Starting a neobank requires securing a banking license or partnering with an existing bank, raising significant capital (typically $10-50 million minimum), building a compliant technology infrastructure, and assembling a team with both fintech expertise and regulatory experience. The fastest path for most founders is the Banking-as-a-Service (BaaS) model, where you partner with a sponsor bank that provides the charter and regulatory infrastructure while you focus on the customer-facing product””this approach allowed Chime to launch in 2013 without obtaining its own bank charter and grow to over 20 million customers.
The alternative path””obtaining your own banking charter””offers more control and better unit economics long-term but requires 18-36 months of regulatory approval, capital reserves often exceeding $30 million, and ongoing compliance costs that can consume 15-20% of operating expenses. Varo Bank took this route, spending nearly four years and substantial resources to become the first consumer fintech to receive a national bank charter in 2020. This article covers the critical decisions around licensing strategy, the technology stack you’ll need, regulatory requirements across different jurisdictions, funding considerations, and the operational realities that determine whether a neobank survives its first five years.
Table of Contents
- What Are the Core Requirements to Start a Neobank?
- Building the Technology Stack
- Regulatory Compliance and Risk Management
- Funding Strategy and Unit Economics
- Common Pitfalls and Why Neobanks Fail
- International Expansion and Multi-Jurisdiction Operations
- How to Prepare
- How to Apply This
- Expert Tips
- Conclusion
- Frequently Asked Questions
What Are the Core Requirements to Start a Neobank?
The foundational requirements for launching a neobank fall into four categories: regulatory authorization, capital, technology infrastructure, and human expertise. Regulatory authorization is non-negotiable””you cannot accept deposits or offer banking services without either holding a license yourself or operating under a licensed partner’s umbrella. In the United States, this means either a state or federal banking charter, or a partnership with a bank that already holds one. The European Union requires an Electronic Money Institution (EMI) license at minimum, with full banking licenses offering broader capabilities. Capital requirements vary dramatically based on your licensing approach. A BaaS partnership might let you launch with $5-10 million in initial funding, primarily for technology development, customer acquisition, and operating runway. Pursuing your own charter pushes that figure to $20-50 million or more, with regulators requiring proof that you can sustain operations and absorb losses for several years. Germany’s N26, for example, raised over $500 million before obtaining its full European banking license, though much of that funded growth rather than regulatory requirements alone. The technology stack represents another major consideration, and here founders face a build-versus-buy decision that shapes their cost structure and competitive positioning. Core banking systems from vendors like Mambu, Thought Machine, or Temenos can cost $500,000 to several million dollars annually, while building proprietary systems requires a team of 20-50 engineers and 12-18 months before launch. Most successful neobanks use a hybrid approach: licensed core banking infrastructure with proprietary customer-facing applications and data analytics layers. ## Licensing Pathways: Charter vs.
Partnership The charter-versus-partnership decision is the most consequential strategic choice a neobank founder makes, affecting everything from profit margins to regulatory burden to exit opportunities. The BaaS partnership model dominates early-stage neobanks because it allows faster time-to-market and lower upfront costs. Under this arrangement, companies like Synapse, Treasury Prime, or Unit provide the connection to a sponsor bank (such as Evolve Bank & Trust or Cross River Bank), handling the regulatory complexity while you build the product. Revenue splits typically give 70-80% to the neobank and 20-30% to the sponsor bank and BaaS provider combined. However, this model carries significant risks that have materialized in recent years. When Synapse filed for bankruptcy in 2024, it left numerous fintech partners scrambling to maintain operations and customer access to funds. Sponsor bank relationships can also deteriorate””regulators increasingly scrutinize these arrangements, and banks have terminated partnerships with little warning when compliance concerns arise. Founders should negotiate contracts carefully, ensuring clear terms around data portability, transition periods, and customer fund protection. Obtaining your own charter provides independence but demands patience and resources most startups lack. The OCC’s special purpose national bank charter, designed for fintechs, requires detailed business plans, proof of capital adequacy, and demonstration of management competence. State charters vary in requirements and take 12-24 months on average. Square obtained an Industrial Loan Company (ILC) charter through Utah after a multi-year process, giving it direct access to FDIC insurance and the ability to lend from its own balance sheet. For founders committed to long-term independence and willing to invest the time, the charter path builds a more defensible business.
