MAY 2, 2022
9 min read
To create a neobank platform is more than just designing a nice app on a smartphone. You’ll be working on several important web applications.
A modern neo bank like Dozens is powered by 40 different micro-services, 5 different user interfaces, and uses multiple 3rd party integrations. A neobank might … or leverage custom development and integrations by using existing platforms or bank-as-the-service approaches.
In this article, I will focus on covering the minimum workflow for the neobank: Know Your Customer, creating banking accounts, and incorporating card issuing and processing providers.
Three approaches to implement a neobank’s back-end
Custom development. In this approach, you are the only responsible party for everything: design, implementation, and future development. Also, once written, the code and implementation may be used multiple times for different products. Another advantage is that you may keep adding features to your product. However, it takes more time than the other choices we’ll discuss shortly, and it costs a lot upfront.
Implementation on top of existing banking platforms or products. Remember that the financial services your app offers will have a huge impact on how well it functions. It still requires back-end engineers to operate. This option saves time and money and gives you access to an established client base. Still, bank legacy software is usually hard to work with and slows down new features. It also has a limited range of consumer banking products because of regulations.
Using Banking-as-a-Service solutions. This approach has a shorter time to market and costs less than starting from scratch. However, it is difficult to customise and adapt to unique business needs. Among the most essential solutions are: Know Your Customer and Anti-Money Laundering, Card Issuing, and Account Management.
Some Vendor Integrations For Neobank Are Must-Have
Know Your Customer and Anti-Money Laundering
In a globalised economy, financial institutions are more sensitive to criminal activity. Know Your Customer rules (KYC) protect financial institutions from fraud, corruption, money laundering, and funding for terrorists.
This process is needed by law for fintechs to reduce the danger of being exploited for financial crime. Several KYC/AML services are available to help neobanks and other financial institutions comply with regulations.
Successful compliance and risk management programmes rely on effective KYC procedures, and KYC responsibilities are increasing. Banks and businesses are spending a lot of money and time on KYC compliance operations as more fines and stricter regulations come into effect.
KYC compliance is crucial for real-time cross-border payments, fostering trust, transparency, and cooperation while reducing risk. A community approach is important to speeding up compliance and tackling financial crime in new, collaborative ways.
Financial institutions begin the KYC process by requesting consumers’ basic personal and company information. It contains director names, business locations, NI or SSNs, and company numbers. Information from open sources is added to this, such as names and addresses, registration numbers, stock market listings, and annual reports.
The KYC data is then matched to a database of known people and organisations. The lists serve many purposes.
- To identify those who have been accused of illegal activity.
- To provide information on companies or individuals suspected of bribery or money laundering.
- To find Politically Exposed People (PEPs).
- To filter and block people and entities under sanctions.
Consumers can be checked out by KYC service providers to make sure all the rules are being followed.
The UK’s Joint Money Laundering Standards Group provides KYC suppliers with guidelines (JMLSG). To guarantee compliance with the UK’s anti-money laundering and counter-terrorist financing laws and regulations, the financial sector uses the JMLSG advice to ensure best practises are utilised.
If a company does not have its own eMoney licence, it must give the KYC vendor access to client information. The vendor verifies the data, asking for further details as required.
Bank Accounting and Ledgers
Generally, accounts contain money. This service is vital to banking, but fintechs usually can’t provide it without bank partners. Fintechs function as mediators for money transfers.
The UK has two types of accounts: FSCS Bank Accounts and Virtual Accounts.
The Financial Services Compensation Scheme (FSCS) insures accounts at UK licenced banks (FSCS). The FSCS protects up to £85,000 per consumer, per bank.
In this context, distinguish between an EMI and a banking license. If you have money in a bank account, you are covered by the Financial Services Compensation Scheme (FSCS), which means the UK government will reimburse you (up to a point). The EMI licence, which is prevalent among UK challengers, requires that once a customer’s money is received, it be placed in a special “safeguarding account” with a bank. To make it clear, the UK government provides FSCS protection, while the EMI provides safeguarding protection for people who work for a company.
The value of various bank accounts is determined by their attributes. Some accounts allow withdrawals immediately, while others restrict or prevent them. Others pay interest. Others charge a fee. But basically, any bank account is a checking account.
Accounts may be divided into two types.
- Consumer accounts are sometimes known as retail or personal accounts. Personal accounts are those used by individuals. This usually refers to personal checking and savings accounts.
- Business accounts. These include commercial checking and savings accounts, but also escrow, brokerage, and FBO (for benefit of) accounts.
Checking accounts, often called demand deposit accounts (DDAs), allow for spending. They frequently provide for limitless or high withdrawal limitations per day, as well as unlimited or high account transactions per day. Checking accounts allow ACH, wire transfers, cheques, and bill pay.
Savings accounts frequently limit the number of withdrawals per month and the amount that may be withdrawn all at once. The money is supposed to stay put for a long time because banks lend money against the money they have in savings.
FBO accounts are bigger umbrella accounts that hold smaller subaccounts. Fintechs employ FBO accounts to provide virtual accounts to consumers, which are tracked on a ledger. Individual FBO accounts can be insured, contrary to popular belief. As long as the subaccounts are properly integrated and reported, FSCS insurance can be transferred through to the underlying bank accounts. These accounts are still vulnerable to fraud, but so are others.
For security reasons, several fintechs opt to create on-core accounts for their customers. However, many fintechs prefer the FBO account structure over the on-core account structure since it allows them to better manage the user experience. However, an experienced BaaS provider can handle this level of risk.
