How to Start a Neobank: Features, Challenges and Development Steps

Digital-only banks have gone from a curiosity to a normal way to manage money. Not long ago, few people would have kept their savings in an app-only bank; today many use one as their main account. So what exactly is a neobank, and is it worth building your own?

In this article we explain how neobanks work and make money, which features they share, the challenges you will face, and how neobank software development works step by step.

Neobanks differ from traditional banks in one fundamental way: they have no branches and far fewer staff, because almost everything is done by software. Customers open accounts in minutes and get help through in-app chat and messengers instead of visiting an office. You can also look at our list of popular fintech apps for inspiration.

Why Neobanks Grew

The main driver is the smartphone. As more people do everything on their phones, they want to avoid physical visits to banks just as they avoid them elsewhere. Neobanks are mobile-first by design: the app is the bank.

The United Kingdom became the best-known neobank market, and its experience with digital-only banking and open banking is used as a benchmark by many other countries. Names like Monzo, Revolut, N26 and Monese became familiar far beyond fintech circles.

Growth has not been a straight line. In uncertain times, many people stick with the digital services of the large banks they already trust, and neobanks have gone through periods of slower growth and cost cutting. But neobanks keep one lasting advantage: they adapt to users' needs faster than large banks, whose processes have much longer life cycles.

If you are working on an app for an existing bank rather than a new one, see our guide on how to build a banking app.

What Is a Neobank and How Does It Work?

Neobanking is a part of fintech that offers digital-only financial services without physical branches. Customers interact with the bank through the app, phone, email and chat. All services are available in the mobile app, so customers always have access to their finances.

Large banks offer apps too, but neobanks typically offer a broader set of features and more partner offerings in the app, and they let customers tailor services to their needs. Even conservative customers start to try them because of strong word of mouth.

Licensing models

Many neobanks are not chartered banks themselves. They partner with licensed banks that hold customer deposits and provide deposit insurance, and they rarely lend directly. Broadly, there are three models:

Your choice of model determines how fast you can launch, which products you can offer and how much regulatory work you take on.

How neobanks make money

The main source of revenue is interchange: the fee merchants pay when customers buy with the neobank's debit card. In the US, debit interchange is capped for banks with more than $10 billion in assets, but not for smaller banks, so neobanks partnered with smaller banks can earn noticeably more per transaction. Other income comes from fees for out-of-network ATM use, premium subscriptions and partner products.

Because they appeal strongly to younger customers, neobanks (also called challenger banks) are often funded by venture capital, which gives them time to grow before reaching profitability.

The customer's view

For the customer, a neobank is a capable app that helps manage money and make decisions. Opening an account takes minutes: download the app and sign up. Some neobanks let customers link their existing bank account, so they keep their traditional bank and add the convenience of the neobank on top.

Successful Neobank Examples

• Chime (USA): a mobile-only bank focused on simple, low-fee everyday banking.
• Varo (USA): the first US neobank to receive a national bank charter.
• Dave (USA): a mobile banking app built around everyday money management.
• Monzo (UK): one of the first app-only banks to obtain a full UK banking license.
• Revolut (UK): the most visible newsmaker among neobanks, known for its aggressive marketing and fast expansion.

Common Features of a Neobank

Neobanks differ from one another, but most share these features:

• Enhanced customer experience. Personal finance management, with analytics and machine learning helping customers make better decisions.
• Banking anywhere, anytime. Customers manage money wherever their phone is online, with chat support and chatbots for quick answers. Many neobanks also offer small businesses tools for reporting, accounting and tax management.
• International transfers and cash abroad. Fast, affordable international transfers and easy cash withdrawals in other countries.
• Open technical infrastructure. Without heavy legacy systems, neobanks can build and release new financial tools quickly.
• Customer-centric design. User insights drive the business model, and resources go into meeting customers' needs.

Challenges You May Face When Starting a Neobank

1. Finding your unique selling proposition

You need a feature or focus that sets you apart, and that is hard when every neobank is looking for one. Card freezing and automatic spending categories, once differentiators, are now standard. Many successful challengers focus on a specific audience or need instead of trying to out-feature everyone.

2. Regulation and open banking

Partnering with a traditional bank to offer services through open APIs used to be a strong advantage. Now it is close to an industry standard. The UK's government-mandated Open Banking initiative pushed banks to open up to third parties, and similar rules have spread elsewhere. That lowers the entry barrier and makes competition between neobanks tougher. Licensing, anti-money-laundering and know-your-customer requirements remain a major part of the work.

