Natalie Monko Lead Project Manager

• Fintech

May 16, 2024 8 min read

Starting a Neobank: How to Get a Banking License

How to get a banking license and what are the requirements? This is likely to be one of your main concerns, as soon as you’ve chosen a neobank as a business model for your project. 

Not saddled with physical branches and paper-based workflows, virtual banks allow organizations to cut operational costs and increase efficiency while providing private individuals with lower fees and enhanced user experience. Furthermore, legacy compliance issues are not so strict for online banks in comparison with traditional ones. However, these businesses still have to obtain a banking license to enter the market. The types of licenses and the rules for obtaining them differ depending on the scope of services of the neobank.

We have delivered web and mobile solutions for fintech and banking since 2011 and we know the domain throughout. In this article, we describe banking license guidelines for getting banking licenses of all possible kinds for a bank launch. Also, we offer a brief look at statistics demonstrating a shift towards the adoption of new digital norms. Finally, we present our concept case study for a neobank app with Flutter that allows saving up to 60% of development costs, for those who successfully get a license. 

Getting a banking license in 2024 and beyond

Over the past few years, obtaining a banking license has become an increasingly sophisticated process for neobanks. Regulators prioritize financial solvency and consumer protection higher than ever, and, for neobanks, this means meeting strict requirements in risk management, business sustainability, and data privacy

Neobanking market current state 

Aiming to obtain a banking license and stand out among the competition by providing improved client engagement and digital workflows, the finance and banking industry players integrate innovative solutions for both technical and business aspects. This promotes growth in the number of neobanks, meaning there is a significant impact on the entire online banking sector.

According to Fortune Business Insights, the global market size for neobank was valued at $98.4 billion in 2023 and is anticipated to reach $3,400 billion by 2032, growing at a growth rate (CAGR) of 48.6%. Statista reports that the number of users in the neobanking market is expected to amount to 386 million by 2028. 

This surge is driven by multiple factors including:

• Increased use of fintech online apps.
• Reduced interest rates.
• More favorable regulator guidelines.

Since customers do not have to personally visit bank branches to conduct different operations, they save time and cut down travel costs, performing them online from wherever they are. 

Additionally, Mordor Intelligence informs that Europe dominates the market with a share amounting to more than 30% of global revenue. This region is characterized by the development of multiple innovative approaches, the widespread adoption of cutting-edge technologies, and partnerships between fintech companies to strengthen their positions and streamline the license acquisition process.

We know this from our own experience as we created the first Flutter-powered banking app in Europe. The cross-platform framework was relatively young yet met the requirements and worked well for a new business application with a bright modern design and user-friendly interface and allowed to save time and money due to its cross-platform approach where one single code base was used for both platforms, iOS and Android.

Another key driver of the market growth is partnerships between private companies and banks. A prominent example of such financial cooperation is Fi, a challenger bank launched by Google Pay and Federal Bank. It is a serious investment move, and the companies must have high hopes for the neobank business model.

At last, the exponential surge in the adoption of new banking license norms results from the implementation of the European Payment Services Directive (PSD 1). The initiative facilitated the foundation of new financial organizations that emerged at the forefront of delivering digital-only services. 

Since 2022, neobank investors have shifted their requirements focus from growth at all costs to profitability. This means successful neobanks are those that align their strategy with their customers’ needs. One of our clients’ apps is a good example: Y Combinator startup designed their app for tech-savvy millennials, with multiple integrations, all must-have features, and laconic design. But the first step towards profitability remains getting a license: let us dive deeper into the existing types of an online banking license.

What a banking license is

A banking license is a formal document that authorizes financial entities to provide banking-related operations. Licenses are typically granted by national regulatory bodies such as central banks or financial market surveillance agencies, referred to as National Competent Authorities (NCAs). Notable NCAs include ACPR in France and the BaFin in Germany.

When figuring out how to get a banking license, entities must meet specific regulatory requirements including shareholder equity, the number of directors needed, and establishing a permanent residence. There are variations in banking license guidelines depending on the jurisdiction and business type.

The main types of banking licenses for neobank launch

A full banking license

This type of license allows financial institutions to offer comprehensive banking services including accepting customer deposits and issuing loans. These licenses cover a broader spectrum of financial services and are subject to more stringent regulations. Such licenses are typically issued by central regulatory bodies, and their cost usually exceeds those of other licenses.

