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January 8, 2021

How to Build a Neobank

Brett Hales

Background

As part of the Global Financial Crisis fallout in 2008, regulators around the world began to offer a new, streamlined path for emerging players to gain a banking license. Regulators in the United Kingdom and Europe were early movers, however, today many regulators worldwide have opened their arms to new players that spark innovation into the sector. 


The term neobank simply means ‘new’ bank and typically doesn’t rely upon branches to distribute their products. They favor digital channels and are widely mobile-focused. 


The early pioneers were required to spend a substantial amount of time and effort to build their own banking platforms and connect to card and payment networks since technology at the time from the banking sectors hadn’t fully developed for cloud computing. 


Neobanks were also required to work with regulators hand-in-hand to push new ways of working inline with new regulatory frameworks which required large teams of people specializing in this area. Therefore, these early pioneers were required to raise substantial investment rounds before their products were available to end-users and keep a large portion of their equity in security just to operate.


In the US, the rapid rise of neobanks including Chime, N26, and Dave has spurned user growth and they’ve raised considerable amounts of venture capital to sustain their business and compete with traditional banks. These first-mover neobanks in the US took advantage of a different path to market, often partnering with a traditional bank in order to gain speed to market and product depth without the need for their own banking license. This gave them the ability to focus on customer solutions and utilize the banking partner to assist with risk, compliance, and other back-office requirements. The ability to focus on customer experiences has led to niche banking offerings that target a certain product or segment in the market. 


Many have targeted specific verticals inside banking like Foreign Exchange, Savings Accounts, Micro-Lending, or Cryptocurrency and utilized Banking-as-a-Service capabilities to grow and scale.


How do you build a neobank?

If you are looking to build and launch your own neobank, there are several paths you can take.


  1. Become a bank - Essentially you’ll be doing everything from deploying a core banking platform to building up the requirements and capital necessary to apply for a banking license. You’ll likely have divisions of people in engineering, operations, finance & reporting, compliance, audit & risk, treasury, product, customer service, and human resources to name a few areas. Notable Banks that have gone down this route include N26, Monzo, Starling Bank, and Atom Bank. These banks didn’t have the support or access to platforms like banking-as-a-service that more recent entrants do today, so they had to do it all themselves.
  2. Partner with a bank - Partnering with a bank can be a popular route to market due to the fact that the licensing, team, core platform, and products all exist. Often the downside is usually in the technical infrastructure and integration where the bank may not have the modern architecture to build from. Additionally, the upfront and ongoing costs to integrate with a banking partner are usually high and out of reach to most new entrants looking to expand and grow. Banks like Varo, Zero, or Simple have gone down this path and partnered with a traditional bank in order to launch and scale. 
  3. Use the Banking-as-a-Service play - Using a banking-as-a-service platform offers the ability to start faster and scale at your own pace without requiring large sums of capital, armies of people, or the need to build from expensive legacy systems. You can focus on what matters most, solving customer problems, and scaling your business. Notably, companies that utilize this recipe are able to solve niche banking problems (like Foreign Exchange or micro-lending) and can still be profitable, whereas other traditional banks wouldn’t easily be able to specialize wholly in any one vertical. Banks that have scaled via banking-as-a-service include Mercury, Chime, and Dave.

What is Banking-as-a-Service?

Banking-as-a-service (BaaS) solves the requirements for new entrants by offering banking service from day zero without the need for huge programs of work or raising substantial amounts of capital. 


Synapse offers a suite of capabilities for neobanks to offer their own financial products and services via simple, developer-friendly APIs. Creating accounts, conducting KYC, issuing cards, processing payments, and issuing loans or credit are all part of the Synapse platform.


Banking-as-a-Service Benefits

Using Synapse, your company benefits from:


  • A modern architecture, not a legacy system.
  • An end-to-end product suite offering from accounts to cards to lending. 
  • A scalable commercial model with low upfront costs and ongoing fees.

Summary:

For a long time, launching your own neobank with banking products and services was costly, time-consuming, and full of hoops and hurdles.


Today, banking-as-a-service is solving painful problems and giving new entrants the ability to launch and scale. Now, more and more companies are entering the market with innovative solutions, competing against traditional banks with superior user experiences.

Sources

How to Build a Neobank

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Brett Hales
January 8, 2021

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