Many now have a neobank, a quick tiny app with banking capabilities provided by non-traditional digital-only banks. Neobank, also known as challenger bank or digital bank, is a particular form of direct bank that only utilizes Internet banking and does not have conventional physical branch networks.
We can confirm that emerging neobanks pursue the underbanked and concentrate on specific sectors after studying the most recent investment series, for instance:
- e-commerce,
- startups in general,
- freelancers,
- immigrants, etc.
Here is a full overview from the viewpoint of a company owner if you have discovered the distinctive banking demands of a big cohort and seek to learn how to construct a neobank to service them.
Key findings:
- Along with developing mobile apps, neobank development involves building a number of back-end programs. Using BaaS (Banking as a Service) companies or collaborating with a reputable bank are two solutions to this problem.
- Avoid integrating open-source and third-party code as is while creating a neobank from scratch since it can be out-of-date or include viruses.
- Consider the security architecture of a neobank before setting it up in terms of numerous defensive layers that extend from the creation of the environment to a live neobank app. After all, challenger banks place a high focus on security.
How to Launch a Neobank from Nil
When creating your own neobank platform, it is important to keep in mind that you will need to create more than just a slick mobile app. You will essentially be running on a series of web apps that are essential to the mobile app’s functionality.
On the surface, challenger bank applications like Revolut appear to be quite straightforward and enticing. You may establish and upload an online account with Revolut. You may pay and shop online internationally with this account. The mobile app gives you control over your digital account. You may conduct any kind of transaction using the app, including transfers and payments, deposits and withdrawals; even for on-first-sight risky activities, like gambling. Given it is quick, safe, and simple to use, it is one of the most well-liked brand-new payment methods offered in the gambling sector consisting of Revolut casino sites. You will need a card if you intend to use the app to make traditional payments but the good news is that you will be able to use the prepaid debit card practically anyplace. Revolut utilizes the interbank exchange rate, charges no startup or maintenance fees, and offers fee-free ATM withdrawals at more than 55,000 of its in-network ATMs.
While users encounter all of this gloss through a seemingly straightforward mobile app, its back end has the following:
- supports all of the major functions of the mobile app; 90 back-end apps,
- the company’s staff uses 10 web applications to manage the mobile app.
Can you picture it? One cool app is seemingly hidden behind 100 more apps. Of course, Revolut did not create all of that when it launched the business in 2015. However, for the mobile app to operate as intended, some of these “concealed” programs have to be included with the first release to the general public. If you wish to create a neobank app, you are in the same place.
We hope we succeeded in our attention to present you some of the benefits of neobanking through the example of the London-headquartered service.
“Oh, but wait a second. How does this Chime app fare? According to what I have heard, they collaborated with a bank and did not squander money on all this back-end work,” we hear your question. And you are entirely correct, fellow software developer. There are several approaches to solving this problem; go over the first step below for details as you begin to picture your neobank application.
A little note: Industry statistics state that the worldwide neobanking market, driven by applications like Chime and Varo, was estimated to be worth USD 66.82 billion in 2022 and is projected to increase to an astonishing USD 2048.53 billion by 2030, expanding at a CAGR (Compound Annual Growth Rate) of 53.4% from 2022 to 2030.
Step 1: Create a Neobank’s Core
It has been determined that you will need to develop, at least, a few back-end apps for your neobank application. What do those mean? At a basic minimum, you will need the following to launch a neobank app:
- API (Application Programming Interface),
- card processing application,
- back-office technology.
Your app’s connection to other services, such as an authentication module or a payment gateway, is made possible through the API, which is an unnoticeable layer. Additionally, APIs integrate different banking services inside your own application, which is the case while creating fintech apps generally.
The card processing app handles everything pertaining to transactions (such as transaction value) and other activities involving credit/debit cards and account management. The main business logic for your app will be there.
