How to Build a Neobank From Scratch in 2024

by Alona O. on Nov 12, 2024

Gone are the days when brick-and-mortar bank branches were the only players in the game. In today’s digital era, a new breed of financial institutions is taking over. The name of this breed is neobanks. Highly engaging and easy-to-use, they have made a revolution in the industry, offering a level of convenience and flexibility that traditional banks can’t match.

Interestingly, the concept of neobank emerged a while ago. This happened in 2015 due to the phenomenon of Open Banking, which allowed traditional banks and other financial institutions to share data and manage financial flows in a secure environment.

Around that time, the first neobanks started to appear, with the UK and Germany introducing Revolut, Monzo, Atom Bank, and N26. However, the real wave in the digital realm happened in 2021. With pandemic restrictions, financial institutions, like no other sector, were motivated to create financial services that would make it possible to use banking online.

To say that this move was seismic is an understatement. Within just one year, the global market size of neobanking jumped from $79.1 billion to $118.51 billion. And this is just the beginning of what neobanking can be. According to experts, the neobanking market will reach a staggering $2078.54 by the end of 2030.

These numbers clearly indicate the increased demand for neobanks. If you’ve been thinking about creating your own solution, the timing couldn’t be better. With just 272 neobanks in the world, you have all the chances to ride this wave of growth and innovation by jumping on board now.

The future of banking is about creating an experience that customers love.” – Renaud Laplanche, Founder & CEO of Upgrade.

In this article, we’ll guide you through the essential steps to build a neobank from scratch. From understanding the market and obtaining necessary licenses to developing a robust tech infrastructure and ensuring top-notch security, we’ve got you covered.

What Is a Neobank and How Is It Different From a Digital Bank?

Many use the terms “neobank” and “digital bank” interchangeably, but they aren’t quite the same thing. Let’s look more closely at the definition of “neobank” and how it differs from digital banking apps.

Neobank apps

A neobank is a financial digital solution that operates exclusively online. It doesn’t have traditional physical branches and can be offered by any financial tech organization. A neobank provides a wide range of banking services, similar to those provided by traditional banks. The main difference is that these services can be very specific depending on who they are aimed at, and can only be accessed through websites and mobile apps.

Digital banks

When it comes to digital banks, these solutions can only be provided by traditional banks. Basically, it’s the extension of brick-and-mortar institutions, providing the same suite of services through online channels. As a rule, banks still maintain their physical presence, but they also offer an alternative way to access their services via digital platforms, saving users a trip to a branch.

As you can see, the differences between the neobank and digital banks are tightly related to their origins and business models. To better illustrate these differences, let’s look at the comparison chart below:

Feature	Neobanks	Digital banks
Origin	Launched by fintech startups or tech companies	Extensions of traditional banking institutions
Physical presence	No physical branches	Maintain physical branches
Services offered	Wide range of digital-only banking services	Full suite of traditional banking services online
Target audience	Tech-savvy individuals, freelancers, small businesses	Existing customer base of traditional banks
Cost structure	Lower operational costs, often lower fees and no membership charges	Higher operational costs due to physical branches
Innovation	Highly agile and innovative	Stable and reliable with slower adoption of new tech
Customer experience	Entirely digital, often with advanced features	Hybrid experience with both online and in-person services

Understanding these differences is essential when building a neobank. While both solutions essentially provide banking services, neobanks go further by offering unique experiences through cutting-edge technology. In other words, these are often completely new products that have not yet been seen in the financial world.

Want to step into the finance industry with a groundbreaking application? We’re here to guide you every step of the way.

Why Build a Neobank

Neobanks have shaken up the financial sector, challenging traditional banks with their innovative and customer-centric approach. Offering quick and hassle-free access to banking services, they are constantly attracting new users, primarily from the younger generation who actively use mobile applications and don’t like the bureaucratic nature of traditional banks. The stats reflect this trend. In 2021, there were 146.42 million neobank users. By 2028, user penetration is expected to soar to 386.3 million.

