As the fintech realm continues to evolve, neobank establishment has become an enticing and viable venture for many entrepreneurs targeting to transform the banking industry. Neobanks have been growing tremendously, but if you want to create a successful venture, you need to put in a lot of work to offer valuable solutions to customers.
One critical action to start a neobank is obtaining a neo bank license. This step is vital and demands that you meticulously plan and have a thorough understanding of the guidelines and compliance requirements of the regulatory frameworks.
We will guide you on exactly what you need by diving into the intricacies of sourcing and securing a neobank banking license.
What does a neo bank license mean?
This is the legal document/certificate you will need to obtain as a financial company seeking to offer banking-related services. It helps in ensuring security and compliance.
Typically, a local banking regulator, like a central bank, issues the banking license. National Competent Authorities (NCAs)/ financial market supervisors can also issue a banking license, e.g. BaFin(Germany) and ACPR(France).
Obtaining a neo bank license for your start-up is costly and complicated. Depending on the jurisdiction, the application process may take up to a year or more. Still, starting a neobank with a license means more business prospects.
Generally, choosing a neobank license will mainly depend on your business’s scale, financial ability, and long-term goals.
Primary Neobank Banking Licenses
Full Banking License
This license lets your organization deliver general banking services like customer deposits and loan issuance. It supports a wider scope of activities but it also has more regulations compared to other licenses.
The regulatory authority issuing this license depends on where your neobank is registered and your target market. For example, the Fed is the national regulator in the USA, while the ECB works in Europe. The HKMA works in Hong Kong, while SAMA works in Saudi Arabia.
Fintech License
As the industry has kept developing, new licenses like the Fintech licenses have emerged. These are also referred to as digital or virtual baking licenses. They have a lower eligibility threshold compared to full banking licenses but still allow you to offer similar services.
Technically, they are what we may refer to as light full banking license versions. They do not require physical branches, have lower capital needs, and have more accessible approval procedures.
With a digital banking license comes some limitations; You cannot issue loans or keep customer funds, and they also come with transactional e-wallet limitations.
This option is cost-effective for start-up neobanks due to their lesser application time.
A Partnership/service provider agent model
We have highlighted the legal aspects of creating an independent digital bank. However, if you cooperate with a traditional bank, you may not need a license. This can save you money and time, and you can work with the bank till you obtain the financial strength to operate independently.
However, you must understand that this is a less flexible option than the others discussed. The start-up cannot take full charge of the financial flows and continues to depend on a third party.
Essential Requirements for Obtaining a Neo bank License
Do your Research and Due Diligence
Before beginning your licensing journey, it is best to do ample research about the regulations governing your area of operation. Different countries or regions have varying requirements, and you must know what applies to you and what does not.
You can even opt to seek help from legal or regulatory experts. They will usually have valuable insights on how you can navigate the regulatory landscape, ensure compliance, and mitigate any potential obstacles.
Developing a Business Plan
It is best to come up with a comprehensive business plan before you can even begin to source a neo bank license. Outline things like your target market, competitors, projected financials, revenue model(s), and risk management schemes.
Having a robust business plan instills regulator confidence, and your neobank venture will seem more viable and sustainable.
Capital Adequacy
Regulatory authorities require that you meet the capital requirements for neobank establishment. You must demonstrate your neobank’s financial strength so they can ensure that you do not run a substantial risk of insolvency and that your venture is sustainable.
Engaging with Regulatory Authorities
You will need to establish open communication lines with the regulatory bodies. You must avail yourself during pre-application meetings so that you may seek further clarifications if need be. This will help you understand what is required of you.
Documentation
Like other business models, establishing a neobank requires compiling several documents. Generally, these will include a business plan, compliance policies, financial projections, key personnel details and frameworks for risk management. Make sure these are at par with the regulatory requirements.
Technology
Neobanks are agile in innovation, so regulatory bodies will scrutinize your venture’s technological infrastructure. You must demonstrate that the systems in place comply with data protection regulations and security standards and are well-equipped to manoeuvre the demands of modern banking.
Compliance Framework
From a compliance perspective, you need a robust framework that aligns with the regulations set out for banks. Have procedures that showcase your neobank’s commitment to holding high ethical standards. AML(Anti-money Laundering), KYC (Know your Customer), and CFT(Countering the financing of terrorism), liquidity, capital, and prudential requirements must be met.
Risk Management
Neobanking regulators are big on risk mitigation. You, therefore, must have risk management policies in place. For instance, policies that take care of operational and market risks and credit coverage should be in place.
Obtaining Feedback and Handling Delays
Before your neo bank license is approved, you will get feedback, and it is always best to respond to any issues or concerns about the application process. You must also address issues promptly to show that you are committed to complying with and expediting the license application procedures.
The process may be time-consuming, but patience is best even when you experience delays.
Final Thoughts
Starting a neobank is an ambitious undertaking, and obtaining a banking license is pivotal. You must understand the regulatory landscape, build a solid business foundation, and navigate the application process while showing your commitment to compliance and risk mitigation.
This will better your chances of landing the necessary approvals for your contribution to the financial sector revolution.