The goal of back-office tools is to administer your neobank platform in its entirety. If you have to alter the code each time an interest rate has to be changed, you cannot be efficient.
How is this core constructed? Now, the first choice is to create these back-end programs from scratch, along with many others, like fraud detection and compliance services. Naturally, there are several restrictions when creating financial products employing this method.
The Benefits of Building a Neobank From Scratch
- You are solely responsible for the system’s conception, execution, and future expansion.
- Later, you may create a SaaS (Software as a Service) offering to other neo-banking firms using the infrastructure you have already developed.
- By paying for more features with an item that already has traction, you may progressively grow your offering.
The Drawbacks of Building a Neobank From Scratch
- Requires more time than the other cases (which we will talk about in a moment).
- Needs a substantial up-front expenditure.
The second choice is to imitate neo-banking firms Dave, Chime, and others that choose to join up with well-known banks providing conventional banking services. Keep in mind that the type of financial assistance your app will provide will influence a lot of things. To handle your mobile neobank, you must still create some back-end applications, even if there are only a handful.
The Benefits of Outsourcing the Back End of a Neobank to a Traditional Bank
- Time to market is quicker.
- Access to a current clientele might be an option.
- Budget-friendly compared to starting from scratch.
The Drawbacks of Outsourcing the Back End of a Neobank to a Traditional Bank
Despite what may appear to be benefits, collaborating with traditional banks for your neobank’s back-end might limit your capacity to adopt cutting-edge digital banking solutions since you would need to follow their existing technological and regulatory frameworks.
- It is typically challenging to integrate new functionality, such as AI (Artificial Intelligence) consumer profiling, with bank old software.
- Due to regulatory restrictions, consumer banking products are restricted in number.
You can also choose to use banking as a service. Businesses like Synapsefi and Temenos, which act as the backbone for your neobank app, provide all the necessary server and software resources on demand.
The Benefits of Employing a BaaS Provider
- Time to market is quicker.
- Entails a lower initial outlay than starting from scratch.
The Drawbacks of Employing a BaaS Provider
- Support for intriguing new features is difficult to anticipate.
- Integration with a BaaS using a locked-in tech stack.
Neobanks like Judo Capital and Volt use pre-built banking infrastructure from Microsoft Azure and Temenos to offer cutting-edge financial services.
Bottom line: By choosing banking as a service, you cede control over your IT stack to a service supplier. When creating anything from scratch, you will be in charge of the tech stack, as well as adhering to all applicable financial sector regulations and obtaining a banking license.
However, that is neither wholly terrible nor unusual among banking apps. As an illustration, Revolut built the key elements of a neobank, including the API, card processing, and back-office infrastructure, from the ground up using Angular, Java, and PostgreSQL.
Key findings: Making a neobank app for mobile requires skilled full-stack or back-end app developers because server-side development cannot be avoided.
Step 2: Create a Neobank App That Targets Customers
To build an engaging neobanking platform, you must develop a geared toward customers’ mobile banking app in addition to the back-end. We suggest applying a method that entails creating a compelling user experience for a certain clientele before testing it to ensure that the UI (User Interface)/UX (User Experience) is appealing to the intended market.
The following functions would typically be present in a neobanking app to aid users in managing their finances:
- escrow accounts,
- debit or credit cards,
- payments,
- past transactions,
- budgeting,
- investing possibilities,
- instantaneous fraud detection,
- minor accounts,
- notifications,
- live chat support desk.
Now, we are strong supporters of leveraging third-party solutions as a shortcut to creating things more quickly, whether they are open-source or commercial. However, since an external library could include malware, it is preferable to construct your functionality set from scratch while building a neobank.
Use only trusted providers, even if you decide to speed up neobank implementation with third-party code. Make sure that before using any open-source library, developers scan it for viruses and security flaws.
Key findings: Wherever feasible, avoid utilizing third-party components in favor of concentrating on developing an interesting banking experience with distinctive capabilities. Verify every piece of external code carefully, especially if it is open-source. Utilize quick prototyping to test your UX/UI concepts.
