Main Fintech and Neobank Set-up Models

The fintech and neobank sector has evolved rapidly, with various models offering innovative financial services. These have different regulatory requirements, market positioning, and operational structures. Below is an overview of the key fintech and neobank set-up models, along with their advantages and disadvantages. Big tech and telcos integrate financial services into their core business platform, so don't follow these models.

1. Fully Licensed Digital Bank

A fully licensed digital bank operates entirely in a digital environment, providing a comprehensive range of services, including deposit-taking, lending, savings products, and payments, without the need for physical branches. This structure enables them to operate more cost-effectively and offer lower fees to customers. Examples include N26 in Germany, Starling Bank in the UK, Revolut, Kuda Bank (Nigeria), Nubank in Brazil, Colombia, Mexico and the US, Ally Bank in the US, and GXS in Singapore.

However, they must adhere to stringent regulatory standards, including high capital requirements and compliance with consumer protection regulations, AML, and KYC protocols. The advantages of fully licensed digital banks include offering a full range of banking services at lower operational costs and building customer trust through regulatory oversight. On the downside, these banks face a high regulatory burden, costly compliance requirements, and capital constraints, which can limit scalability. Additionally, they compete with traditional banks that have established customer bases, making customer acquisition challenging for new entrants.

2. E-money Institution (EMI) or Payment Institution (PI)

E-money Institutions (EMIs) and Payment Institutions (PIs) specialise in providing digital wallets, payment processing, and money transfer services but are not permitted to offer loans or interest-bearing accounts. The names may differ by country. For example, the Central Bank of Nigeria offers licences for Payment Service Providers, Mobile Money Operators, Switching and Processing Licences and Payment Solution Service Licence. Brazil recognises Payment Institutions and Payment Schemes.

These institutions are regulated under payment services laws, with relatively lower capital requirements than full banks. They must adhere to licensing, consumer protection, and AML and KYC regulations. The advantages of EMIs and PIs include lower regulatory barriers, cost efficiency, and a focus on innovation in payment solutions. However, their services are limited, and they cannot offer loans or interest-bearing accounts, restricting their revenue potential. Additionally, without a full banking license, they may face challenges in building customer trust and are subject to regulatory scrutiny, particularly in terms of payment fraud and data protection. Despite these limitations, EMIs and PIs play a crucial role in facilitating digital payments and money transfers, offering flexible and innovative solutions – and often providing the springboard for fintechs with ambitions to become full digital banks.

3. Banking-as-a-Service (BaaS) Provider

BaaS providers offer platforms that enable fintech companies to access banking services through APIs, partnering with licensed banks to provide products such as accounts, payments, and lending. Examples include Solarisbank (Germany) and Synapse (USA). BaaS providers do not require their own banking licenses but must comply with regulations regarding data privacy, AML, and KYC standards, relying on their banking partners for regulatory compliance.

The advantages of BaaS include lower barriers to entry, faster time-to-market for fintechs, and the ability to focus on customer experience, as the BaaS provider manages compliance and technical infrastructure. However, there are challenges such as limited control over backend operations, dependence on partnerships with licensed banks, and regulatory complexities, as fintechs must ensure their services comply with local financial regulations. Despite these challenges, BaaS models enable fintechs to launch financial services quickly while outsourcing backend compliance and operations.

4. Credit-only Fintech or Alternative Lenders

Credit-only fintechs focus on providing lending services such as personal loans, business loans, and Buy Now, Pay Later (BNPL) options, without taking deposits. Examples include Klarna (Sweden), Tala (Kenya) and Affirm (USA). These fintechs are sometimes but not always subject to consumer credit regulations (many BNPLs for instance are unregulated). They may be subject to lending licenses, and AML and KYC requirements. Some telcos offer lending in partnership with banks.

The advantages of credit-only fintechs include faster loan approval processes, flexibility in lending terms, and the ability to serve underserved individuals and businesses. However, they face challenges such as a higher risk of default, regulatory complexities, and limited service offerings, as they cannot provide deposit accounts, which limits their revenue potential and customer engagement. Despite these challenges, credit-only fintechs offer more accessible credit options compared to traditional banks.

5. Crypto and DeFi (Decentralised Finance) Platform

Cryptocurrency and Decentralised Finance (DeFi) platforms use blockchain technology to provide financial services including lending, trading, and payments, often bypassing traditional banking intermediaries. Examples include Coinbase (USA) and Aave (decentralised). DeFi offers some advantages such as decentralised decision-making, transparency, resilience, innovative financial products (lending and yield farming that involves providing liquidity to decentralised finance protocols in exchange for rewards, such as tokens). DeFi does face regulatory challenges: it's borderless, anonymous, and code-based nature challenges traditional regulation, which is entity-based, jurisdictional, and identity-driven (for AML, KYC and data protection laws). Even if laws can be established, the decentralised nature of these platforms complicates enforcement.

Regulators are still debating how to balance innovation, consumer protection, and systemic stability, possibly by regulating access points (e.g. wallets, exchanges), encouraging hybrid models, or creating new legal definitions for DeFi entities.

Disadvantages include regulatory uncertainty, security risks (such as hacking), and complexity for consumers unfamiliar with DeFi platforms, making them less user-friendly compared to traditional banks. Despite these challenges, crypto and DeFi platforms are reshaping the financial services landscape. Financial regulators in the US, under the 2025 US administration, are moving to relax rules around cryptocurrencies.

Conclusion

Each fintech and neobank model offers distinct advantages and challenges. Fully licensed digital banks provide full services but face high regulatory burdens. E-money institutions and payment providers offer flexibility but lack lending capabilities. BaaS platforms enable fast product development but depend on third-party partners. Credit-only fintechs offer accessible lending but face very high default risks until their credit assessment models mature.

Crypto and DeFi platforms are innovative but face regulatory uncertainty and security risks. Businesses must choose their model based on market, regulations, and operational capacity to thrive in a competitive environment.