Digitization has redefined the modus operandi of every business sector. We have seen a steady shift in operation from strictly brick and mortar to online enable banking systems in the finance sector. Among these online-enabled banking systems, one popular type that comes to mind is digital banks. How can one develop a digital banking app? How do they stay afloat? Let us find out.

What is a digital bank?

Digital banks (a.k.a. neobanks) is a type of banking that offers customers autonomous control over their finances. Neobanks operate fully online without any physical branch or location, thus allowing customers access basic financial services through mobile applications. Customers can access and manage their funds, run basic transactions, and have access to 24/7 online customer support without dealing with the hassles queuing in a banking hall.

One major competitive advantage digital banks have over traditional banks is the higher interest rate they offer customers. Although this is sometimes not the case; however, the reduced overhead cost occasioned by the absence of a physical location rubs off on customers in the form of lesser transaction fees.

Notwithstanding the numerous benefits neobanks offer to customers, especially the tech-savvy segment, their services are still quite limited. For instance, they may not be able to offer credit, loans, or FDIC insurance for deposits because they are not licensed banks. However, a digital bank may offer these services by partnering with traditional banks.

How do neobanks make money?

The main monetization models for the digital banks are net interest income, premium accounts, and fees. However, the buck of revenue is generated from interchange fees paid by merchants when customers run a transaction using their debit or credit cards. For instance, Chime, one of the largest neobanks in the USA with over 12 million users, issues visa debit cards to its customers. And Visa charges users a 1.5% fee whenever a transaction is made with the card, after which a fraction of the charge is remitted to Chime.

Also, Nubank, a Brazilian digital bank, issues credit cards to customers and deducts a fee when the card is used to make a purchase. Nubank also generates revenue from the overdrawn balances. Given the size of neobanks, they are allowed to charge interchange fees 7% higher than conventional banks. Aside from the revenue made from interchange fees, digital banks also generate profit from interest charged on deposits, account opening, and ATM charges.

The important question then is how much it costs to build a digital bank? The fact is: getting an amount that fits into every intending digital bank owner's budget would be difficult as the development cost depends on a lot of factors like:

  1. The nature of the complexity of the app
  2. The number of features
  3. Choice of a tech stack
  4. Development time
  5. Number of developers
  6. The location of developers

For instance, the hourly rate of developers in the USA ranges between $120-$150, while in the UK, it ranges between $75-$100. A fairer choice may entail looking towards countries in Eastern Europe for similar expertise but at friendlier rates. Software developers in countries like Poland or Ukraine charge between $35-$50 per hour.

As an intending owner of a digital bank, depending on your specific business needs, your budget should be between $350,000 and $800,000.

How to make a digital bank from scratch?

Below we will discuss how you can develop a digital bank that can attract attention from scratch.

Step #1: Develop a bank platform

Before you can create a digital bank that will win users' hearts, you must ensure you get the back-end stuff right. The API (application programming interface) is at the heart of development. Still, you'll also require card processing software and a number of back-office utilities.

APIs enable you to integrate your technology into third-party services such as authentication modules and payment gateways. The card processing app manages transactions and other procedures involving credit or debit cards.

Your digital bank platform will be easier to operate and scale with the back-office solutions. However, whatever you do, ensure the core of your platform doesn't require many frequent updates. The finance industry is rapidly changing, and as such, the only way to stay ahead of the game is to keep improving your platform to be on par with trends as they come.

Step #2: Front-end development

Aiming for perfection is necessary. Maybe you won't attain it but you can hit excellence in your front-end. Digital bank operates fully online without any physical location; your application's interface is the point of meeting between you and your customers. Therefore, you need to ensure that UI/UX design and features deliver a top-notch user experience. Ensure your interface is easy to navigate through.

Most customers of neobanks ran from the stress-inducing bureaucratic service pattern of traditional finance houses. Don't bring that bureaucracy to your application. To this end, it may make more sense to approach your features list with a minimalist mindset.

Focus on the major features like accounts, credit/debit cards, payments, transactions history, budgeting, investing possibilities, kid accounts, notifications, and chatbot. Then add a few unique features that add value to your platform. Don't overkill it.

Step #3: Safeguard your solution

Given the online-only mode of operation, ensuring your users' activities and data are secured must be the top priority. Consider some ways you can secure the app and build trust among your users:

  1. Security architecture. You'll need to create a multi-layer security system that integrates custom solutions with tools from reputable providers. Some bots, for example, can be extremely useful in preventing malware, fraud, hacking, and data theft. One of the best ways to achieve top-notch security is implementing a Security Office Center (SOC), which acts as a control station for analyzing every piece of data. Although some companies prefer to implement security information and event management (SIEM) software, creating your own security architecture is advised. To add a bit of context, let us look at the security system of Nubank - it employs AWS Lambda to build a security station that can protect against fraud, hacking, and other typical risks.
  2. Security alerts based on machine learning: this security technique utilizes algorithms to aid in analyzing large chunks of data and the discovery of correlations that will assist your security teams in identifying harmful situations in real time.
  3. Authentication. When creating a collection of authentication techniques, you should concentrate on those that can truly defend against common dangers, such as password theft, by implementing two-factor authentication, biometrics, and face checks to authenticate users' identities.

Step #4: Testing and deployment

Testing should not be postponed till the end of the development process as that may be counterproductive. Run routine tests on code consistency, features, user interface flexibility, etc. You can employ synthetic testing in any of the stages to anticipate how users will interact with your software, then fix any issues. Before your software gets deployed into the market, ensure the following test are properly performed:

  1. unit testing
  2. integration testing
  3. security testing (including penetration tests)
  4. user acceptance testing
  5. regression testing

After deployment, don't go skydiving yet; focus on getting users' feedback and continue to upgrade your systems to meet users' needs and curtail challenges as they come. Also, employ real user monitoring to watch and track how users interact with your app. Watch out for any complexities they may face and simplify them before it impacts their interests in your app.

Conclusion

The appetite for digital technology is insatiable. However, there are certain practices one can implement in a product to ensure continued relationship with customers. First, ensure the app is simple to use, intuitive and automated. Then proceed to the security systems and reliability. Finally, provide real value to customers quickly without lagging, and your digital bank up will fly.