Step 3: Make Your Solution Secure
Because the success of a neobank depends on trust, security is obviously essential. Let us look at what you can do to ensure the security of your app even if safeguarding a neobank is a series of procedures covering the full procedure rather than just one step.
First of all, you should be aware that a strong neobank security plan must rely on numerous protection layers, beginning with the building and staging environment and ending with the actual production configuration of a platform.
Advanced Security
Establishing a Security Office Center (SOC), which serves as a command center and analyzes every piece of data generated by your neobank online infrastructure, is the proper strategy for dealing with this Herculean undertaking.
To achieve these goals, several financial institutions now use business SIEM (Security Information & Event Management) software. However, it is preferable to create your own security pipeline by combining tools from reliable suppliers and custom-built solutions.
As an illustration, NuBank utilizes AWS Lambda to build a bot army that can defend against fraudulent activity, security breaches, and other typical threats. With this strategy, you essentially deconstruct the monolithic security of your neobank into microservices because each bot only has restricted access to a single module and, even if hacked, cannot bring the entire system down.
Because they can detect abnormalities far more quickly than humans operating around the clock and can repeat the same process nearly indefinitely without error, bots are excellent for protecting neobanks. The method also makes the software creation process simpler.
Other AWS (Amazon Web Services) capabilities that you might utilize to safeguard your clients include:
- AWS configuration firewall rules (protections against unintentional coding errors).
- AWS Shield (prevents DDoS attacks).
- Guard Duty (registers mishaps at the network level).
Unassertive Security
You should record each and every action that takes place on your neo-banking platform, then use machine learning computational methods across these terabytes worth of information to search for trends that could catch the attention of your security team.
Setting up security groups (which servers are able to access what data, on which ports, etc.) and volumetric management are additional passive defenses that often aid in catching problems at the protocol level where you cannot instantly see what is wrong.
Customer-Focused Privacy
You should keep in mind that despite the abundance of security tools and methods available (we have just scratched the surface here), they cannot prevent users from using your app. Neobank security should ideally be undetectable to customers or take the most user-friendly form possible, such as video conversations to confirm identification.
Key findings: For a neobank, an effective security strategy has to involve a set of procedures for both the creation and deployment of backend and frontend apps.
Step 4: Carry Out Trials on a Platform for Neobanking
You should have as much automated testing as you can, based on what we have seen with several top-rated neobanks like NuBank and Revolut. One strategy for doing such is test-driven development.
Consider all the use scenarios that your clients could encounter when utilizing the software. It is nearly hard to find and fix every problem using manual testing. Revolut, for instance, formerly ran almost 100 automated tests to cover all potential scenarios involving currency conversion.
While they are still required, QA (Quality Assurance) engineers ought to be able to create code and streamline the process of testing. Here are some of the tests you might anticipate your team to conduct on your platform without getting into great detail:
- testing for integration,
- unit-testing,
- testing for user acceptability,
- testing for security (including penetration tests),
- load testing (spikes in user base),
- regression testing.
Key findings: Assemble a group of code quality assurance engineers who are accustomed to utilizing automated testing tools and who can build a specialized testing framework for unit, integration, and end-to-end tests eliminating the requirement for screen rendering.
Step 5: Install a Neobank
A successful neobank experiences changes constantly, as you could expect. For instance, Chime updates its banking app for the iPhone about five times per month. Can you imagine how many server-side upgrades are taking place in the background to support these mobile app modifications? At least a dozen, if not hundreds, in our wager.
Because of this, while launching a neobank online, a well-established DevOps methodology and toolchain are needed. DevOps, in summary, consists of best practices and equipment that hasten the release of fresh editions of your software to the general population.
In reality, this entails spinning up an entirely new version of your neobank with well-tested new features, redirecting DNS servers to this new illustration, and then killing the old bank instance once traffic begins flowing to the new one.
