Neobanks have rapidly transformed the financial landscape, driven by the growing demand for digital-first banking and continuous advances in fintech. As a result, there are now 317 neobanks worldwide, serving a fast-growing customer base that reached over 400 million users in 2025. With no signal of slowing down, the global neobank market is predicted to reach USD 3,406.47 billion by 2032 at a CAGR of 48.6%, offering numerous opportunities for startups and businesses.
For startups and businesses who are going to build one, neobanks offer opportunities like lower costs, easy scaling, and access to niche markets. However, challenges such as regulations, cybersecurity risks, and profitability remain.
This article will give you a guide of what neobanks are, how they work, and what you should consider entering this fast-growing sector.
What is a neobank?
A neobank is a digital-only bank that operates entirely online with no physical branches. Everything runs through a mobile app or website, from opening an account to making transfers or tracking spending.
Some of the biggest names in this neobanking world include Revolut (UK), N26 (Germany), Chime (USA), NuBank (Brazil), Starling Bank (UK). They serve individuals and businesses with all-in-one financial apps, and offer features like smart budgeting tools, multi-currency accounts, seamless international payments, and cryptocurrency trading. With user-friendly interfaces, low or no fees, and real-time financial insights, they make banking more accessible, transparent, and convenient.
For startups and businesses looking build a neobanking platform, there’s a lot to learn from these industry leaders – both in terms of the features they offer and how they manage their neo banks.
How do neobanks differ from traditional and digital banks?
Now that we know what neobanks are, you might be wondering: aren’t all banks going digital these days? What makes them truly different from traditional banks or digital banking services?
Here are the key differences:
Neobank vs. traditional banks
| Feature | Neobank | Traditional bank |
|---|---|---|
| Operational model | Entirely digital, no physical branches | Physical branches |
| Technology & innovation | Cloud, API, AI, automation, open banking | Legacy systems limited adopt new technologies |
| Cost structure | Lower operational costs and higher competitive of pricing and innovation | Higher overhead costs due to physical branches and infrastructure |
| Service offerings | Mainly digital banking solutions, such as fee-free transactions, budgeting tools, etc. | Various financial services such as loans, mortgages, investment advisory |
| Customer support | Primarily app-based with chatbots and digital assistance | In-person support along with digital services |
Neobank vs. digital banks
| Feature | Neobank | Digital bank |
|---|---|---|
| Ownership & regulation | Independent fintech companies with different regulatory requirements | Often subsidiaries of traditional banks, adhering to the same banking regulations |
| Service scope | Focuses on niche financial products | Combine traditional and modern banking services |
| Customer approach | Agile, innovation-driven, integrated fintech solutions | Balances innovation with regulatory and operational constraints of its parent bank |
| Banking license | Operates without a banking license, partnering with licensed banks instead | Holds a banking license under the parent bank’s regulation |
| Flexibility & innovation | More experimental and adaptable to market changes | Limited by the regulations and strategies of the parent bank |
These differences explain why neobanks have gained such rapid traction. They’re built to be fast, innovative, and user-friendly from the ground up.
But here’s the interesting part. How do they pull it all off without physical branches or legacy systems? The next part will explain it.
How do neobanks work?
These differences explain why neobanks have gained such rapid traction. They’re built to be fast, innovative, and user-friendly from the ground up.
But here’s the interesting part. How do they pull it all off without physical branches or legacy systems? The next part will explain it.
Core architectural approaches
Depending on how deeply a neobank controls its infrastructure, there are four main approaches:
| Model | Description | Example use case |
|---|---|---|
| Full-stack neobank | Builds and owns its entire core banking system, payment rails, and licenses. Offers full control but requires heavy investment and regulatory approval. | Varo Bank (US) |
| BaaS-based (Banking-as-a-Service) | Uses licensed partner banks’ infrastructure through APIs for compliance, payments, and accounts. Allows faster launch and lower cost. | Chime, Monese |
| API-first neobank | Focuses on building a flexible layer of APIs that connect user-facing products to multiple third-party providers (KYC, payments, cards, lending). | Revolut, Starling |
| Front-end / White-label model | Builds only customer-facing layers (app, UX, analytics) while relying entirely on backend vendors for banking operations. | Niche / regional neobanks |
To put it simply:
Full-stack = maximum control, slow to launch.
BaaS/ API-first = faster time-to-market, less regulatory overhead.
Front-end = lightest setup, but least flexibility.
No matter which architecture a neobank chooses, they all need the same essential system modules under the hood. Here’s what’s inside.