People are getting accustomed to the convenience and efficiency that neobanks offer and become more reluctant to use traditional banks. Major players like Revolut and Wise have already amassed millions of people! For example, Revolut boasts 25.5 million consumers worldwide, while Wise has grown to 16 million, processing around £9 billion in transactions on a monthly basis. N26 and Monzo, two other prominent neobanks, come close to Wise, counting 8 and 7 million users respectively.

These numbers underscore the growing preference for digital-first banking solutions. Considering the rapid adoption of neo-banking, building a neobank is a strategic move to tap into a rapidly expanding market. With a fresh and customer-centric approach to financial services, you can position yourself at the forefront of fintech innovation, catering to the evolving needs of a tech-savvy customer base.

“As the digital movement takes the globe by storm and the influence of Gen Z grows stronger, there has been a fundamental shift in the preferences and choices of the average banking customer. Customers are prioritizing convenience and an untethered access to their essential services at all times and that is becoming a requirement rather than a choice.”

Mr. Robert Hazboun, Managing Director at ICS Financial Systems Ltd.

Advantages of Neobanks

Neobanks have transformed the financial space, giving a boost to the growth of digital banking users. Convenient and easy-to-use, they have become the favorite payment option for many consumers worldwide. Let’s look at some of the most prominent advantages that neobanks offer to consumers and businesses alike.

Lower operational costs. Unlike traditional banks, neobanks don’t have a physical branch to maintain, allowing them to operate with significantly lower overhead costs. These savings are passed to consumers in the form of lower fees for transactions, account maintenance, and other banking services.
Streamlined financial management. Advanced neobanks often come with features like real-time expense tracking, automated accounting integrations, and detailed analytics which help users analyze their spending and make better financial decisions.
Faster transaction processing. With neobanks, there’s no need to queue for hours waiting for a payment to be processed. All money transfers happen virtually in an instant, helping businesses improve cash flow.
Innovative financial services. Neobanks often have it all, including advanced features such as multi-currency accounts, virtual cards, and integrated payment solutions, making them a preferred option for managing international transactions.
Enhanced security. Neobanks implement cutting-edge security measures, including multi-factor authentication, biometric verification, and advanced encryption. These features protect consumers from fraud and cyber threats while keeping their financial data safe.
Improved user experience. With user-friendly interfaces and mobile-first designs, neobanks are hard to beat when it comes to user banking experience.
Greater transparency. Another benefit of neobanks is their transparency in pricing and services. With clear and straightforward fee structures, consumers can manage their finances more efficiently without worrying about any unexpected charges.
Personalized customer support. Neobanks take advantage of AI technology, allowing them to provide customers with 24/7 support and constantly improve based on user’s interaction patterns.
Scalability. Neobanks can easily scale their services by adding new features and integrations to meet the evolving needs of their customer base.
Global reach. Neobanks often have a global reach, allowing users to manage international transactions more efficiently. This is particularly beneficial for businesses that have a global customer base or operate in multiple countries.

Must-Have Neobank App Features

While the functionality of a neobank may vary based on its purposes, there’s a bunch of features inherent for any neobank app. These include:

Authorization with sign up and sign in options, allowing users to easily create accounts and securely access their financial information.
Biometrics such as fingerprint or facial recognition to ensure secure and convenient access to accounts and transactions.
Know Your Customer (KYC) system to prevent fraud and ensure compliance.
Personal account profile to allow users to manage their finances and change settings, including tasks like updating personal information, changing PINs, blocking/unblocking payment cards, or enabling/disabling notifications and alerts.
Transaction history to help consumers easily track their spending.
Onboarding to make the navigation of an app easier and smoother for new users
Customer support to ensure the clients can get help whenever they have a query or face any issue while using the app.
Notifications to keep users informed about their account activity, payments, and other updates.

