Opening a Neobank from Scratch: A Step-by-Step Guide and Expert Advice

How can one open a neobank, and is there any point in such an undertaking in the market, where traditional banks almost completely fill the niche of consumer financial services? Individuals have access to all types of accounts (current/settlement, credit, deposit) and can get loans if necessary, financial services for wealth management are widely available, and almost all transactions can be carried out online. 

The requirements of the financial regulators to traditional banks are quite strict, so customers and their funds placed on deposits are to some extent protected. And if a bank experiences serious problems, its license is recalled (suspended), the regulator introduces external management, therefore, at first glance it may seem that private traders have no particular cause for concern

Therefore, if you do not know how to open a neobank and want to get an answer to this question (preferably, as detailed and comprehensive as possible), you need to figure out if there is any reason to start such an undertaking. To do this, you need to understand how neobanks differ from traditional financial institutions and why all analysts unanimously claim that neobanks can be called the future of the entire consumer financial sector.

Listed below are some of the key advantages of Neobanks (which, at the same time, are the disadvantages of the “traditional” banks):

• Fully remote service (including account opening and all financial transactions without any exception);
• Minimal costs for the maintenance of numerous district branches;
• Significantly lower costs of document flow (not counting the stage when you want to open a neobank and deal with administrative / legal troubles);
• Minimization of the client’s risks associated with the COVID-19 pandemic (there is no need to visit the office);
• Full control over the account (including the opportunity to open an account) from any client terminal – on a smartphone, a computer, a laptop, or a tablet);
• Significant reduction of the time spent by the client on using the bank’s services (no queues, waiting for a free manager, always a free cash desk);
• Full control over the account online;
• The opportunity to get a loan online: at the time of requesting a loan, the client may be located anywhere in the world, as long as there is a stable Internet connection;
• Significantly higher level of confidentiality;
• Availability of all services immediately after their introduction by the bank.

Listed below are the potential drawbacks (which you should take into account if you want to start a neobank and not go broke in the first few months):

• Relatively high costs of development and testing of specialized software;
• Significantly higher risk of hacking of the internal network;
• Strict requirements to information security (creation and maintenance of operations);
• The need for sufficient capital at the start;
• Dependence on software/hardware to ensure operations (servers, firewalls, specialized software);
• If you open a neobank without taking into account the current market trends in a particular region, potential clients may choose another financial institution (a traditional bank or a payment system);
• Distrust on the part of corporate clients;
• Insufficient level of financial knowledge of the majority of the population (this problem is observed even in the more developed countries, although there it is not so acute).

The conclusion that can be drawn based on the analysis of the advantages and disadvantages of Next Gen banking will not be unexpected. You can go ahead and open a neobank and, if you “guess right” about the target audience, convince the regulator about the transparency of your business (license) and manage to offer your customers an array of USPs, the business will definitely be profitable.

Further on we will discuss the practicalities connected with opening a neobank. It is extremely difficult to describe all the subtleties in one article, so we recommend you to contact the experts of the International Wealth portal (e-mail info@offshore-pro.info) and use their expert advice to develop tactics and strategies for further actions. You can choose the format of cooperation that suits you best, but the first step towards realizing your dream project will be the same in any set of circumstances – getting an individual consultation with our experts

Opening a Neobank – General Considerations

The biggest mistake that people who want to open a neobank make is focusing exclusively on the features of a mobile application. All the resources are invested in the functionality that may help the bank stand out among its competitors. A potential client must have the opportunity to open an account, take out a loan, and get the necessary financial services. The rest of the creators’ “inspiration” is spent on meeting the requirements of the regulator (license), developing the website and planning an advertising campaign.

Meanwhile, analysts unanimously assert that a good sustainable neobank is, first of all, not a mobile application that may be functional (convenient, practical, simple – choose one), but rather a complex platform. In fact, a neobank mobile application is a user interface, a kind of communication channel between the user and a variety of financial services / services.

The best samples of specialized client software (for example, Revolut Neobank, if we are to mention just one) are striking in their simplicity, if not asceticism. But if you dig deeper, it turns out that the server architecture of the application (hidden from the user’s eyes) includes at least 90 server applications, monitoring and control software, and numerous protection/identification systems.

The architecture of the software critically needed to open a neobank is developed with an eye to further expansion, and not to satisfy momentary requirements. Development of such software requires significant investments of time and money, and scalability is a necessary prerequisite for successful work.