Key system modules inside a neobank
| Module | Function | Example APIs/ providers |
|---|---|---|
| Account management | Create and manage digital accounts, link bank or crypto wallets | Solarisbank, Mambu |
| Ledger system | Real-time transaction recording, reconciliation, and reporting | Thought Machine, Treasury Prime |
| Payments engine | Send/receive money via local rails (ACH, SEPA, Faster Payments) | Stripe Treasury, Rapyd |
| Card issuing & processing | Issue debit/credit cards, tokenization, BIN sponsorship, fraud monitoring | Marqeta, Galileo |
| KYC / AML | Verify identities, monitor transactions, ensure regulatory compliance | SumSub, Onfido, Alloy |
| FX & cross-border | Handle multi-currency transfers and conversions | Currencycloud, Wise Platform |
| Analytics & reporting | Monitor user behavior, revenue, and regulatory reports | Segment, Snowflake |
These modules form the technical backbone, but technology isn’t enough. To operate legally and gain customer trust, neobanks need the right partnerships and compliance infrastructure.
Collaboration and compliance
Most neobanks collaborate with traditional banks or BaaS providers to access regulated infrastructure and deposit insurance.
Others operate under their own licenses, managing customer funds via segregated accounts to meet compliance standards.
Card issuing, partnering & settlement flows
A key example of this partnership model in action is card issuing – a feature that looks simple to users but involves intricate backend processes.
Most neobanks don’t issue cards entirely on their own. They partner with card networks (like Visa or Mastercard) and licensed issuers through BIN sponsorships. This lets them create branded debit or credit cards without holding a full banking license.
Modern card issuing runs through API integrations with third-party providers, covering everything from virtual and physical card creation to tokenization for secure digital payments.
Behind every transaction, neobanks rely on automated settlement and reconciliation systems to match payments, ensure ledger accuracy, and finalize fund transfers between parties.
For example, in international transfers, a neobank may route payments through correspondent banks and FX rails (like SWIFT or Wise) to complete currency conversion and settlement These processes run automatically via APIs, reducing manual errors and enabling real-time financial reporting.
What do they offer?
All these technical components and partnerships ultimately serve one goal, to deliver seamless banking experiences to users. It provides specialized financial products, such as:
- High-interest checking and savings accounts.
- Credit and debit cards for real-time transactions.
- Easy, low-cost international transfers and FX services.
- Financial management tools (budgeting, spending insights, automated savings features, etc.)
How do neobanks make money?
Now you know neobank offers all these benefits for users. But how do they actually make money?
Unlike traditional banks, neobanks don’t charge account maintenance fees. Instead, they generate revenue through various channels:
- Interchange fees: Every time you pay with a debit or credit card, neobanks earn 1-2% from transaction fees. The more transactions, the higher their revenue.
- Subscription plans: Offer free and premium accounts with perks like investment tools, cashback rewards, and exclusive benefits.
- Lending & interest on loans: Charge fees on currency exchange, international transfers, and crypto transactions, profiting from high trading volumes.
- Foreign exchange and crypto trading fees: Apply fees to currency exchanges and international transfers along with crypto transactions at a low exchange rate while generating revenue through frequent transactions.
- Banking-as-a-Service (BaaS): Partner with fintech startups to provide financial services via API, earning fees for integrations and service usage.
- Partnerships & affiliate marketing: Collaborate with insurers, investment platforms, and fintech firms to earn commissions from referrals and in-app financial tools like wealth management and stock trading.
However, profitability remains a key challenge for most neobanks. Their unit economics depend on balancing three critical factors:
- Customer Acquisition Cost (CAC): Often high due to marketing and referral incentives.
- Lifetime Value (LTV): Driven by retention and successful cross-selling.
- Interchange Margins: Under pressure as regulations and network fees tighten.
To stay profitable, modern neobanks are focusing on monetizing value-added services (wealth management, credit lines, B2B payments) and improving cost-to-income ratios through automation and partnerships with BaaS providers.
Are neobanks safe?
Neobanks are safe when they adhere to strict financial regulations with strong cybersecurity measures. These will make sure they are sustainable while minimizing risks related to fraud, cyber threats, and financial instability.
- To remain compliant and protect deposits, most neobanks either partner with licensed banks or obtain their own banking licenses.
- To protect user data, neobanks utilize encryption, multi-factor authentication (MFA), and biometric login, while AI-powered fraud detection manages transactions, detects suspicious activities to avoid.
- To identify cyber threats and data breaches, neobanks conduct regular penetration testing, red team exercises, and incident response planning. However, this practice can involve a third party like a cybersecurity outsourcing service provider.
- To protect customer deposits, many neobanks hold FDIC (or equivalent) deposit insurance up to a certain limit. At the same time, they require customers to verify deposit protection policies before entrusting large sums.
