The total number of digital banking customers now stands at approximately 1.1 billion worldwide, and 20 neobanks now serve 10 million or more customers (and 39 with more than 5 million), placing several of them among the top 5 or 10 largest banks in their country.
This article summarizes the best of "How to Build a Digital Bank", a detailed guide to building a digital bank, and insights from The Reality of Building a Digital Bank webinar. To complement this narrative and provide a real-world perspective, we present an article on the reality of building a digital bank.
Setting up a neo-bank is not easy. The process involves knowledge of local and international regulations or perhaps building a complex technology infrastructure. It requires partnering with banking institutions, implementing anti-money laundering protections and going through rigorous auditing processes. It's much more complex than starting a regular business because you're working with people's money, which brings an increased level of accountability and control.
(Arnaud Schwartz – ex-COO @ Shine and Co-Founder @ Marble, Laurence Krieger – ex-CEO Tide, Magda Marczak - Ex-Product lead @ Monese and Tide, Remco Veenenberg – Neobanking expert)
Obtaining the necessary licenses is crucial. Whether you start with an Electronic Money (EMI) license or aim for a full banking license, understanding and complying with regulatory requirements is a significant hurdle. Different regions have different levels of regulatory complexity, and it is important to work closely with regulators to ensure compliance.
The technology infrastructure is essential. It should be flexible and scalable to allow you to introduce new products quickly. Building or selecting the right platform for your core banking system is critical. This includes having robust compliance and AML systems integrated from the start.
Working with third-party providers for various operational aspects such as payment processing, KYC and onboarding can accelerate your time to market. However, these partnerships should be aligned with your long-term strategy to avoid significant rebuilds in the future.
User experience (UX) is a major dealbreaker. Successful neobanks focus on solving specific problems for their target audience, whether it's simplifying banking for small businesses or offering innovative financial products for the underbanked. Creating a product that resonates with your audience and provides real value is key to attracting and retaining customers. An example of this is providing insight into the sustainability of user, which EcoTrack can help with.
One of the biggest challenges for neobanks is achieving profitability. Customer Acquisition Cost (CAC) is often high, while monetizing users can be a challenge.
CAC can be in the hundreds of dollars per user. Successful social media campaigns and referral programs can reduce this cost. Interesting numbers are shown in the FXcintel overview in the chart below, where we can see that Revolut, with a $70 CAC, is the only neobank that gets below $100 per user acquisition.
Monetization may include premium account fees, transaction fees, interest income from loans, and affiliate products such as insurance and investment services. Only 5% of all global Neobanks are profitable. It is important to start monetizing as early as possible to reduce pressure on sustainability. As we can see, the road to profitability is long and tricky. One of the key areas for profitability is lending, be it loans, BNPL or mortgages. According to Simon-Kucher & Partners, profitability should be at the heart of every future initiative or decision a neobank makes.
Building a neobank, or digital bank, is an ambitious project that seeks to redefine traditional banking and make it more accessible and customer-centric. In recent years, a huge amount of money has been invested in the development of mobile banking apps, which is linked to the use of technology to improve banking services.
The cost of creating a digital bank can vary significantly depending on the scale of the project. Here is what to consider in the project scope:
1. Licensing: Often, opening a neobank stops at obtaining a license. A solution may be to obtain a license in a fintech-friendly country such as Lithuania, where there is simplified licensing, a live testing environment, or a DAMAMA program that minimizes reporting burden and improves regulatory oversight. Another increasingly popular option is to buy a company with the required license.
2. Core Banking System: Developing or leasing a core banking system can cost hundreds of thousands to millions of dollars.
3. Mobile and Web Apps: Investing in user-friendly and secure apps requires significant resources.
4. APIs and Integrations: Integrations with third parties for payments, identity verification and financial data enrichment are essential for a complete banking experience.