There were enough examples in the history of IT when ignoring this requirement led to most unfortunate consequences. Suffice it to say that there was a limit 640 kilobytes on the maximum amount of RAM in the era of early PCs (1980s – early 1990s). We can also recall that some companies deliberately refused to develop an interface based on touch screen (Nokia‘s whopping mistake).

It is impossible to fit all the necessary features into a ready-to-use application immediately at the launching stage. But if you do not want to open a neobank and then constantly have to explain to your customers why the banking has collapsed, you should take architecture development as responsibly as possible.

Step 1 – Build a Strong Core

At this stage, you only have plans and a general understanding of how the project will eventually work. It will not be possible to open a neobank today or tomorrow – you are only at the beginning of the journey. In order for the bank to actually operate, you will have to work out the architecture (at least on paper, but preferably in the form of a simulator).

Minimum required software package:

• API (application programming interface). Essentially, it’s the “skeleton” of your application, which unites various services of your neobank in the space of a single interface;
• Software for working with credit cards. It provides the opportunity to run money transactions and any transactions related to debit/credit cards;
• Backoffice tools used to manage the entire platform during real commercial operations. If they are flawed, there is a chance that you will be able to open a neobank, but it will not function normally.

Creating the core is a very complex and costly task requiring both time and financial investments. However, it can be approached in two ways. The first one is the most resource-intensive, but also the most promising: developing the core from scratch. The second one allows you to minimize costs, but you will also have significantly less room for maneuver. It presupposes using the software developed by an already existing financial institution (most often, a traditional bank). An unobvious advantage of this method is the simplification of the process of obtaining a license (figuratively speaking, you are opening a neobank as an online “branch” of a traditional bank). But there are also disadvantages.

Arguments in favor of developing the core “from scratch”:

• Full control over the functions, capabilities and further development of the system (adding new services, scaling, etc.);
• The possibility of further conversion to SaaS (Software as a Service), while you can license the platform to other fintech projects;
• Simpler expansion of functionality. If you open a neobank that does not provide the options that are not currently required, the core will have to be created anew. This will lead to a situation when some bank services may become unavailable to customers. 

Arguments against in-house development:

• Considerable investments of time and money;
• The need for a competent team of programmers who would be able to take into account all your requirements, which is not an easy task.

Using a third-party platform (the opportunity to open a neobank based on the developments of an already operating traditional bank) is the path that was chosen, for example, by neobanks Chime and Dave. In fact, we are talking about outsourcing the server part of the project architecture. It has a number of advantages, including the following key ones:

• The chance to enter the market sooner (with this approach the only thing required is a license from the regulator; the neobank can theoretically work “under the wing” of a traditional bank);
• An existing wide client base right at the start;
• Minimization of initial costs. In fact, you can open a neobank with a relatively small investment (by relevant standards), offering your clients high-quality services and financial tools almost immediately after registering and setting up the software.

Disadvantages of a third-party platform:

• Potentially outdated software.
• Problems with integration of new services and features.
• Clientele connected to the “old” traditional bank (which means that your target audience may be inert and set on certain demands which you may find hard to satisfy).

Another option in opening a neobank is to use third-party software that is widely considered the industry standard (for example, Temenos or Synapsefi). The main advantage of this approach is the turnkey infrastructure. The complete character of such solutions (software plus hardware) allows us to talk about the complete replacement of the server infrastructure of a neobank. In this case, the services and tools (loans, bills, and customer support) will be fully operational from the start. You can add the missing elements with minimal time and money investments. There is also a downside to this approach to opening a neobank: rigid binding to the solutions that you cannot control. Examples of ready-made solutions include Volt and Judo Capital (platform providers are Temenos and Microsoft Azure).

The opportunity to open a neobank in the format of a financial service provider has two main advantages:

• Faster market penetration;
• Smaller requirements in terms of the initial investments.

However, the opportunity to open a neobank in the format of a financial service provider has two main disadvantages:

• Difficulties with integrating new features, solutions and services.
• Difficulties with integrating with BaaS (Banking as a Service) because of the blocked technology stack.

Step 2 – Create the Client App

A client that wants to open an account, take out a loan, or receive a financial service for savings management is unlikely to be interested in the intricacies of the core software implementation. Among the factors not directly related to their personal interests, the most they would care about is security (whether the regulator issued a license and whether its requirements are taken into account) and convenience and ease of communication with technical support (presence of a website, availability of communication channels).

However, this client will care much more about their own comfort. So, if you want to open a neobank, you should make the biggest emphasis on the development of the application. There are enough nuances here, so we cannot give a universal recipe for creating the best mobile application. We strongly recommend involving representatives of the target audience in the development process, working with focus groups and concentrating on those services that are really in demand.