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Building the Technology Stack
A neobank’s technology infrastructure must handle core banking functions (ledger management, transaction processing, account management), customer-facing applications (mobile and web interfaces), compliance systems (KYC/AML, fraud detection, reporting), and integrations with payment networks and third-party services. The architecture decisions made at launch often persist for years, making early choices about build-versus-buy particularly consequential. Monzo’s technology approach illustrates one end of the spectrum. The UK neobank built its core banking system from scratch using modern cloud infrastructure, giving it the flexibility to add features rapidly and the unit economics that come from not paying licensing fees. This required raising over £100 million before meaningful revenue and assembling an engineering team capable of building financial-grade systems.
The payoff came in their ability to launch new products quickly and maintain margins that licensed-software competitors couldn’t match. Most founders should take a more pragmatic approach, especially in early stages. Cloud-based core banking platforms have matured significantly””Thought Machine (used by Standard Chartered and Lloyds) and Mambu (used by N26 and OakNorth) offer modern, API-first architectures that avoid the legacy system problems of traditional banking software. These platforms typically charge based on customer accounts or transaction volume, aligning costs with growth. The limitation is customization: you’re constrained by the vendor’s roadmap and may find yourself unable to implement differentiating features without significant workarounds.
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Regulatory Compliance and Risk Management
Regulatory compliance consumes 15-25% of a typical neobank’s operating budget, and underestimating this cost is among the most common founder mistakes. Beyond the initial licensing requirements, ongoing compliance includes Bank Secrecy Act (BSA) obligations, anti-money laundering (AML) programs, consumer protection regulations, fair lending requirements, and regular examinations by state or federal regulators. The compliance team at a mid-sized neobank typically includes 10-30 people, including a Chief Compliance Officer, BSA Officer, and specialists in various regulatory domains. Know Your Customer (KYC) processes deserve particular attention because they directly impact customer acquisition costs and conversion rates. Traditional banks might take 3-5 days to open an account; neobanks differentiate by completing this process in minutes. This requires sophisticated identity verification systems (from vendors like Jumio, Onfido, or Alloy) that balance friction reduction with fraud prevention.
Getting this balance wrong in either direction hurts: too much friction kills growth; too little invites fraud losses and regulatory scrutiny. Revolut faced significant regulatory pressure in the UK partly due to concerns about their customer verification processes during rapid growth phases. Fair lending compliance presents particular challenges for neobanks using algorithmic decision-making. Machine learning models that improve credit decisioning can inadvertently create discriminatory outcomes that violate the Equal Credit Opportunity Act or Fair Housing Act. Regulators have increased scrutiny of these systems, requiring explainability and regular testing for disparate impact. Upstart, a lending-focused fintech, invested heavily in demonstrating that their AI models expanded access to credit for underserved populations””an approach that proactively addressed regulatory concerns while supporting their business model.
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Funding Strategy and Unit Economics
Neobank funding requirements fall into distinct phases: pre-launch (licensing and technology development), launch-to-scale (customer acquisition and product expansion), and mature operations (capital adequacy and profitability). The total capital required to reach profitability typically ranges from $100-500 million, though this varies significantly based on business model, geography, and customer acquisition efficiency. Current, a US neobank, raised over $400 million before reaching profitability, while Mercury achieved profitability with under $200 million raised by focusing on business banking with higher revenue per customer. The revenue model tradeoff centers on interchange versus lending. Interchange-dependent neobanks (like Chime) earn money when customers use debit cards””typically 1-2% of transaction value, of which the neobank might keep 0.5-1%. This model requires massive scale to reach profitability: with average revenue per user of $100-200 annually, you need millions of active customers.
Lending-focused models generate higher revenue per customer but require more capital and regulatory capability. SoFi’s transition from student loan refinancing to full banking services illustrates how lending economics can support premium customer acquisition costs. Customer acquisition cost (CAC) and lifetime value (LTV) determine viability, and these metrics have shifted unfavorably for consumer neobanks in recent years. Early entrants like Chime acquired customers for under $30; today’s CAC often exceeds $100 for quality customers. This has pushed newer entrants toward niche strategies: Mercury focusing on startups, Ramp on corporate expense management, Novo on small businesses. These segments offer higher LTV and more defensible positioning than the general consumer market where Chime, Cash App, and Venmo dominate.
