How to Start a Neobank: 8 Steps that Follow Regulatory Compliance

August 30, 2022
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When starting a neobank, it’s difficult to align all the moving pieces. It can be challenging to know at what point you need to consider risk and compliance operations in neobanking, and at what point to integrate different tools (like transaction monitoring).

Most neobanks focus on growth, and then things escalate rapidly - leading to potential compliance issues down the line. Instead, you should have a proper compliance program set up from the beginning so you’re not putting out fires as you go. Your team should be poised to scale as your business does.

To help ensure your neobank is compliant, we’ll show you how to set up a neobank with proper regulatory compliance from the beginning by covering the following steps:

Let’s get right to it!

Download AML Compliance Checklist

8 Steps to Building Your Own Neobank From Scratch

Building a neobank from scratch is no easy task, and it will inevitably require cooperation with other financial institutions. A major component of setting up your neobank is AML compliance.

Below, we cover all the steps you need to be aware of to set up your neobank from a compliance perspective. This way, you’ll do the proper preparation so you’re compliant at launch. By having the right start, you’ll ensure managing compliance is easier down the road.

Pre-launch compliance preparation

Compliance will be an ongoing process once your neobank is running, but don’t get ahead of yourselves. There are a number of things you’ll need to do to prepare before you even launch, including market analysis and finding your sponsor bank.

We’ll cover everything you need to do pre-launch to get your neobank ready from a compliance perspective:

1. Understand the space and what type of neobank you’re creating

The first thing to do is analyze and understand the space you’ll be operating in. You should know the type of neobank you’re creating, and how it fits within the market. Research neobank market trends to identify best practices and what to watch for.

Most importantly, you’ll want to have a very clear handle on who your intended and ideal customers are. This will help you understand your audience and consider what features and capabilities they care about most, allowing you to better serve your customers. By truly understanding the biggest money laundering threats your neobank could face, the better prepared you’ll be to handle them.

2. Wisely choose a partner bank

To run your neobank, you’ll need to partner with a sponsor bank (or partner bank). This Fintech provider will give you a banking license, essentially allowing you to operate under their routing number. You’ll be able to facilitate and carry out transactions for your users, but all of this will be done using the partner bank’s infrastructure.

When choosing a sponsor bank, it’s best to find one that has a robust, high-quality Fintech program, and ideally one that’s been doing this for a while. The more experience they have, the easier it will be for you to work with them - and the more guidance and support they’ll be able to provide you.

3. Ask questions about compliance

After choosing your partner bank, it’s extremely important to ask questions about compliance. While there may be rules that you want to follow, you will also be obligated to follow certain rules, regulations, and best practices based on your partnership with the sponsor bank.

Be sure to ask compliance-related questions of your partner bank, including what regulations apply to you, what rules need to be followed, and what best practices they would like you to follow. As you’ll have an agreement with a partner bank, it’s incredibly important to know the scope of the requirements you’ll have to operate under - so that you adhere to your agreement.

Once this discussion is over, you should have a very clear understanding of what guidelines you have to follow in relation to compliance - as well as what the sponsor bank will do for you. In some cases, the sponsor bank will have systems in place that alleviate responsibility for your team. However, you’ll need to know the exact details of what is and isn’t required of your team to adhere to all compliance requirements.

4. Choose your banking as a service provider

Compliance is extremely important when choosing your banking as a service (BaaS) provider. Since the bank is the one facilitating financial services (i.e. transactions), it’s important to choose a reliable, high-quality service.

This will allow you to offer more to your customers, but it will also make it easier for your team to get support and make updates.

From a compliance perspective, you’ll need to make sure you adhere to what your BaaS needs you to follow, and reconcile that with the requirements of your partner bank. For example, your partner bank may set inbound or outbound limits on your transactions or user onboarding requirements; to stay compliant, you’ll need to ensure that your BaaS provider understands the compliance requirements you need to adhere to (and that they operate within those limits).

Administering compliance while launching

Now that you’ve properly prepared your neobank for compliance, it’s time to launch. At this point, there are still a couple of decisions you’ll need to make to ensure compliance is operational at launch. This is crucial, or you could expose yourself to AML fines and penalties, which can be expensive, and could sink you early on if you’re not compliant.

Compliance will require consistent maintenance and upkeep, but you’ll want to set yourself up for success by having everything ready at launch.

