How to get a banking license and what are the requirements? This is the first question you face 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 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.
Surf team has delivered web and mobile solutions for fintech and banking since 2011 and we know the domain throughout. In this article we have described the process of getting banking licenses of all possible kinds for an online bank launch. Also we offer a brief look at statistics demonstrating a shift towards digitization. And finally, we present our concept case study for neobanks with Flutter that allows saving up to 60% of your budget, for those who successfully get a license.
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.
Neobanking market current state
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 global neobanking market size was valued at USD 66.82 billion in 2022 and is anticipated to grow at a compound annual growth rate (CAGR) of 54.8% from 2023 to 2030.
Statista reports that the number of users in the neobanking market is expected to amount to 376.90m users by 2027
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 2022 with the share amounting to more than 29% of global revenue. This region is characterized by development of multiple innovative technologies, the widespread adoption of cutting-edge technologies and partnerships between fintech companies to strengthen their positions.
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 but met the requirements 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’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.
Insider Intelligence reports that in 2022 neobank investors 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 banking license: let’s dive deeper into types available.
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. For example, Hong Kong Monetary Authority (HKMA) requires not less than HK$300 million (about US$38 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, Monzo started entering the USA market with an application for a full banking license with the FCA but then withdrew it and decided for partnership with a traditional bank based in the U.S, and namely, Ohio-based Sutton Bank.
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. 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 is a Switzerland-based neobank Relio focuses on vertical banking for SMEa and start-ups. The bank has received a fintech license from the Swiss Financial Market Supervisory Authority (FINMA). The public deposits for each fintech are limited to up to CHF 100 million and this helps avoid waiting for the approval of the supervisory authority to go live.
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 possibilities of Bankable platform 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.
Bonus case study
We have written hoOur team not only works on current projects but we think ahead — searching for new opportunities to use technology 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. Flutter is 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 for about 40% due to using a single code base for both iOS and Android apps.
The third Flutter version has made it possible to develop an application on a single code base and adapt it for different six basic platforms. Just after release, without wasting time our team developed a concept to show how these possibilities work in reality.
As banking and FinTech belong to our focus domains — we made 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 and looks native on all platforms and adapts to any devices. 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.
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.