3. Neobanks owned by traditional banks

Traditional banks see the same opportunity and can afford strong teams. Some have launched their own digital brands, such as Mettle from NatWest.

4. Funding and time to profitability

Neobanks need a lot of customers before interchange and subscriptions cover their costs, and growth can slow down unexpectedly. Make sure you have enough runway, and investors who do not expect an immediate return.

How to Start a Neobank in 4 Steps

Before development starts, define what success means for the first version: who the first customers are, what problem you solve for them, and which numbers will show it works, such as completed sign-ups, active accounts or card transactions per user. Start with the smallest product that can prove that to customers and investors, then grow it.

To estimate the scope, here are the main stages on the way to a working product.

Step 1: Build the platform core

Development starts with the back end. The core of a neobank is an API layer, a card processing system and back-office tools:

• APIs connect your software to other services, such as identity verification, core banking providers and payment gateways.
• Card processing handles transactions and other operations with debit and credit cards.
• Back-office tools let your team manage customers, operations and compliance.

The core must be easy to update at any time. The market changes quickly, and if you miss key trends, you lose customers.

Step 2: Front-end development

A neobank is digital-only, so the app is your only point of contact with customers. This is where you should be a perfectionist. Core features include:

• Accounts
• Debit and credit cards
• Payments
• Transaction history
• Budgeting
• Investing options
• Child accounts
• Notifications
• In-app support and chatbot

Step 3: Security

Security is the basis of customer trust. Approach it from three sides:

• Built-in security. Multi-layered protection combining your own solutions with tools from trusted vendors to guard against fraud, hacking and data theft.
• Machine learning alerts. Algorithms that analyze large volumes of transactions and behavior to spot suspicious patterns and alert the security team in time.
• Strong authentication. Tools that protect against common threats like password theft, from biometrics to video-call identity verification during onboarding.

Step 4: Testing

Before launch, test thoroughly:

• Unit testing: checks each component of the app.
• Integration testing: checks how well your system works with external services.
• Security testing, including penetration tests.
• User acceptance testing, including the user experience.
• Regression testing: confirms that changes have not broken what already worked.

Where AI Helps a Neobank

A digital-only bank has few people and a lot of data, so AI fits naturally in several places:

• Onboarding and KYC. Extracting data from identity documents and proofs of address, with uncertain cases sent to a compliance officer.
• Fraud and anomaly detection, working alongside rule-based controls.
• Support assistants grounded in your own product terms and the customer's account, handling routine questions and passing complex or sensitive cases to people.
• Classification and routing of support requests, disputes and complaints.
• Personal finance insights: categorizing spending, forecasting cash flow and suggesting savings goals.

What to watch: evaluate models on real data before launch, keep people in charge of decisions that affect customers' money or access to their account, be strict about where personal and financial data is processed, and budget for running costs that grow with your customer base. Regulators expect you to explain automated decisions.

What Drives the Cost of Building a Neobank

Building a fintech company is expensive, and the cost of a neobank depends much more on decisions than on hourly rates. The main drivers:

• Licensing model. Partnering with a licensed bank is faster and cheaper to start than obtaining your own license.
• Scope of the first version. Accounts, cards and payments for one market are a very different project from investing, lending and multi-currency features.
• Integrations. Core banking providers, card issuing and processing, identity verification, open banking and payment networks.
• Security and compliance. Anti-money-laundering controls, audits, penetration testing and the reporting regulators require.
• Team and support. The skills you need in-house versus with partners, plus monitoring, updates and customer support after launch.

We do not publish prices. We price each stage after an outcome brief, once both sides know what is being built and why. For more on budgeting and planning, see our guide on how to build a fintech app, or read about how we work.

Conclusion

Neobanking remains a promising area, especially as large companies build ecosystems in which financial services are one part. To succeed in an ecosystem, a company often has to change how it thinks about customers and serve them across the whole customer journey, not only within its traditional industry borders. For neobanks this comes naturally: finding niches where they can meet customers' needs better than anyone else is the reason they exist.

Neobanks are unlikely to replace traditional banks, but the two will coexist, and neobanks will fit into more ecosystems. If you start with a clear audience, the right licensing model, strong security and a focused first version, you give your neobank a real chance.