Neobank regulation and compliance
While cybersecurity keeps data safe, compliance is the foundation of user trust.
Failure to meet the regulatory requirements or noncompliance can cause neobanks to suffer from heavy fines – such as the £7.6 million penalty imposed by the UK’s FCA in 2022, license revocation, operational restrictions on customer acquisitions and transactions, and even legal action against executives for financial misconduct.
Key regulatory issues
- Approval and licensing from national financial authorities (FCA, MAS, OCC, etc.)
- Compliance with Anti-money Laundering (AML) and Know Your Customer (KYC).
- Adherence to data protection and privacy laws (GDPR, PSD2, or regional equivalents)
- Capital adequacy and risk management requirements for licensed entities
- Ongoing transaction monitoring and suspicious activity reporting
Regional regulations
Neobank regulations differ by region.
In the U.S., most partner with FDIC-insured banks to protect deposits up to $250,000 and comply with agencies like the OCC and CFPB. The U.K. enforces full licensing under the FCA and PRA, with FSCS coverage up to £85,000 and strong support for open banking. Across the EU, PSD2 regulations mandate secure API access, driving interoperability between banks and fintechs.
In Asia, markets like Singapore and India promote innovation through regulatory sandboxes by MAS and RBI, while Japan and Hong Kong apply similar frameworks under tight data and cybersecurity rules, which ensure consumer protection while encouraging fintech growth.
Opportunities and challenges for fintechs building a neobank
If you’re considering entering this market, here’s what you should know about the opportunities and challenges ahead.
On the opportunity side, it gives you a chance to serve the customers traditional banks often ignore such as freelancers, gig workers, SMEs, and underbanked populations. By focusing on this niche, you can build deeper loyalty and scale faster without spending huge budgets on mass marketing.
Modern BaaS and white-label neobank platforms make it easier than ever to launch. You don’t need to build everything from scratch, just plug into ready-made modules for payments, KYC, or card issuing, and focus your energy on what really matters: creating a great user experience. With no physical branches, your costs stay lean, so every dollar goes into growth, innovation, and user acquisition.
You also get access to rich customer data from day one. With the right analytics, that data helps you personalize offers, improve credit decisions, and turn insights into new revenue streams. Plus, many regulators now support sandbox programs, letting you test your ideas safely before going full scale.
If you’re exploring this space and considering building your own digital bank, partnering with an experienced neobank app development company will be a good choice.
Of course, challenges remain, especially around regulation, profitability and trust.
Launching and sustaining a neobank is not easy. You either need to get your own banking license or partner with licensed institutions. Both options take time, money, and a ton of effort to meet all the regulations.
Profitability is also a very crucial area since neobanks survive on thin margins. To sustain growth, you should focus on rapid customer acquisition, strategic partnerships, and diversifying revenue streams as much as possible.
In terms of security, neobanks lack physical branches to rely on, thus you may have to invest heavily in fraud detection, encryption, and AI-driven protection to protect user data and funds. This practice is crucial to earn customer trust, as safety, transparency, along with strong customer support are what customers prioritize. Moreover, these factors can give a highly competitive edge against traditional banks.
Emerging trends
As the neobank landscape continues to mature, new trends are shaping how these digital banks will evolve and compete in 2025 and beyond. They cater to startups and enterprises with a demand for agile financial solutions.
AI-Driven personalization. Over half of neobanks now use AI to predict what customers need and spot risks early. By 2025, ~70% of neobanks plan to use predictive analytics for credit scoring and personalization. This means fewer surprise fees and smarter, more personalized experiences.
Embedded finance & open banking. By 2025, 80% of neobanks are building APIs that let any business from ride-sharing apps to online stores add banking features directly into their platforms. This opens up new revenue from payments and lending.
Crypto & blockchain. Some neobanks are adding cryptocurrency and blockchain technology for faster international transfers and new investment options. Regulations are still evolving, so early movers have an edge.
B2B neobanking. Nearly 30% of new neobank accounts in 2024 were for small businesses. These platforms offer expense tracking, virtual cards, and automated invoicing. These are features that startups and SMEs desperately need.
The catch. Innovation brings risk. AI needs ethical oversight, embedded finance raises privacy concerns, and crypto requires regulatory clarity. The winners will balance speed with compliance from the start.
Conclusion
With neobanks at the forefront of this revolution, the future of banking is unquestionably digital. To boost the evolution of banking and financial services, startups and businesses have never had this sort of chance to use agile technology-based banking models that make customer experience better.
Stepping into 2026, it’s no longer a competition between traditional and digital platforms or just a focus on growing global user base, it’s about strengthening relationships with the people who rely on you. All through transparency, compliance, and technology that truly serves them.