For bank or fintech collaborations, ledgers are essential technical components. Inflexible financial systems or rudimentary accounting software are used by most banks and fintechs. As a result, tasks like reconciliation can be tedious and time-consuming.
A ledger balance is the “morning” balance of a checking account. At the end of each business day, all credit, debit, and interest transactions are added up to the ledger balance. This is not the same as available balance.
There are several methods for issuing cards: you can print physical cards or use virtual ones; you can get your own BIN or share one. What’s BIN? The BIN (or bank identification code) is a coding system used to identify which institution issued a credit card or other bank card. It is the bank’s calling card; each issuing bank has its own BIN.
Consumers expect businesses to provide cards. The right card issuing supplier can help you cut costs, reduce operational stress, and even come up with new ways to make money.
Cardholders get physical cards through a specialised carrier that may be used anywhere for online or offline payments. A virtual card is a fully functional card for online payments. Cards may also be debit, credit, or prepaid.
Much more sophisticated than debit, credit must have an “open to purchase” button that verifies whether a user has reached their limit and still has money available to spend. Debit is considerably easier. The sole question is whether a user’s account has enough money to pay for a transaction or if they have overdraft protection.
Interchangeability is also different. The neobank will pay card issuers to facilitate a purchase or transaction. Because retailers are willing to pay more to get credit and because of regulations, credit card issuers often get more interchange fees than debit card issuers.
In summary, fintechs may generate more money by issuing credit cards, but operating credit programmes is more difficult and costly.
Various card issuers feature sophisticated spending restrictions and real-time authorizations, allowing comprehensive charge management. Popular features include establishing spending restrictions, limiting merchant categories, and generating complex rule combinations. Vendors place your company immediately in the authorization pipeline, enabling you to make real-time choices on every charge.
Physical cards are the most expensive to make and send because they have to be manufactured. Adding dip or tap payments to the magnetic strip increases the cost. Digital cards, which may be used in digital wallets like Google Pay and Apple Pay, are less costly but take the longest time to issue.
The card’s BIN must be tokenized. Ideally, this should be set up during the BIN sponsorship process; doing it afterwards may delay your launch by many months. There must also be legal agreements with wallets and networks.
The quickest cards to issue are virtual cards, which are non-physical cards that are online apps. They still need to be tokenized to be put into digital wallets, but not manufactured. Some neobanks allow clients to use their services before receiving their actual cards. As a result, clients can use their new account right away and have their card credentials automatically loaded to Apple Pay, Google Pay, or Samsung Pay.
Regardless of card type, you must choose between sharing a BIN or acquiring your own. Sharing BINs for fintech is faster and no less effective, while obtaining a BIN might take three months. Sharing a BIN takes a fraction of that time, and you may use an already tokenized BIN.
Companies that issue or handle payment cards must follow the Payment Card Industry Data Security Standard (PCI DSS, or just PCI for short). It’s important to follow the standards, yet it’s hard and time-consuming.
The old-fashioned method of attaining PCI is highly labor-consuming. You get an auditor, run a gap analysis, repair a number of things, and then get verified. You must revalidate and re-attest every year. If a bank tries to do it alone, it might take six to twelve months. Fortunately, PCI service providers can accomplish it quicker.
Some Examples in EU and UK Regions
Not all suppliers can meet your company’s demands. Some may not comply with local rules, while others lack the required characteristics. Changing the BaaS supplier afterwards will be difficult since all client interactions will be connected to its financial infrastructure. There are a few solid examples from the EU and UK regions.
solarisBank is a Berlin-based startup that holds a German banking licence and allows companies to deliver completely digital and compliance white-branded financial services to their clients. BBVA, Visa, SBI Group, and Lakestar all invested in the company’s €56.6 million (£47.37 million) Series B capital round in early 2018.
Bankable is a London-based firm that helps banks, fintechs, and other businesses launch innovative payment solutions. In addition, it offers virtual ledger management, digital banking, and e-wallets. Its end-to-end payment services are available through a unique interoperable platform that is PCI-DSS certified and housed in Tier-4 data centres for maximum protection. Bankable assists its partners in overcoming technical and regulatory hurdles.
Treezor is a Paris-based banking platform that handles both receiving and sending payments. In addition to wire transfers and P2P transfers, the firm’s licenced and unlicensed fintech clients can offer customers personalised payment services such as digital wallets, account management, check acquiring, and physical and virtual prepaid debit and credit cards, as well as dedicated International Bank Account Numbers (IBANs).
11:FS Foundry is another London-based SaaS/PaaS firm trying to make fundamental banking upgrades and overhauls more appealing and scalable for customers by reducing risk, cost, and time-to-market hurdles.
ClearBank is a London-based company that helps financial institutions and fintechs construct their own solutions. Its technology allows financial institutions to give customers current accounts, which means faster payments and more people who have access to money.
- There are three basically necessary features in a neobank: “Know Your Customer” and “Anti-Money Laundering”, Card Issuing, and Account Management.
- You need KYC/AML processes to protect financial institutions against fraud, corruption, money laundering, and terrorist financing.
- There are several paths you can take to issue cards. Whatever type of card you issue, you will have to decide between sharing a BIN or getting your own.
- One of the most important features of accounts at chartered banks in the UK is that they are insured by the Financial Services Compensation Scheme (FSCS). This applies to other countries as well, only in accordance with their own laws.
If you are interested in creating your own perfect financial solution for your customers, don’t hesitate to contact our team. And subscribe to our newsletter to get interesting information about fintech.
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