The coronavirus pandemic has brought significant changes to the way people look at banking. Safety became one of the major concerns, and the world’s population started to accept remote banking and payments more eagerly. The industry’s answer to this change is digital banking services, and neobanks in particular.
Neobanks are becoming more and more popular in recent years: Statista predicts that this year the global neobanking sector transaction value will grow up to $3.84 trillion.
In this article, we’re going to review the benefits of neobanks, how they operate, and in what ways they are different from digital banks, and, most importantly, provide a step-by-step guide to create a digital banking app – neobank from scratch.
But first, let’s deal with the basics — what are neobanks?
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Neobanks — what are they?
The most basic answer is simple: a neobank is a financial organization similar to a traditional bank, but with all its operations being conducted digitally. Two main neobank features are the complete absence of real-world offices and the implementation of cutting-edge technologies in their activity.
Neobanks services mostly mirror the services available at traditional banks, such as personal/corporate accounts, loans, deposits, transactions etc.
You should not, however, get them confused with digital banks. Despite being quite similar in services and technologies used, digital banks always represent a digital branch of some traditional banking institution, while neobanks are separate and independent. Neobanks almost always limit their activities to online banking.
Now let’s take a short look at the main approaches which neobanks take in their activities.
Three neobank operating models
The global financial system is still firmly tied to the traditional banking system, therefore neobanks still have to find a way to intercommunicate with traditional financial institutions in order to work. There are three main models they use:
- Being a digital initiative of a traditional banking institution
- Get a partnership with a traditional bank and use their product as a base for neobank’s web and mobile applications
- Become a completely independent institution with your own license. It should be noted that this approach is limited to countries that allow completely digital banking institutions to be licensed.
There are some discussions about the companies from the third category being the only “real” neobanks, since only they are completely independent, but we’re not going to delve into those. Anyway, it doesn’t seem likely that neobanks will get complete independence from traditional banking soon.
Now that we have a clear understanding of what neobank is, let’s get the process of creating one straightened out.
How to build a neobank from scratch
There are seven main steps in establishing your own neobank.
Get to know your future clientele
The most important thing before you even begin is to understand the people you’re going to work with and try to attract. Define your strategy, basic marketing principles, and the value you’re going to bring.
Clarify use cases
When you have a firm understanding of your audience, it is time to write out a clear vision of how your neobank solution will work. This is also the step to define the requirements of your project, both business and technical ones. After that, you need to create a comprehensive and detailed description of how users will interact with your solution.
Prepare a platform for your neobank
There are several ways to establish a platform: you can either create your own, purchase an already established platform, or get into a partnership with one. All three approaches have their advantages and disadvantages, and you can always combine them in accordance with your circumstances and budget.
Get your neobank licensed
Some mistakes in development can be fixed later, but without proper licensing, your neobank will simply not be able to operate. So it is important to spend time learning your country’s legislation when it comes to digital banking and prepare everything in advance.
Customize your platform
The whole user experience of your customers will depend on the way you customize your neobank’s platform because it defines the process of their interaction with each other. Make it simple, learn and address some key pain points of your audience, and you will have no problem attracting new customers.
Launch your neobank
While some might think that the hardest part is behind them, it cannot be further from the truth. Yes, all the work on creating your neobank is done, but its lifecycle is never going to be self-reliant and will always require your close attention and preparedness to react fast. Communication with your customers becomes a top priority — it will most likely define your success.
Post-launch changes
The banking sphere is changing constantly. New technologies bring possibilities for expansion, and decisions of legislative organizations can change the terrain overnight. Always stay vigilant and ready to adapt your neobank to stand the test of time.
Costs and challenges
It is hard to predict the exact sum you’d require to open neobank, as it is dependent on many factors. Based on your needs, local regulations, and ambitions, it can start from $300,000-$400,000 and get as high as several million dollars. Carefully study the market to avoid unnecessary expenses.
As a neobank creator, you’re most likely to face these most frequent challenges:
- Unclear prospects. You better know precisely what you want to avoid stalling during design and development of neobank.
- Monetary problems. Neobanks need time to get profitable. Include that in your calculations preemptively.
- Problems with legislation. Even the slightest indiscretion in your legal affairs may lead to a complete failure.
- Development is too expensive. Developing software for your neobank can be really expensive, especially if you want it to include a lot of features. Treat your contract with the developing team carefully and make sure to take all little nooks and crannies into account to avoid expenditures.
Some final thoughts on the matter
Neobanks grow more and more popular as of late, creating quite a harsh competition environment in the industry. The more attention to detail you put forth during the creation of your neobank, the more likely you are to succeed. We hope that our short guide will help you with that.
