis of project implementation costs, we recommend consulting experts who will provide you with the necessary answers considering market specifics and project characteristics.

 

Lawrange Assistance in Opening a Neobank

Creating a digital bank is not a project that can be handled by one person or even a group of people. Success requires a lot of specialized knowledge and practical experience. In particular, resolving all legal issues is very challenging. Choosing the wrong jurisdiction for neobank registration, errors in documents sent to regulators, incorrect agreements with partners, and incomplete internal policies and rules lead to significant financial losses.

 

Lawrange Attorneys Association offers you reliable support. We are ready to accompany you from the idea to the fully operational financial institution. Moreover, if desired, we will continue to provide legal services. Our experience and extensive connections with partner lawyers worldwide guarantee your success.

 

Conclusions

Neobanking is always a large and high-risk project, offering prospects for good income. In 2024, the neobanking sector is experiencing growth: customers have already trusted online banking services, but many have not yet decided on a digital bank. Therefore, the competition for potential customers’ attention and trust is intense.

 

If you’ve read this article on how to open a neobanking company, develop an application, and obtain the corresponding license, you understand that you need good partners and contractors for this. Quality resolution of all legal issues is particularly important. The Lawrange team can provide this for you. Contact us to get answers to your questions, an individual commercial proposal, or a consultation.

 

Popular services