These are the key features a neobank can’t do without. However, building a competitive solution that stands out requires more than just basics. To take your solution a step further, consider implementing some cutting-edge features like:

Cashback – this is a great feature to incentivize your product. By returning a small percentage of goods and services ordered by users through the application, you can enhance customer loyalty while also encouraging more frequent use of your app.
Referral system – like cashback, referral system feature is an efficient way to attract new customers through word-of-mouth marketing.
Cryptocurrency – as crypto transactions become more common, providing users with the opportunity to process these kinds of transactions within the app is a strategic move that can go a long way.
Tracker – with the help of a tracker, users can keep track of their spending, set financial goals, and recognize patterns in their spending behavior, allowing them to make better financial decisions.
QR codes – people love QR codes for the convenience of payment. By incorporating a QR code feature in your app, you can reach more customers and simplify the payment process, making it quicker and more secure for in-store and peer-to-peer transactions.
Stocks – another nice-to-have feature is stocks that can help users interested in investing buy and sell stocks directly through the app.
Instant loans – offering instant loans or credit lines can be a game-changer. Users can apply for and receive loans quickly, often within minutes, without the need for extensive paperwork.
Bill reminders – integrating bill reminders ensures that users never miss a payment. This feature can send notifications for upcoming bills and allow users to schedule automatic payments, reducing the risk of late fees.
International transfers – the feature of international money transfers can attract users who need to send money abroad frequently. Consumer-friendly neobank apps offer competitive rates, making them a go-to alternative to traditional banking services.
Budgeting assistance – offering users a suite of services tailored to improving their financial literacy can add more value to your app while also making it more engaging and attractive to them.

Obviously, these aren’t the only features that can be integrated into your neobank app development. The more creative and innovative you get, the higher the chance that your neobank will stand out in a crowded market and pay off with good returns.

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Business Models for Neobank Applications

There are a few business models that neobanking applications use as revenue streams. Understanding these models can help you choose the approach that aligns best with your goals.

Transaction-based revenue model

Neobanks often earn revenue from transaction fees paid by customers whenever they make a purchase through the app. This model is best suited for businesses with a large user base, as the revenue stream is directly related to the volume of transactions. One of the best illustrations of the success of this approach is Chime, a famous US neobank. Serving over 7 million users and processing $8 billion monthly transactions, even a modest 1.5% fee yields $1.5 billion in annual revenue for them.

Credit-based revenue model

Neobanks can also generate income through offering credit products like credit cards and personal loans. By offering competitive interest rates and flexible repayment terms, they attract customers looking for accessible credit solutions. This model not only opens a new source of revenue but also helps with building trust with customers and improving retention rates.

Interchangeable fees revenue model

A lot of neobanks make money through interchangeable fees that merchants pay for each transaction made using their debit cards. In practice, every time a user makes a purchase with a Visa card, Visa adds a small fee. Then, this fee is split between the merchant and a neobank. This is a very popular revenue model due to the growth of digital payments worldwide. Just so you can better grasp the scope, the number of digital transactions has long surpassed 700 billion and is expected to reach US$16.59tn in market value in 2028.

Subscription-based revenue model

Some neobanks use a subscription-based revenue model, offering advanced services or features for a specific fee. These subscriptions often include perks like higher transaction limits, priority customer support, and access to exclusive financial products, catering to VIP clients. The beauty of this model is that it fosters recurring revenue and enhances loyalty by offering value-added services.

Partnership and integration revenue model

Besides these four, neobanks can earn money through partnerships and integrations. By collaborating with other financial companies, they can offer additional services and earn a share of the revenue generated through these partnerships. This model proves particularly helpful for those planning to expand their service offerings without making significant investments.

Which model to choose depends on your strategic goals, target market demographics, and competition. If you’re not sure which route to take, don’t shy away from taking a sneak peek at your competitors. This will give you an idea of what they’re doing to monetize their applications and help you make the right choice.

How to Create a Neobank App From Scratch in 9 Steps

By and large, neobanking app development isn’t much different from other types of app development. Like with any other application, you’d need to go through several essential steps. Ideally, you want to get equipped with a professional team of developers experienced in creating neobanks. This will help reduce potential errors and ensure that you have the needed expertise and tools to ensure the success of your neobank application.

Now let’s dive into the intricacies of neobank app creation.

Step 1. Conduct market research

The first step is always to conduct thorough research. You need to understand the current trends in the market, what products and services are already there, and how well they are doing. Look at the strengths and weaknesses of other neobanks in your chosen niche. Think about how your solution can fill the gaps and stand out. Ask yourself:

Who are the main competitors in your target market?
What are the pain points of neobank users?
What features and services are most in demand?
How can your neobank offer a unique value proposition?

