How to Start a Neobank in 2023?

Traditional banking models are being challenged by a new breed of financial institutions known as neobanks. These innovative entities leverage cutting-edge technology to offer a range of financial services, unburdened by the constraints of physical branches and legacy systems.

Whether you're a tech entrepreneur, a seasoned banker, or an enthusiast passionate about revolutionizing the banking sector, this article will equip you with the fundamental knowledge and insights needed to embark on your neobank journey.

What a neobank is and how it works

A neobank is a type of digital bank that operates exclusively online, without any physical branches. Neobanks are known for their user-friendly interfaces, low fees, and innovative banking features.

Unlike traditional banks, neobanks typically offer a more streamlined account-opening process, as customers can sign up and verify their identities online within minutes. Neobanks also use modern technologies such as artificial intelligence (AI) and machine learning to offer personalized financial services and insights to their customers.

According to Grand View Research, the neobank market had a worth of $47.39 billion in 2021 on a global scale, and it's projected to have a compound annual growth rate (CAGR) of 53.4% from 2022 to 2030.

Source: Grand View Research

What are the differences between neobanks and traditional banks?

There are several key differences between neobanks and traditional banks:

1. Physical presence: Traditional banks have physical branches where customers can go to access banking services, whereas neobanks operate entirely online without any physical branches. This means that neobanks have lower operating costs, which they pass on to their customers in the form of lower fees and higher interest rates.

2. Technology: Neobanks leverage technology and automation to offer a seamless and user-friendly banking experience. They typically have intuitive mobile apps that allow customers to manage their finances on-the-go. In contrast, traditional banks may have less user-friendly interfaces and may rely more on manual processes.

3. Account opening: Digital-only banks offer a fast and convenient account opening process that can be completed entirely online, usually within a few minutes. In contrast, traditional banks may require customers to visit a branch in person to open an account, which can be time-consuming.

4. Products and services: Neobanks often focus on offering a limited range of core products and services, such as checking accounts, savings accounts, and debit cards. Traditional banks, on the other hand, typically offer a wider range of products and services, such as mortgages, car loans, and credit cards.

5. Fees: This type of banks generally have lower fees than traditional banks. This is because they have lower overhead costs and do not need to maintain physical branches. Traditional banks may charge more fees for services like ATM withdrawals, overdrafts, and international transactions.

6. Customer support: Neobanks typically offer customer support through a chatbot or a virtual assistant within their mobile app, while traditional banks offer support through phone calls and in-branch visits. Neobanks are also known for their quick response times and 24/7 availability.

Neobank app features

Neobank apps offer a wide range of features that are designed to simplify banking for users. In this section, we will explore some of the key features offered by neobank apps.

1. Account opening: Neobank apps offer the ability to open and manage multiple accounts, including checking and savings accounts, all in one place. Users can view their account balances, transfer funds between accounts, and set up automatic transfers.

2. Credit/debit cards: Neobank apps provide credit and debit card options that can be managed directly within the app. Users can view card balances, track transactions, and control card settings, such as freezing or unfreezing the card, or setting spending limits.

3. Payments: Neobank apps offer various payment options, including peer-to-peer transfers, bill payments, and direct debits. Users can schedule recurring payments and view transaction history.

4. Transactions history: Neobank apps allow users to track and view their transaction history, including card transactions, bank transfers, and payments. The transaction history feature can provide valuable insights into spending habits and financial management.

5. Budgeting: Many neobank apps include budgeting tools that enable users to set spending goals, track expenses, and categorize spending. Users can receive alerts when they approach their spending limits or when they have exceeded their budget.

6. Investing options: Some neobank apps offer investment options, including access to stocks, bonds, and other financial instruments. Users can monitor their investment portfolio and adjust their investment strategy within the app.

7. Notifications: Apps send notifications to users about account activities, such as incoming and outgoing payments, or suspicious account activity. These notifications help users monitor their account and detect any fraudulent activities.

8. Real-time chat help desk: Many apps provide real-time chat support through the app, enabling users to ask questions and receive assistance in real-time.

Please keep in mind that these are just rough estimates and the actual development time can vary based on the specific requirements and complexity of the features, as well as the size and experience of the development team.

Advanced features

These advanced features go beyond the basics of traditional banking and offer a range of tools to help users manage their finances, save money, and invest. 

1. Priority customer support: Premium customers are provided with priority customer support that entitles them to prompt responses to their inquiries and a dedicated support team.

2. Cryptocurrency trading: Premium customers can trade in a variety of cryptocurrencies directly from their account.

3. Customizable account limits: Premium customers can customize their account limits for cash withdrawals, foreign exchanges, and other transactions.

