How to Create a Neobank or Digital Bank

November 11, 2023

White-label neobanks are the future of banking, providing digitized and customized financial services with an agility that traditional financial institutions simply cannot offer. The concept of a digital bank, or digital banking platform, has been around for the better part of a decade, with such institutions providing services like creating and operating savings accounts, loan payments, money transfers, and multicurrency accounts to manage foreign exchange transactions. By operating without physical branches, thus reducing operational costs, neobanks are a smart alternative for traditional financial institutions, large enterprises, and capital-infused startups to consider when expanding their community outreach.The white-label neobank market keeps expanding, with a projected market size of close to $2.05 trillion by 2030 with more than 53% CAGR. It’s a solution that younger generations like Gen Z and millennials especially prefer. So, how can your business successfully create a white-label neobank and reap its many benefits?

Understanding the Neobank Landscape to Create a White-Label Neobank

The neobanking landscape combines a series of non-licensed and licensed neobanks and digital initiatives of traditional financial institutions. Licensed digital banking platforms obtain fully operational banking licenses, allowing them to offer services traditional institutions can’t. Through such decentralized means, neobanks reduce their costs and improve their profitability while optimizing their core banking platforms, enabling smooth integration with any external service providers that they partner with. Meanwhile, non-licensed neobanks, also called over-the-top banking platforms, act as marketplaces for various financial products and use APIs to connect customers to services offered by different financial players.

Obtaining a License or Forming a Partnership

To set up a digital banking platform, you could opt for acquiring a virtual banking license from government officials, then start full-fledged banking services on a mobile app or through digital touchpoints without using physical branches. Neobanks across Europe have gone this route though a lack of clarity surrounding virtual banking policies has forced them to adapt.The best alternative is to partner with traditional financial institutions to offer customer relationship services – a smart move considering neobanks pride themselves on providing unique customer experiences for all they serve. A white-label neobank provides the kind of transactional and onboarding agility customers demand with customizable tools and interfaces to make banking experiences seamless. By setting up a neobank in conjunction with a traditional financial institution, you get around the loopholes of existing banking infrastructures. Also, neobanks enhance the augmentation of distribution networks for traditional banks while helping them save research costs.

The Challenges of Setting Up a Neobank

When setting up a white-label neobank, or digital banking platform, you must address business, technology, and compliance challenges for your solution to last.

The Business Challenges

Some of the biggest challenges with setting up a white-label neobank are:

  • Getting the right technical solution
  • Licensing
  • Customer support
  • Go-to-market strategies
  • Customer segmentation and targeting the right segments
  • Creating the right product-market fit for addressable segments
  • Decision-making regarding partnerships with traditional financial institutions
  • Adapting to regulatory requirements within the affiliated region

Scaling up for different segments and regions can be challenging during the growth stage for a white-label neobank if there’s no advanced plan. Intense research of the economy within the targeted region and customer segment is necessary to understand which customer bases you should prioritize servicing depending on their needs. With sound research, you can then establish a strong marketing strategy that properly targets underserved segments and personalizes digital banking services for them to use regularly.

The Technological Challenges

When a new white-label digital bank tries to gain market positioning by partnering with traditional financial institutions or going for licenses, you must explore all technological limitations. Emerging digital banking platforms must explore the partner institution's banking and digital API capabilities before entering into a partnership. Many core banking systems for traditional institutions don’t meet modern standards, with these systems having to undergo cycles of changes before meeting enhanced industry standards. Addressing technical debts, skill gaps, and improving knowledge transfer are among the obstacles institutions must overcome to provide improved core banking solutions to customers. With a white-label neobank providing customer-centric, technology-driven solutions, partnerships with traditional institutions require experienced teams, robust software, and faster processes to realize the many benefits a neobank offers.

Regulatory/Compliance Challenges

The better data security is, the easier it is for customers to trust the solution you’re providing. Regulatory compliance and security infrastructure are vital for a white-label neobank solution to prosper, considering that customer data and financial products are at the crux of its services.You need to be in an environment that allows neobanks to operate without the burden of tight restrictions. For example, countries like China aim to be leaders in regulatory compliance initiatives as they increase neobank adoption. Then, there are other management issues such as PCI DSS compliance, the creation/issuance of payment tokens, and creating security tools to protect customer data. Ensuring that you maintain access logs to inspect your neobank platform’s security is a best practice. Also, you should run a series of checks to identify and quarantine security issues before deploying a white-label digital banking solution.Creating a white-label neobank has never been easier as the many benefits and services it provides can be leveraged to add much-needed nuance and flexibility to the traditional financial sector.