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Common Pitfalls and Why Neobanks Fail
The neobank failure rate is substantial””most funded neobanks either fail outright, get acquired at unfavorable terms, or pivot to non-banking models. Understanding common failure patterns helps founders avoid them. The most frequent cause is running out of capital before reaching sustainable unit economics, often because founders underestimate customer acquisition costs and overestimate revenue growth. Xinja, an Australian neobank that raised A$100 million, returned its banking license and customer deposits in 2020 after concluding it couldn’t reach profitability with its remaining capital. Regulatory issues represent another major failure category. Regulators can effectively kill a neobank through enforcement actions, consent orders, or simply by delaying approvals that prevent product launches.
Germany’s regulators placed N26 under a growth cap in 2021, limiting new customer acquisition and fundamentally altering the company’s trajectory. In the US, the Federal Reserve and OCC have increased scrutiny of BaaS relationships, with several sponsor banks receiving consent orders that affected their fintech partners. Founders should maintain direct relationships with relevant regulators rather than assuming their sponsor bank or legal team handles everything. Differentiation failure deserves mention because many neobanks launch without a clear answer to “why would a customer switch from their existing bank?” The features that seemed innovative in 2015″”no-fee accounts, instant transaction notifications, spending analytics””are now table stakes offered by traditional banks and established neobanks alike. Successful recent entrants found underserved niches: Mercury served startups frustrated with slow traditional business banking; Dave targeted the payday lending alternative market; Greenlight focused on family financial management. Without genuine differentiation, customer acquisition costs become prohibitive.
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International Expansion and Multi-Jurisdiction Operations
Operating across borders multiplies regulatory complexity while potentially expanding the addressable market. Each jurisdiction requires its own licensing (or partnership arrangements), compliance infrastructure, and often localized product features. Revolut’s expansion across Europe leveraged the EU’s passporting system, allowing a single license to cover multiple countries””an efficiency unavailable in more fragmented markets like the Americas or Asia-Pacific. The UK and EU remain the most accessible markets for neobank launches due to clear regulatory frameworks and relatively efficient licensing processes.
The UK’s Financial Conduct Authority (FCA) issues EMI licenses within 12 months in most cases, and the regulatory sandbox program allows limited live testing before full authorization. Monzo, Starling, and Revolut all benefited from this environment. In contrast, US expansion for foreign neobanks typically requires partnerships with domestic banks, as obtaining direct licensing is prohibitively complex for non-US entities. N26’s US market entry relied on a partnership with Axos Bank, and the company ultimately exited the US market in 2022 after concluding the investment required for independent operations wasn’t justified.
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How to Prepare
- **Define your target customer and value proposition with specificity.** “Better mobile banking for millennials” is not a strategy; “helping freelancers manage irregular income with automated tax set-asides and invoice-based cash advances” is. Interview at least 50 potential customers in your target segment before committing to a direction.
- **Map the regulatory landscape for your target market and products.** Determine which licenses you’ll need, whether partnership or charter makes sense for your timeline and capital, and identify the specific regulators you’ll interact with. Engage a specialized banking attorney during this phase””generalist startup lawyers lack the domain expertise for accurate guidance.
- **Build financial projections that honestly model the path to profitability.** Include realistic customer acquisition costs (benchmark against similar companies), revenue ramp assumptions, and compliance costs (which founders consistently underestimate by 50% or more). If the model doesn’t work without assumptions that require everything to go perfectly, reconsider the approach.
- **Assemble a founding team with relevant experience.** Regulators and investors both scrutinize whether your team has banking or fintech operating experience. Having at least one founder or early executive with compliance background significantly improves licensing outcomes and reduces regulatory risk.
- **Identify your BaaS partners or charter strategy and begin conversations early.** These relationships take months to establish, and waiting until you need them creates delays. Warning: don’t commit to exclusive partnerships too early””maintain optionality until you understand your true requirements.