4. Junior packages: The Revolut app, for example, allows customers to open a Revolut Junior account for children, providing them with a safe and easy way to manage their money.

6 steps to build a neobank app

Neobank development requires careful planning and execution. In this section, we will outline six key steps to help you build a successful neobank app. From conducting market research and defining your target audience, to selecting the right technology stack and designing a user-friendly interface, these steps will provide a framework to guide you through the app development process. 

Step 1: Product discovery and idea definition

Product discovery and idea definition lay the foundation for the successful neobank app development. Product discovery involves researching the market, identifying user needs, and determining the app's unique selling proposition. This process enables neobanks to understand their target audience, competition, and industry trends.

Once the product discovery phase is complete, neobanks can move onto idea definition. This step involves defining the app's features and functionality, user interface, and technical requirements. Neobanks should prioritize building features that align with user needs and add value to the overall user experience.

Some key considerations during product discovery and idea definition include security, compliance with regulations, scalability, and integration with other financial platforms. 

Step 2: Market research (market and target audience analysis)

Market research, specifically market and target audience analysis, is a critical step in developing a successful marketing strategy for any product or service, including a neobank app. Market research involves gathering and analyzing data on the industry, competitors, and customer behavior to understand the market landscape and identify opportunities and threats.

Target audience analysis involves understanding the characteristics, behaviors, and preferences of the neobank app's ideal customers. This information helps neobanks to tailor their marketing messages, design, and features to meet the needs and expectations of their target audience.

During the marketing research phase, neobanks can use various techniques to gather data, including surveys, focus groups, interviews, and online analytics. Some key areas to focus on during the market and target audience analysis include:

• Demographics and psychographics of the target audience

• User needs, preferences, and pain points

• Market size and growth potential

• Competitor analysis, including their strengths and weaknesses

• Pricing and positioning strategies of competitors

• Marketing channels and messaging that resonates with the target audience

Step 3: UI/UX design creation

During this phase, neobanks should focus on designing an intuitive and visually appealing app that is easy to navigate and meets the needs of their target audience. This includes designing a user-friendly interface, creating clear and concise content, and ensuring that the app is accessible to all users.

It is also essential to consider the technical requirements of the neobank app during the UI/UX design creation phase. Neobanks should ensure that the app is compatible with various devices, platforms, and screen sizes, and that it meets any security and regulatory requirements.

Step 4: Development

Finally, the actual software is being built and tested. During this phase, developers work to implement the UI/UX design and technical requirements identified in previous steps, including security, scalability, and integration with other financial platforms.

The development phase typically involves several steps, including:

1. Frontend development: This involves creating the user interface and user experience journey for the app, including the visual design, layout, and functionality.

2. Backend development: It’s about creating the server-side of the app, which manages the app's database, security, and other technical requirements.

3. Quality assurance (QA) testing: This includes ensuring that the app's functionality, performance, and security remain in focus, that the app meets the technical requirements, and that it provides a high-quality user experience.

4. Beta testing: This involves releasing the app to a select group of users to test and provide feedback on the app's usability, functionality, and performance.

5. Iterative development: Based on the feedback received during beta testing, developers make improvements to the app to ensure that it meets user needs and expectations.

During the development phase, neobanks should also keep in mind the importance of ensuring compliance with relevant regulations, including data privacy and financial regulations.

Step 5: Testing

Testing is a crucial step in the neobank app development process as it helps to identify and address any technical or usability issues before the app is released to the public. The testing phase typically follows the development phase and involves several types of testing, including functional testing, performance testing, and security testing.

Functional testing ensures that the app's features and functionality are working as intended. This involves testing individual features and the app as a whole to ensure that they are meeting the requirements outlined during the development phase.

Performance testing involves testing the app's speed, scalability, and reliability. This includes testing the app under different user loads and on different devices and platforms to ensure that it is performing as expected.

Security testing involves testing the app's security features, including data encryption, user authentication, and compliance with relevant data privacy and financial regulations. This is especially important for neobanks, which deal with sensitive financial data.

Neobanks may also conduct user acceptance testing (UAT), which involves releasing the app to a select group of users to test and provide feedback on the app's usability and functionality.

Step 6: Launch the product

The launch of a neobank app is a critical step in the development process, as it marks the point at which the app is made available to the public. The launch phase typically involves several steps, including:

1. Pre-launch marketing: This involves building anticipation for the app through marketing and promotional activities such as social media campaigns, press releases, and influencer partnerships.

2. App store optimization: This involves optimizing the app's listing on app stores by including relevant keywords, images, and descriptions to improve visibility and attract downloads.