Key findings: DevOps is crucial to the smooth operation of a neobank. DevOps is therefore absolutely a component of the solution if you are asking how to launch a neobank in the most adaptable way. Following the launch, keep an eye on client involvement.
Acknowledge Top Neobanks’ Defects
Do not give up while starting your own neobank if you encounter certain difficulties. Even elite athletes make blunders occasionally. Hopefully, you can steer clear of some of these flaws with the added advantage of hindsight.
Anti-hacking Spree with Machine Learning Included
The most popular US neobank, Chime, offended quite a few of its users by abruptly canceling their bank accounts in June 2021.
The neobank was reportedly attempting to combat an increase in bogus deposits. The fact that accounts were blocked automatically and that access could not be immediately restored, however, shows that a development firm used machine learning algorithms that were not properly trained for the job.
Advice: Always have a backup security system in place to rapidly address any problems and keep servicing legitimate clients who become the target of false-positive warnings – an unbeatable business strategy.
Look at the Entire Architecture of Your Neobank
When Revolut found there was an excessive amount of spaghetti code, it had to start over and rebuild all of its original code.
Advice: Do not start off by creating a monolithic app. I advise starting with a microservices architecture in place. Additionally, all services should be available for integration, so be prepared with APIs.
Stay Away from Integrations with Nascent Service Providers
A security flaw occurred when hackers gained control of Waydev, a developer analytics platform that Dave connected with, exposing the data of 7M users.
Advice: Do not start off by creating a monolithic app. We advise starting with a microservices architecture in place. Additionally, all services should be available for integration, so be prepared with APIs.
Advanced Decision on Your Mobile Tech Stack
In order to hire native mobile developers, NuBank had to first move to React Native and subsequently to Flutter. The firm is progressively replacing its mobile and web apps with Flutter while still managing three different codebases.
Advice: Pick the suitable mobile neobanking app mobile stack as soon as you are in the MVP stage. By doing it in this manner, you will save money by not having to rework anything that is currently effective.
Barriers to Developing a Neobanking App
The creation of a neobanking app is like navigating new seas, where even the best-prepared teams run across unforeseen difficulties. Consider Monzo’s first launch phase as an illustration. Despite having a sound concept and a strong team, they encountered several difficulties, such as regulatory complexity and technological obstacles.
There are a number of important things to consider when starting a neobank. Let us go through some important factors.
The Regulatory Maze Navigation
Although it is no easy task, following regulations is essential for the effective operation of your neobank. How to do it is as follows:
- Recognize the regulatory environment: Each nation has its unique set of banking laws. Make sure your neobank conforms to these rules by familiarizing yourself with them.
- Consult with knowledgeable legal counsel; they can assist you in figuring out how to handle these restrictions and what impact they will have on your neobank.
- Add compliance-related functionality to your app: Neobank applications have to have elements like verification of identification and fraud prevention systems that assist users in complying with legal obligations.
To make sure your neobanking is completely compliant, always get the advice of a reputable legal advisor. Also, keep in mind that regulatory guidelines in the nation where you wish to start operating might change. For instance, in the United States, these regulations are BSA, USA PATRIOT Act, TILA, EFTA, and FCRA.
Adopt Technology Standards, Including PCI DSS, and More
To guarantee secure and effective operations, neobanks developing apps for mobile devices must also go by a number of technical requirements. The PCI DSS (Payment Card Industry Data Security Standard) is one such significant standard. In order to maintain a secure environment, all businesses that take, store, handle, or communicate credit card information must adhere to this set of security requirements.
PCI DSS Compliance: Adherence to PCI DSS is essential for neobanks since it guarantees that cardholder data will be kept safe and secure. To achieve these requirements, your neobank app has to be well-protected with encryption, firewalls, and frequent vulnerability checks. Beyond PCI DSS, comparable standards that are suitable for the creation of neobank solutions comprise ISO 27001, GDPR, and PSD2.
