June 15, 2022

Can You Start Your Own Neobank?

Day after day, technology continues to progress. It replaces jobs, allows us to create innovative products, and brings convenience and security to our daily lives. 


Neobanks are something that recently came up, but in just a decade, more than 250 neo banks have been created and are currently operating. Such products are allowed to exist because the mind and perception of the public evolved. Just 5 or 10 years ago, nobody would’ve trusted a neo bank. Now, people understand how things work and how secure their funds can be with a Neobank.

Since this market is expanding widely, is there a place for new businesses in the niche? And if so, how could you start your own neo bank? To answer this question, we must first start at the beginning – the definition of these digital institutions.


What is a Neobank?


Neobanks are fintech companies that provide some of the services a regular brick-and-mortar bank would, alongside other added services. All of this happens online since they don’t reside within a physical office anywhere. Each neobank specializes in something different, for example, deposits, investing vehicles, cryptocurrency trading, and others.


You might also have heard the term “challenger” bank. This term was first used in 2009 in the UK at the end of the previous financial crisis and referred to the freshly emerging neobanks. 


Since mobile devices became mainstream, the room for disruptive innovation has grown substantially. Mobile applications like Airbnb, Lyft, and Uber shook the world in each of the niches they operate in. Neobanks are starting to do something similar. 


What is a Neobank’s Business Model?


In order to create a neobank, you must first understand the business model of the venture. Since there are no physical locations, and these banks don’t give out loans and financing, there must be other ways to prosper and ensure a steady cash flow for their operations.



Interchange Fees


The majority of the profit in a neobank’s revenue stream comes out of interchange fees. These fees are generally paid by merchant providers when a transaction occurs with a debit or credit card. If you are wondering why traditional banks don’t do this, they are simply not allowed to charge merchants as much as neobanks are. Since they are considered smaller organizations with limited capital, some of them could charge 7 to 8 times more than a traditional bank for an interchange fee.


ATM Withdrawals

Another thing that brings in the cash for neobanks is ATM withdrawals. Most digital banks provide their user base with free or cheap physical debit cards, which they can use for withdrawal. But since the general service of these banks is tax-free, and there aren’t any supporting taxes per rolling period like traditional banks, they charge users after a certain limit is reached.
Traditionally, subscriptions to higher banking profiles would allow them to avoid these charges.


Subscription Packages


Modern neobanks offer subscription packages for users that actively use their products and services. For example, if you regularly use ATMs to withdraw and you surpass your limit, you don’t want to be charged indefinitely with each next withdrawal.

Then it would be a good idea for you to check their pricing regarding removing limits. There is usually more than just one pricing plan, and all focus either on something different or bring more and more advanced benefits for the user to take advantage of.




Some neobanks provide a marketplace to trade crypto or stocks. Some of them would even give you an initial number of commission-free transactions at the start. But later on, as you progress in your trading or investing, you would start to pay a commission for each of your trading operations.


Although neobanks might provide a free product, their business model is greatly oriented around trying to make users subscribe to their paid plans, which ultimately is a subscription-based model combined with charges and fees per transaction if you don’t decide to opt-in to the funnel.


What Are The Advantages And Disadvantages of Neobanks?


Both the advantages and disadvantages of neobanks derive from the same fact – they don’t have a physical office location. Neobanks should not be confused with online banks, which could be a part of a brick-and-mortar bank or in partnership with another financial institution that has a physical location. These can generally give out loans and all the other financial services traditional banks offer.


Benefits of Neobanks


From not having a physical location, neobanks save a ton of resources and can invest them in something else – their product, services, and security. If you’ve wondered why online banking applications of brick-and-mortar banks feel like they’ve been developed in the 2000s, it’s because they have. 



Physical banks have to pay salaries, on-site security, rent, up-front costs, cleaning services, and resource management and thus, the funds for research and development become limited. In contrast, neobanks don’t have to pay for any of these things, and they invest heavily in their products and security. Other benefits include:

  • Significantly smaller fees. If you compare the fees of a brick-and-mortar and a neobank, you will notice how much lower are all the fees of the latter. The reason is the above-mentioned fact of fewer up-front and recurring costs.
  • More convenient. Digital banks are much more convenient. Their mobile applications are better; they provide a wide range of functionalities, and you can access everything with your phone. They are suitable for both personal and business uses.
  • Bigger interest rates. Because of the lack of physical location, they can allow giving a better interest to their users.
  • Up to date with innovation. Many neobanks implemented blockchain security as soon as the technology was checked, and people became more aware of how it works. Few brick-and-mortar banks (only the largest and most successful ones) have taken advantage of this unparalleled form of digital security.


Disadvantages of Neobanks

Of course, everything has two sides. Much like the advantages, the disadvantages of neobanks also stem from the fact of the lack of a physical location.


  • A limited number of services. Neobanks have a limited number of services compared to ‘classic’ banks. In the majority of them, you can’t get a loan or get a mortgage from them, and you wouldn’t be able to find a financial advisor or run a pension fund with them.
  • No physical location. Since there are no physical locations, you can’t go to the bank and ask someone questions in person. 



How To Start a Neobank?


Now that you know what a neobank is and are aware of the business model, as well as the pros and cons, it’s time to reveal the process of how to start your own bank.

For you to estimate whether you are up to the task or if your resources are better off somewhere else, here’s the simplified process explained in steps:

  1. Backend Development or Software Purchase


In order to start a neobanking project, you would need a platform with a core API. Gateway payment processors, authentication modules, transaction management like processing apps, and everything else that needs to take place within your software. 
For that to happen, you must either hire a developer team to do the job for you or purchase a ready-to-use software solution.


  1. Front end Side

The front end is just as important. Imagine having the best functionalities in your new banking platform, but it looks ugly and is hard to use. People wouldn’t even try it out. In terms of user experience, you need the interface to be so easy to use that even older customers with little digital experience are able to know how to use the app.


  1. Security

You would need to set up authentication and machine learning algorithms and alarms to test your system for flaws. Blockchain technology could also be used to step up your security game. Regulators would need you to pass all tests on a regular basis.


    Testing & Regulations



Without a license and passing regulations, even the best neobank can’t make it on the market. It is illegal, but also, who would trust software with their money that isn’t backed by any reputable institution?
You need to test security, UAT, regression testing, and integrations before you can start. 


How Much Would it Cost To Create a Neobank?


Based on the hourly prices of developers around the world, the cheapest places to use labor would be India, APAC, or Eastern Europe. Based on an average hourly rate of a developer being between $30 and $45, the total project would be estimated to cost between $300,000 and $450,000 USD.


Of course, more complex solutions or labor from the US could cost more and would bring up that range all the way up to $1,000,000. But compared to regulations, which in some regions require a capital of no less than $10,000,000 to even file papers for a brick-and-mortar bank, this sum is acceptable.


Final Words


A neobanks is a disruptive innovation just beginning to unfold its potential. If you want to dive deep into the niche and start your own neobank, you must be prepared with thorough research, and you must have a clear vision of what your key selling proposition would be in order to have a competitive advantage over your adversaries.