Depending on the geographical location of neobank incorporation, the authorities issuing a license can be national banking regulators like the Hong Kong Monetary Authority (HKMA), and supranational regulators, such as the Federal Reserve (the Fed) in the US or the European Central Bank (ECB) in Europe. When planning neobank development, it is important to take into account that the application process for a digital bank license may require more than 12 months. As for the authorization criteria, there is a minimum capital requirement for a full banking license and, of course, it varies from one regulator to another. For example, the HKMA requires an organization to have not less than HK$300 million (about US$38 million) in capital in order to obtain a license.

The process of obtaining banking licenses is a bit more complicated in the USA in terms of regulatory authorities. The country has a dual banking system which includes federal and state level regulatory institutions. One should not neglect to perform a thorough research of the banking license requirements before applying for it.

Speaking of real-life cases, Monzo started entering the US market with an application for a full banking license with the FCA but then withdrew it and decided to partner with a traditional bank based in the U.S., namely, Ohio-based Sutton Bank.

A fintech license

The number of financial technology companies operating online has significantly increased over the past years, encouraging governments to release a fintech license (alternatively referred to as a virtual or digital banking license).

It is a ’lighter’ version of a full banking license that enables organizations to provide products and services while avoiding the necessity to open physical branches. This type of license typically comes with less strict compliance obligations. Compared to everything we know about how to get a banking license, the approval procedures are easier to complete and the capital requirements are lower. 

The real life example here is a Switzerland-based neobank Relio that focuses on vertical financial services for small- and midsize enterprises and emerging companies. The bank has its fintech license issued by Swiss Financial Market Supervisory Authority (FINMA). The public deposits for each entity are capped at CHF 100 million, which helps avoid a longer approval process by supervisory authorities. 

Service provider model

To start a neobank, financial startups do not have to put in a request for a banking license and spend up to a year and a half being idle. Instead, fintech companies can act within a payment service provider agent paradigm and offer digital payment services to other entities. This way, it is faster and easier to launch a virtual bank online, meaning there is no tedious license acquisition process.

This way, an organization can turn to a Banking-as-a-Service (BaaS) agent, offering financial services under license. A good example is BIN Sponsorship that helps enable lending, account management, and card payments (Visa, Mastercard, and others). For instance, a French BIN Sponsor can manage card programs in the EU. Concerning real-life cases, Kard, a neobank for teenagers, uses BIN sponsorship possibilities of Bankable platform to implement card management programs under license. Founded in 2018, Kard has already raised €6 million over 2 rounds.

It is noteworthy that a variety of online banks employ white-label solutions like payment cards and electronic wallets. However, third parties generally charge fees for initial setup, monthly/annual subscriptions, and others, which can come at a high cost, especially in the long term. Nevertheless, this model allows fintech startups to improve time to market, as well as attract initial customers and try out various strategies before initiating the process of acquiring a banking license. 

Summing it up

When thinking about how to get a banking license, you have to consider what options exist in your country and research requirements to ensure compliance. To make the right choice, it is crucial to identify the business-specific needs you pursue to meet, meaning the scope of digital services you want to deliver, a geographical location, the time it takes to issue a license, and other factors.

Additionally, you should consider the opportunity of turning to third parties that offer licensed financial services and starting a neobank while applying for a license at the same time. When waiting for the license you will be able to test the ground, scale a company, and generate revenue.

As for the technical side of the project, it’s crucial to take care of security, convenience, and user-friendliness of the interface of your neobank application for users. Specializing in banking app development, the Surf team will help you address app development challenges, from achieving data security and enabling high performance to building great UX/UI.

Bonus case study

Our team not only works on current projects but also thinks ahead — searching for new opportunities to apply digital technologies for the benefit of our clients.

This was exactly the case with a concept for a 3-in-1 universal banking app covering mobile, web, and desktop. The concept is built on Flutter, a cross-platform framework developed and supported by Google. We have been successfully using it in our mobile projects where it helped to save time and budget by about 40% due to using a single code base for both iOS and Android apps.

Flutter’s third version has made it possible to develop an application on a single code base and adapt it for different six basic platforms. Shortly after its release, without wasting any time, our team developed a concept to showcase the capabilities of the framework’s new version. Since banking and fintech are among our focus domains, we have developed the banking app concept.

Flutter allows us to reuse 80-95% of the code base and all we need to do is to work on platform-specific features and UX solutions. The framework is a good match for all core banking functionalities and requirements, looking native on all platforms and adapting to any device. What is more, you do not need multiple native developer teams for each platform, but only one Flutter team.

If it sounds interesting — here you can get more information about the framework possibilities and test the concept.