5. Security Infrastructure: Implementing robust security measures to protect against cyber threats is essential.
Must read: 7 KPIs Every Digital Bank Should Focus On
1. Revolut - $2.14 billion over 13 rounds
2. Monzo - US$1.9 billion in funding over 19 rounds
3. N26 - $1.72 billion in funding over 11 rounds
4. Starling Bank - US$1.06 billion in funding over 13 rounds
5. Wise - US$1.03 billion in funding over 15 rounds
(data from Tracxn 2024)
Goldman Sachs' Marcus struggled with incomplete fundamentals and rapid hiring, leading to high costs. While Monzo, Starling and Revolut make digital banking easy. Starting a new consumer finance business in the UK is not easy. Or in most other jurisdictions for that matter. But David Solomon saw an opportunity in creating a digital banking division. He spent much of his four years at Goldman Sachs convincing shareholders and his own managers of the benefits of building a full-service digital bank.
But all of this came at a cost. Some observers suggest that Goldman Sachs lost more than $3 billion. one of the key problems was the company's reorganization, when Solomon incorporated Marcus into the investment management division, which led to a loss of autonomy for his management. Other problems arose from rapid expansion and high costs, including a costly partnership with Apple to issue the Apple Credit Card.
Must read: Why Major Banks Struggle to Innovate
The key is to start understanding your customers. Talk to them during development, but keep in mind that they may not always know what they want. Many market segments are already saturated, so you need to bring in new thinking and in-depth analysis.
Neobanks led by bankers often underestimate the technology stack, while techies overestimate it. Start with the customer, not the technology. Then validate the offering and only then build the technology. An example would be payment data enrichment, it's the kind of thing someone may have forgotten, but can you imagine your transaction history without the merchant logo or GPS location? These are the details that matter.
Successful neobanks have a simple and unique premise from the start. A case in point is Germany's N26, which used English to become the first pan-European digital bank. bunq offers up to 20 linked accounts, each with its own IBAN number, allowing families to have separate accounts for individual members or different activities. Bunq also offers its users the EcoTrack service. The focus on Kids Banking and nurturing the next generation of users is an example of differentiation. It is good not to go too far and focus on too small a group that may not be profitable.
For a very good primer on 3 strategies for neobanking success, read Mambu's article.
David Vélez set out to fight the high fees and poor service of Brazil's big banks. The operation succeeded beyond his wildest expectations and dreams: today, his fee-free Nubank is the world's most valuable digital bank with 35 million customers.
In the summer of 2012, David Vélez moved to São Paulo with a fresh MBA from Stanford and a lucrative job as a partner at Sequoia Capital. Douglas Leone, the head of Sequoia, recruited the then 30-year-old Colombian to secure the equity giant's position in Brazil - a young, wealthy country of 200 million people that had grown at 4% a year for a decade to become the world's seventh-largest economy. But on October 1, Leone called Vélez with bad news: after considering lackluster projects from Brazilian entrepreneurs and hearing that the prestigious University of São Paulo had produced only 42 computer science graduates the previous year,he decided to end the project in Brazil. Sequoia's adventure in Brazil was over.
"It was the day before my birthday and it was a bit of a shock," admits Vélez. Still, he had always wanted to found his own startup and saw an opportunity in the lack of Brazilian innovators that had discouraged his venture capital colleagues. "You want to position yourself on the side of the market where there is a shortage," Vélez explains. "There is a surplus of good entrepreneurs in the US. Someone with my experience and background is a commodity there. There has been a significant shortage in Latin America."
This shortcoming led him to found Nubank, which quickly became synonymous with innovation and customer-friendliness. Today, Nubank is one of the most successful fintech companies in the world, proving that the right opportunity and the courage to go against the tide can lead to extraordinary success. David Vélez and his team continue their mission and his story is an inspiration for all those who want to change the world of finance.
Nubank is a great example of success in the digital banking sector. Their strategy includes:
1. User Acquisition: marketing campaigns and referral programs to significantly grow their user base.
2. Diversified Revenue: They offer a variety of financial products, including credit cards, loans and insurance.
3. Customer-Centric Approach: They provide personalised service and a seamless user experience through their mobile app.
“In addition to the record profit, Nubank almost doubled its revenue in one year. Today, we have around 80 million customers.”
Building a digital bank is a complex and challenging process that requires careful planning, strategic implementation and continuous innovation. By understanding the key aspects of profitability, team structure, costs and common challenges, ambitious digital banks can more effectively navigate this dynamic environment. Let's learn from successful examples like Nubank to achieve growth and sustainability in this industry.
About author
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Ondřej Machač
Executive officer