3. App release: This involves making the app available on app stores such as the Apple App Store or Google Play Store.

4. Post-launch monitoring: This involves monitoring the app's performance and user feedback to identify and address any technical or usability issues.

During the launch phase, neobanks should also ensure that they have the necessary resources in place to handle any issues that may arise, such as customer support and technical support.

Challenges of neobank app development

Neobanks have been on the rise in recent years, providing customers with a convenient and user-friendly way to manage their finances. However, creating a neobank app comes with its own set of challenges that developers need to overcome.

One of the biggest challenges is meeting regulatory requirements. Neobanks are subject to the same regulations as traditional banks (banking license), such as KYC (know your customer) and AML (anti-money laundering) laws. Compliance with these regulations can be time-consuming and costly, and failure to comply can result in fines and legal repercussions.

Another challenge is ensuring the security of customer data. Neobanks store sensitive information, including financial and personal details, which makes them an attractive target for hackers. Developers need to implement strong security infrastructure, such as encryption and multi-factor authentication, to protect user data from cyber threats.

Finally, neobanks need to ensure that their app is scalable and can handle a growing number of users. As they expand their customer base, neobanks need to be able to handle increased traffic and transaction volume without compromising on the speed or reliability of their service.

Great examples of neobank apps

As of 2022, Chime had the highest number of active users among neobanks in the US, with 12 million customers. The online banking service is fee-free and provides a simple and convenient way for people to handle their finances. The app offers an option to traditional bank accounts and provides a Visa debit card that can be used to withdraw money from ATMs, and make purchases online and in-store wherever Visa is accepted.

Discover is a firm in the financial industry that provides a mobile banking application to its clients, enabling them to control and view their banking accounts, credit cards, and other monetary services via their mobile devices.

Source: Discover

Monzo is a UK-based banking app that was established in 2015. It has gained popularity in the UK's digital banking sector due to its user-friendly interface and wide variety of features.

Source: Monzo

Wise, previously known as TransferWise, is a mobile app that provides access to the Wise Borderless Account and the ability to manage finances on-the-go. The app is compatible with iOS and Android and allows users to view account balances, exchange rates, conduct transactions, and transfer funds to other accounts.

Source: Wise

N26, a neobanking app established in Berlin, Germany in 2013, enables users to create personal or business bank accounts and access a range of functionalities, including instant account notifications, contactless payments, and money transfer options. Additionally, the app provides a collaboration with TransferWise for affordable overseas money transfers.

Source: N26

The cost of building a neobank app

Building a neobank app can be a costly endeavor, and the total cost can vary depending on a number of factors. Here are some of the key considerations that can impact the cost of building a neobank app:

1. Platform: The platform on which the app will be built can significantly impact the cost. Native apps, which are built specifically for iOS or Android devices, tend to be more expensive than hybrid apps, which can run on multiple platforms with a single codebase. However, native apps offer better performance and can provide a more seamless user experience. 

2. Features and functionality: The cost of building a neobank app will depend on the features and functionalities it offers. Basic features such as account management, balance inquiries, and transaction history will likely be included, but additional features such as bill payments, peer-to-peer payments, and investment management can add to the cost.

3. User interface and user experience (UI/UX): The user interface and user experience of the app are critical to its success. Designing an intuitive and user-friendly interface can be time-consuming and require specialized expertise, which can increase the overall cost.

Let’s present an estimation of the hours needed for the development stages of neobank app’s MVP. 

Now let’s compare the average hourly wages of tech engineers in different regions. 

1. Compliance and security: Neobanks are subject to the same regulations as traditional banks, and compliance with these regulations can be a significant expense. In addition, ensuring the security of user data requires implementing robust security measures such as encryption and multi-factor authentication, which can also add to the cost.

2. Integrations: Neobanks need to integrate with third-party services such as payment gateways and identity verification providers. Integrating with these services can be complex and require specialized expertise, which can add to the overall cost.

On average, the cost of building a basic neobanking app can range from $250,000 to $500,000. However, this is just an estimate, and the actual cost will depend on various factors such as the number of features, the complexity of the app, the number of platforms where it will be available, and the region where the development team is located.

To sum it up

Now you know how to start a neobank in today’s finance industry. By following the six steps outlined in this article, you can build an app that meets the needs of modern banking customers and helps you compete in a rapidly changing industry.

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Learn more

If you're interested in starting a neobank or another type of fintech product, it's important to work with an experienced software development company that can help you navigate the complexities of the industry and build an app that meets the needs of your target audience. At Yellow, we have a team of experienced developers and financial experts who can help you bring your vision to life.

Book a consultation with our team today to learn more about how we can help you build a successful neobank app in 2023.