Answering these questions will help you build the right strategy for your neobank development and ensure that the end product meets real user needs. At this point, you should also estimate the timeframe it would take you to bring your product to life and the cost of development. If building a neobank is your first rodeo, it might be helpful to run this stage together with business analysts and the development team, who can help with project estimation.

You should also decide whether you want to follow in the footsteps of Revolut and build your neobank on 100+ back-end and web apps to support its features and administer the app, which is what you’d need to do if you decide to create a neobank from scratch. Alternatively, you could take a route of Chime and partner with a bank to skip all this back-end stuff. You could also look in the direction of BaaS services. Basically, these are bank-as-a-service providers that have all the required infrastructure to function as a backend for your neobanking app and act as a merchant between a business and a bank.

By doing a thorough research of the market, you can better prepare yourself for the competitive landscape of neobank 2024 and make well-informed decisions.

Step 2. Define your unique selling proposition (USP)

Based on your market research, decide on what will set your solution apart from the competition. Your unique selling proposition could be anything from innovative features, better interest rates, top-notch customer service, or a unique user experience.

To come up with a strong offering, it’s essential to understand your target audience. For example, if you’re targeting youngsters who love to travel, you should be looking into adding services like fee-free international transactions or attractive currency exchange rates. On the other hand, if you’re tailoring your app for tech-savvy millennials, you may want to focus on advanced security features, cryptocurrency support, and integration with other tech platforms.

Again, there’s nothing wrong with taking a look at what your competitors are doing. No app is perfect, but when you know what they lack, you equip yourself with important knowledge that can help you create a compelling product and enter the neobank market with finesse and grace.

Step 3. Choose an IT partner

To start a neobank app from scratch, the best thing you can do is hire an experienced software development company that offers extensive app development services. Since developing fintech solutions is a laborious and expensive process, having professionals by your side will prevent costly mistakes and increase your chances of creating a successful neobank solution.

Of course, it’s easier said than done. The market is overflooded with IT vendors, all claiming to be the best in the field, which makes the choice of the right vendor quite challenging. But don’t just take their word for it. Take your time to research and shortlist companies that have a proven track record in banking software development. Check their portfolios, read reviews, and look for case studies to get a grasp of their development expertise. Ensure that the company you hire has the knowledge of financial regulations and legislation and is proficient in areas such as blockchain, AI, and cybersecurity. These are all important steps that will help you sift through the many options and find a tech partner in alignment with your project goals.

We know what users want from a neobank and what features to add to make it stand out from the crowd

Step 4. Ensure industry compliance

While developing a neobank from scratch, the most important thing is to ensure that it complies with fintech and banking regulations. Make sure to go through the standard requirements before diving into the development process. Mind that these requirements will vary based on the country in which you’re going to conduct business.

For example, in the USA, you need to comply with regulations such as the Bank Secrecy Act (BSA), Anti-Money Laundering (AML) laws, and the Dodd-Frank Act. You will also need to work closely with federal and state regulators, like the Federal Reserve, FDIC, and state banking departments, to obtain the necessary licenses and approvals.

If you’re planning to launch your neobank in the European Union, you’ll need to ensure compliance with the Payment Services Directive (PSD2) and the General Data Protection Regulation (GDPR), which are designed to protect consumer data and ensure secure transactions.

Asia and other regions have their own sets of regulations. For instance, in Singapore, the Monetary Authority of Singapore (MAS) oversees financial institutions, while in India, the Reserve Bank of India (RBI) has specific guidelines for digital banks.

Learning the law governing the banking industry of your region is critical to avoid any legal pitfalls and ensure the credibility of your business.

Besides, you will also need to obtain the right license. Unlike a few years ago when it was necessary to have a full banking license to run a fintech platform, the rules have changed. Now it’s often enough to be a holder of an EMI (Electronic Money Institution) or PI (Payment Institution) license to operate. These licenses allow you to provide many of the services offered by traditional banks, except for giving loans and accepting deposits from the public.

Here’s a quick breakdown of the distinct features of EMI and PI:

Aspect	EMI	PI
Primary functio