How to Apply This
- **Formalize your partnership or licensing application.** For BaaS partnerships, this means completing due diligence, negotiating contracts, and integrating with your sponsor bank’s systems””a process taking 4-8 months. For direct licensing, submit your application and begin the 12-36 month approval process while simultaneously building your technology platform.
- **Build your minimum viable product focused on core banking features.** Account opening, deposits, payments, and a mobile interface represent the baseline. Resist adding features beyond this core until you’ve validated customer interest with real users. Most failed neobanks tried to launch with too much product complexity.
- **Conduct a limited beta with real customers and real money.** This surfaces compliance gaps, technology bugs, and customer experience issues before public launch. Monzo’s “golden ticket” beta program built a waitlist of over 200,000 while providing invaluable product feedback.
- **Launch publicly with a focused customer acquisition strategy.** Rather than broad marketing, target early adopters in your specific niche through communities, partnerships, and referral mechanics. Measure CAC and early retention obsessively””these metrics determine whether your model works.
Expert Tips
- **Don’t underestimate the ongoing cost of compliance.** Budget 20% of operating expenses for compliance functions, and expect regulators to increase scrutiny as you scale. The companies that treat compliance as a strategic capability rather than a cost center perform better in examinations and avoid costly enforcement actions.
- **Avoid launching without a clear path to profitability in your target segment.** The days of “growth at all costs” neobank funding are over. Investors now require realistic unit economics, and founders who can’t articulate how they’ll make money per customer struggle to raise capital.
- **Do not expand product offerings too quickly.** Each new product (lending, investments, insurance) brings regulatory complexity and operational risk. Chime operated for years with only deposit accounts and debit cards, reaching massive scale before adding credit products.
- **Build direct relationships with your regulators rather than hiding behind lawyers and compliance officers.** Regulators appreciate founders who engage transparently, and these relationships prove valuable when issues arise. Schedule introductory meetings early, before you have problems to discuss.
- **Prioritize customer retention over acquisition once you’ve proven initial demand.** A neobank with 500,000 highly engaged customers is worth more than one with 2 million accounts that rarely see activity. Engagement drives interchange revenue, deposit growth, and cross-sell opportunities.
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Conclusion
Starting a neobank requires navigating complex regulatory requirements, making consequential decisions about licensing and technology strategy, raising substantial capital, and building sustainable unit economics in an increasingly competitive market. The BaaS partnership model offers the fastest path to market but introduces dependency risks; obtaining your own charter provides long-term advantages but demands resources most startups lack. Success increasingly depends on targeting specific underserved segments rather than competing broadly with established players.
The founders best positioned to build successful neobanks combine fintech operating experience with realistic expectations about the capital and time required. The 18-36 month timeline to meaningful traction tests the patience of teams accustomed to faster startup feedback loops. Those who persist through regulatory approval, technology development, and the challenging early years of customer acquisition can build genuinely valuable businesses””but the path requires more preparation, capital, and persistence than most first-time founders anticipate.
Frequently Asked Questions
How long does it typically take to see results?
Results vary depending on individual circumstances, but most people begin to see meaningful progress within 4-8 weeks of consistent effort. Patience and persistence are key factors in achieving lasting outcomes.
Is this approach suitable for beginners?
Yes, this approach works well for beginners when implemented gradually. Starting with the fundamentals and building up over time leads to better long-term results than trying to do everything at once.
What are the most common mistakes to avoid?
The most common mistakes include rushing the process, skipping foundational steps, and failing to track progress. Taking a methodical approach and learning from both successes and setbacks leads to better outcomes.
How can I measure my progress effectively?
Set specific, measurable goals at the outset and track relevant metrics regularly. Keep a journal or log to document your journey, and periodically review your progress against your initial objectives.
When should I seek professional help?
Consider consulting a professional if you encounter persistent challenges, need specialized expertise, or want to accelerate your progress. Professional guidance can provide valuable insights and help you avoid costly mistakes.
What resources do you recommend for further learning?
Look for reputable sources in the field, including industry publications, expert blogs, and educational courses. Joining communities of practitioners can also provide valuable peer support and knowledge sharing.