Starting a Neobank: How to Get a Banking License

    As soon as you’ve chosen a neobank as a business model for your project, the next step to high revenue rates is getting acquainted with neobank license requirements. 

    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 virtual banks in comparison with traditional banks. However, these institutions, as well as the usual banks, have to obtain a banking license for entering the market. The types of licenses and the rules for obtaining them differ depending on the scope of services provided by the neobank. 

    In this article, software experts at Surf have described the process of getting banking licenses of all possible kinds for an online bank launch. But first, let’s have a brief look at neobank statistics demonstrating a shift towards digitization.

    Neobanking market growth in 2021 and beyond

    Aiming to improve client engagement and digitize workflows, the finance and banking industry is integrating innovative technologies and business models. This enables a move for neobank growth, making a significant impact on the entire sector. 

    According to Grand View Research, the worldwide neobanking market size is anticipated to rise from 47.1 billion in 2021 to $722.6 billion by 2028, progressing at a compound annual growth rate (CAGR) of 47.7% during the forecasted period. 

    This surge is driven by multiple factors that include:

    • increased use of fintech mobile apps;
    • reduced interest rates;
    • more favorable government regulations. 

    Since customers do not have to personally visit banks to carry out different operations, they save time and cut down expenses on traveling from home to a bank office. 

    Additionally, Grand View Research informs that Europe dominated the market in 2021 with the share amounting to more than 30% of global revenue. This region is characterized by the widespread adoption of cutting-edge technologies and partnerships between fintech companies to strengthen their positions. 

    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’s a serious investment move, and the companies probably have high hopes for the neobank business model, since they’re doing it.

    At last, this exponential surge is also explained by the implementation of the European Payment Services Directive (PSD 1). Released in December 2009, PSD 1 facilitated the foundation of new financial organizations that became pioneers in delivering digital-only services.

    The US is another leader in the fintech landscape. Insider Intelligence reports that the number of neobank account holders in 2021 is 23.1 million, which is one of the highest rates in the world. Analysts predict that this figure will climb to 47.5 million by 2024, registering a CAGR of 19.8%. 

    As the demand for digital banks is witnessing a rapid increase, their development offers great investment opportunities. So, let’s consider what a financial license is and what types of banking licenses exist.

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    What is a banking license?

    A banking license is a legal certificate that has to be obtained by financial companies aiming to provide banking-related services. Licenses are generally issued by local banking regulators like central banks or financial market supervisors, named National Competent Authorities (NCAs). Examples of NCAs are the FCA that operates in the UK, ACPR acting in France, and the BaFin established in Germany. 

    When figuring out how to get a banking license, it is crucial to find out what requirements have to be met. These requirements can comprise shareholder residence, a minimum number of directors, and other aspects. In addition, one should note that the process of issuing a license may be complex and time-consuming depending on its type.

    The main types of banking licenses for neobank launch

    1. A full banking license

    The license of this type allows financial organizations to deliver general banking services that comprise accepting customer deposits and issuing loans. However, while this license supports a broader scope of activities, it is more regulated compared to others. This type of license is usually granted by regulatory bodies, such as central banks.

    Depending on the geographical location of neobank incorporation, these authorities can be national banking regulators like Hong Kong Monetary Authority (HKMA), and supranational regulators, for instance, 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:

    • Hong Kong Monetary Authority (HKMA) requires not less than HK$300 million (about US$38 million);
    • Federal Reserve (the Fed) demands from US$2 million to US$10 million;
    • the European Central Bank (ECB) sets the minimum capital requirement at €5 million.

    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. So don’t neglect conducting thorough research of the banking license requirements before applying for it.

    Speaking of real-life cases, Starling and Monzo applied for a full banking license with the FCA when starting their neobanks in the UK.

    2. A fintech license

    The number of financial technology companies 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 more light version of a full license that enables organizations to provide products and services while avoiding the necessity to open physical branches. In this case, compliance obligations are typically less strict. Considering true-life examples, famous neobanks, such as N26 and Monzo use a fintech license. 

    This license is issued by regulatory authorities across the world. For instance, to start a neobank in Europe, it is possible to get a European money license (EMI), which is also called an e-wallet or electronic money institution license.

    By obtaining an EMI, a company is empowered to carry out card transactions and wire transfers employing customer digital wallets or accounts. Thanks to an EMI, neobanks can offer the same range of services—making online payments, accepting deposits, supplying credits—as with a full license. 

    The cost of getting an EMI varies from country to country. In the UK, the application fee for this digital bank license is £5,000, the price in the Czech Republic is €1,850 while in Germany startups have to pay €11,900.

    Other countries and regions are promoting fintech licenses, too. This year, for instance, Bank Negara Malaysia established the first round of online banking licensing, setting a deadline for applications for 30 June 2021. In Singapore and Hong Kong, numerous neobanks were launched due to these licenses. 

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    3. A payment service provider agent model

    To start a neobank, financial technology startups and institutions do not have to put in a request for a banking license and wait for up to 15 months. Instead, fintech companies can act according to a payment service provider agent model. 

    Approved by NCAs, they can approach agents to offer digital payment services under their responsibility. This way, it is faster and easier to launch a virtual bank, avoiding the necessity to pass through the complicated and time-consuming process of license issuing.

    For this purpose, an organization can turn to a Banking-as-a-Service (BaaS) company, offering licensed financial services. A good example is BIN Sponsorship that helps enable operations such as 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 to implement card management programs. 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 be too costly, especially in the long term. 

    So, when choosing a vendor, it is essential to pay attention to terms and agreements to find the best option. Nevertheless, this model allows fintech startups to improve time to market, as well as attract clients and try out various strategies before applying for 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 with. 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 necessary to issue a license issuing time, and other factors. 

    Additionally, you should consider the opportunity of turning to third parties that offer licensed financial services and start a neobank while applying for a license at the same time. When waiting for it, 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.