5. Hire a compliance officer

At this point, you’ll want to hire a compliance officer - or a compliance firm that specializes in Fintech. Either way, you’ll want help navigating the complicated landscape of compliance, and a true professional to lead - and steer - your team (and resources).

Make sure you get a compliance officer that truly understands the market, your audience in general, and exactly what space you are focused on (for example, do you target B2B or B2C?). The professional - or service - you employ should know which regulations apply to your market and business. For example, they should know if Regulation E (from the SEC), regarding electronic funds transfers, applies to your business and what your neobank needs to do to stay compliant.

On top of overarching industry regulations, they also need to have a clear understanding of regulations that apply pursuant to where your business is based out of and where you perform business operations. In many cases, you’ll be subject to national, state, and local regulations - and not all of them will be the same.

For instance, California has robust consumer protection laws, with one of the latest additions being the California Consumer Privacy Act (CCPA). To do business there, you’ll need to make sure you abide by the act.

Having a compliance officer or service provider ensures you’re on top of all applicable regulations, and that you have someone implementing them with your neobank to ensure your platform follows guidelines.

6. Create the terms and conditions of your service

One of the first things to prioritize is your terms and conditions. All customers you onboard will need to sign off that they’ve read - and understand - them. This provides protection for both you and your customers, and sets out the guidelines for the use of your neobank.

While most industries can slap a pretty simple TOS onto their service, you need to be much more careful when it comes to the neobanking industry. Clearly outline how customers are allowed to use your service and work in restrictions about using your service legally.

While there will be requirements you have to adhere to in order to meet minimum standards, you don’t want to bog down the user experience. Reduce friction for users as much as possible by offering new users a streamlined onboarding experience - while still meeting all necessary identity verification processes.

With all of the preparation done and a team in place to manage your compliance operations, you’re ready to launch (from a compliance perspective)!

Maintaining compliance while onboarding customers

Onboarding new users is one of the most important processes, as you’ll need to perform proper identity verification to know your customers are who they claim to be.

This process goes a long way in reducing fraud and money laundering attempts on your platform, as you allow less criminals on your neobank platform in the first place.

7. Use KYC, KYB, or both

Identity verification at the point of onboarding is extremely important so that you know your users are who they say they are.

Reach out to your sponsor bank and ask for the exact requirements you need to have in place for customer identification. Partner banks may have specific requirements you need to follow to work with them; you’ll want to know these requirements before you go searching for a KYC/KYB vendor.

Many sponsor banks or banking as a service providers will recommend a KYC/KYB vendor that they frequently use (and trust). You should definitely look into this vendor and compare them to other vendors you’re looking at, as they likely have a good relationship with the sponsor bank - which should make your relationship with them easier as well.

No matter which provider you choose, make sure that they have functionality to share the exact controls you have in place when they audit you. In the past few years, these audits have become more frequent. Any solution you choose should have audit logs that can show you the exact journey from onboarding to using your platform. Make sure you can show the route each customer took through your funnel, and that you can report this to your sponsor bank if requested.

8. Monitor, review data, and check your compliance

Now that you’re up and running (and onboarding users), you can start to think about optimizing compliance, you’ll need to start monitoring activity - such as transactions - on your neobank platform.

Make sure you are actively monitoring transactions with a top-notch solution.

The sooner you have transaction monitoring, the easier it is to prove to your sponsor bank that you are following all requirements they’ve laid out for you. When working off spreadsheets and other more manual tracking methods, it’s very challenging to prove that you’re actually doing the checks you say you are.

Solutions that offer transaction monitoring can provide audit logs and trails, making it very easy for you to show your partner bank that you’re meeting all compliance requirements.

This is where Unit21 comes in! We offer data monitoring, ensuring the best transaction monitoring for suspicious activity. Easily review, analyze, and make decisions from one platform, saving you time and improving operational efficiency.

Download Transaction Monitoring Product Guide

How to Start a Neobank: Final Thoughts

Now that you know how to get your neobank started and up to compliance standards, you also want to keep yourself safe from fraud. To keep your platform safe, learn the best practices for fighting fraud and preventing it on your neobank. Our customer Lili was able to reduce fraud losses by 50% after adopting our transaction monitoring and case management software.

With Unit21, you get a solution that rolls identity verification for user onboarding, KYC and KYB practices, transaction monitoring, and case management all in one place. Rely on less vendors and keep all your operations in one place - making it much easier to manage your risk and compliance program.

Find out how Unit21 can help you navigate fraud and AML compliance with your neobank by scheduling a demo today!

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