The basic set of functions (services, tools, and features) that should be tested by the time you are really ready to open a neobank includes the following:

• The necessary types of accounts;
• Bank cards – credit or debit ones;
• Payments (by using details, to the card of your neobank or another bank), payments of utility bills, etc. Please note that the entire procedure for the client should be as simple as possible, since the users who will work with your application are probably far from the world of IT technologies;
• Budgeting.
• Investment services;
• Affiliated accounts;
• A well-developed system of notifications and reminders.
• Help resources, including the chat with technical support representatives, a list of communication channels, account manager’s contact details, etc.

We believe that when choosing between a third-party/licensed platform and your own development, you should prefer the latter option, even if its implementation will require larger financial investments. If you decide to open a neobank using third-party software, you are risking to lose control over the project and facing numerous lawsuits at one fine moment. On the other hand, the option with outsourcing the software is quite possible, if you do not forget about the strict quality control of the code. This way, you can offer customers the services and tools they need, avoiding excessive costs for software development and testing.

Step 3 – Defend Your Project

Another “simple” topic, which is almost impossible to fully understand within the space of one review article. Many people who want to open a neobank consider software development or finding sources of financing to be the most difficult stage, but that is not really true. Since all the operations, services, tools, and advanced features of the neobank will be implemented online, it is much more difficult to create an immaculate security system.

You should pay attention to the following:

• Proactive Security. The most reliable option is a dedicated SOC (Security Office Center). You can also use software from external companies created for managing corporate security (SIEM, which stands for Security Information and Event Management). For example, NuBank uses AWS Lambda software, which is based on per-module-running permissions approach. Other AWS (Amazon Web Services) security tools that we recommend implementing if you want to open a neobank are Guard Duty (monitors errors and crashes at the network level), AWS Shield (protects the network from DDoS attacks and removes them), and AWS Firewall configuration.
• Passive Security. The main defense methods include ongoing analysis of the entire infrastructure, with mandatory registration of all occurring events, setting up security groups, and volume control (searching for potential problems among the used protocols).
• Client-Oriented Confidentiality. At the initial stage of opening your neobank, your will be dealing with a number of different tasks at once: obtaining a regulator’s license, starting your neobank app, offering customers a variety of basic services (loans, cards, accounts, wealth management, investment tools), and creating a user-friendly interface. If you do everything correctly and provide a sufficient level of security, then over time you will gain a client base and develop a promising business capable of successful long-term operations. However, if your customers are forced to wait for several minutes to enter the application, have to enter long passwords repeatedly, are constantly required to confirm each operation, they may not like it. If security and privacy procedures violate a certain level of client comfort, they will eventually lead to an outflow of users and create problems for the project as a whole. The ideal option is “invisible” security, when protection systems are activated only when directly connected with the client’s current operation. 

Step 4 – Test the Platform

It is impossible to completely insure yourself against mistakes. However, this does not mean you have the right to open a neobank after performing only a few formal tests. A ready-to-launch platform should be run in test mode for some time. First – without access to the outside networks (internal sandbox mode), and then – in beta mode. Only after that it can be put into operation.

We are not going to tell you now how NuBank and Revolut tested their applications, as this will probably be interesting only to network administrators. We will just mention one fact here. In order to make sure that just one service (currency exchange in one currency pair) operates correctly, at least 100 blitz tests were carried out. And this is not including the operations carried out as part of the comprehensive testing of currency exchange tools in any combination, and the testing of the finished version of the client application.

Here are the types of testing recommended for everyone who wants to open a neobank that would eventually become an operational and promising scalable client-oriented business 

• Modular testing;
• Integrated testing;
• Security testing (internal, external, with client-error protection);
• User-oriented, from the point of view of the user’s interaction with the app;
• Regressive testing.

Step 5 – Manage Deployment and Updates

It is impossible to open a neobank and ignore the need for further development in your plans and budget. You will probably want to offer the clients new services and tools, “refresh” the corporate website, tell the users about the changing banking rules. All this requires altering the application code. Also, if the regulator puts forward new requirements, it may be necessary to change the application core or even its interaction methods and the part of the software responsible for working with the clients.

In a word, you will have to deal with software-related issues one way or another. The best option is to employ the DevOps (development & operations) methodology, which involves the active interaction of programmers and maintenance specialists. Only sufficient functionality, reliability and efficiency of the application will give the clients a sense of satisfaction and understanding that the bank they have chosen really provides all the necessary services and tools.