It is important to keep in mind that achieving and keeping conformity to these standards is a continuous process needing frequent audits and modifications. You may reassure your consumers that your neobank is dedicated to upholding the highest standards of security and effectiveness by adopting these criteria.
Putting Together Your “Dream Team”
Leveraging their own in-house development teams may seem like the most direct route for established banks wishing to enter the neobanking space. The development process can go more quickly since these teams have already become conversant with the bank’s systems, culture, and objectives.
However, this might not be a practical choice for companies. Startups sometimes have limited funding, therefore they might not be able to provide a substantial salary for a fully functional development staff.
Hiring a committed and affordable staff emerges as an appealing choice in such circumstances. These companies offer a plethora of diversified expertise to the table, along with a solid grasp of the newest developments in fintech, regulatory compliance, and neobanking development. Their teams work directly with you to comprehend your vision and transform it into leading-edge neobanking software that shines out in the crowded fintech market. As a matter of fact, they function as a subsidiary of your company.
- Employ an app development firm with experience and skills in the fintech sector, including software developers and financial specialists. Look for fintech experts.
- Develop a creative culture: Your staff should be enthusiastic to adopt cutting-edge technologies and novel banking strategies.
- Encourage ongoing learning because the financial industry is always changing. Encourage your staff to stay current on the newest advancements and trends.
This does not preclude established banks from reaping the rewards of assembling a committed workforce, though. They can choose to launch a neobank with an external development services team and progressively move toward in-house development as their neobanking activities improve and grow.
This strategy enables them to reduce project risk in the early going while guaranteeing that they have the internal resources required for the long-term viability of their neobank.
Implementing Strategic Funding to Power Growth
Although it is a difficult task, funding your neobank is not insurmountable. Here are some things to remember:
- Look at several funding options: There are various methods to finance your neobank, from venture money to crowdsourcing. Examine every possibility, then pick the one that most closely reflects your corporate objectives.
- Be truthful with prospective investors: Your company plan and the way you expect to make money should be made clear. Transparency fosters confidence and may aid in obtaining finance.
- Demonstrate value by outlining how your neobank differs from its rivals to prospective investors. You have a better chance of getting money if you can show greater value.
It is a good idea to start talking to a certain bank promptly as you have a working prototype if your long-term aim depends on getting purchased by them. This holds true whether or not your prototype makes use of the bank’s APIs. Early involvement helps promote mutual understanding and vision alignment, resulting in a smoother transition.
Cultivating Collaborations and Partnerships
Collaborations and partnerships can greatly improve the services offered by your neobank:
- Look for strategic alliances: Work together with other fintech businesses to improve your offerings. This may involve everything from selling insurance goods to interacting with payment systems.
- Utilize the current financial infrastructure. Join together with traditional banks to benefit from their expertise in banking and regulations.
- Join ecosystems for fintech: Participate in fintech ecosystems to get access to resources, knowledge, and clients.
The Heart and Soul of a Successful Neobank: Customer Support & Experience
The success of your neobank depends on how well you serve and assist your customers. Here are some methods to improve a neobank’s customer-friendliness:
- Be accessible: It should be simple for your clients to get in touch with you. Offer several customer service methods, including phone, chat, and email.
- To tailor the client experience, from product suggestions to individualized financial advice, use AI and machine learning.
- Pay attention to your clients: Ask for input frequently, then respond to it. Your finest resource for ideas on how to enhance your neobank is your consumers.
It Is Time to Open a Neobank
You should now have a better grasp of how to launch a neobank after reading this blog. It is okay if you find yourself with even more questions than you had before you started reading. Finding fresh issues and their solutions is the key to establishing a successful fintech company.
Do not hesitate to set up a conversation with a specialist firm to talk about how they may assist you in creating a neobank with distinctive capabilities. Your digital bank will be delivering, we are rather confident.