Opening a Neobank: Main Checklist and Key Advice

The information we shared above relates mostly to practical issues connected with developing and implementing of a set of functions, services and tools associated with a neobank. But organizational procedures needed for this kind of startup do not end with those. You will have to solve many problems unrelated to software development, deal with obtaining a license, calculate the requirements of the regulator, look for investors, and so on.

Neobank Must-Do Checklist:

• Think over the proposal for investors and calculate, at least as a first approximation, the main possible short-term results;
• Calculate the overall financial model. Opening a neobank with unlimited funding is easy. It is much more difficult to launch a project when saving resources is one of the most important issues. In order to open a neobank and not to burn out in the very first months, you must understand the approximate budget of the project, the volume of additional investments that may be needed in the nearest future, and the approximate timeframe for reaching self-sufficiency.
• Work on the design and functionality of the application. Determine the services, tools and features that will be in demand among your customers. All other options can be implemented only if you fit into the planned costs and deadlines.
• Gather the necessary resources. Opening a neobank with the staff of 2 or 3 people will not work. You will need a fairly large team of like-minded people. These will include programmers, interface designers, testers, and marketing specialists. It is highly desirable to cooperate with trusted and reliable contractors, outsourcing studios and lawyers (the license of the regulator is not that simple to retrieve).
• Decide on the project launch model. To open a neobank, you can run a large-scale advertising campaign or choose to work with private invites.

The main reasons why your project may fail after all:

• Investors losing interest – or you facing a lack of funding. You can actually open a neobank, but there will not be enough resources to maintain its operation until it reaches self-sufficiency. There are enough examples when a neobank was put into operation, but turned out unprofitable (Revolut, ZA bank, KLARNA);
• The cost of the software being too high;
• Really tough competition. If you do not offer the best services and tools, you will not be able to count on high performance and revenue. Starting a neobank and working for several months or maybe years is the most that can be achieved when working in the second tier;
• Failure to comply with the requirements of the regulator. The procedure for obtaining a license is becoming increasingly complex, and new compliance rules appear almost every month;
• Disagreements in the ownership team. Remember the expression “herding the cats”? It may be hard to make a diverse team of talented, dedicated and knowledgeable professionals to share the same vision and accept the need to move in the same direction. You need to invest efforts in making sure all your team members are on the same page about the goals of your business and the approaches they may use to achieve them.

Our advice:

• Do not worry too much about problems and difficulties. It is unrealistic to open a neobank, or in fact any new business, without them: something will definitely go wrong. The main thing is to have a clear understanding of the goals and offer your clients the financial products and services that they really need. Our experts will be happy to help you to solve organizational problems, such as opening a bank account, registering an operator company, choosing services, obtaining a regulator’s license, and so on);
• Learn from the mistakes that have been made before you;
• Do not fully rely on machine learning technologies. The story of Chine (the most popular US neobank, June 2021) is the best illustration of this thought;
• Make reserve copies of the security system, but do not think that quantity will sooner or later turn into quality;
• At the pre-planning stage, think carefully about the architecture of the project (it’s always better if it is open, but secure enough). If you go for coherence, that may reduce your initial costs, but if there is a need to change part of the code, it will have to be rewritten from scratch.
• When you are planning to open a neobank, you should not cooperate with service providers that have just entered the market. At the dawn of its formation, neobank Dave (USA, market value over 1 billion USD) used the analytical platform Waydev. It was hacked, and the data of 7 million users was leaked onto the Internet.
• Decide on the mobile platform in advance. The NuBank developers failed to do that, and now they are trying to cope with three (!) code bases that largely overlap each other

Recommendations and Expert Advice

Opening a neobank is both simple and difficult at the same time. If everything is done correctly, there should not be any huge problems. But if you do not pay necessary attention to the pre-planning stage, you can get into serious trouble. The main difficulties are obtaining a license from the regulator, choosing the optimal set of services and tools at the start, finding sources of additional financing, “expensive” loans for development, and traditional banks that actively play against the newcomers on the market.

However, all these obstacles are of a technical nature, and, with the proper approach, they may well be resolved. Contact our experts now to discuss the current situation and decide on the best course of action. We will analyze the situation and offer you several solutions. You will be able to choose the necessary services and tools, fully understand the requirements of the regulator, and calculate the possible risks.

You can read more on the topic in the following artciles:

• A business account with a traditional bank, a payment system or a neobank: what should you choose?
• A foreign bank or a payment system: where should you set up an account?
• Neobanks: a revolution in the world of finance

Do you want to open a neobank? Are you looking for a reliable partner to implement this project? Contact our experts, and we will definitely help you!