Building a digital bank: The ropes for businesses looking to get started on this journey

Published on Jul 05 2022.

reading time 15 minutes reading

Latin American countries are experiencing a major revolution in their financial system. In addition to the “fintech boom,” players from various sectors are entering this universe and taking advantage of the countless opportunities it offers. Since there is still plenty of room for new entrants, understanding how to create a digital bank and be part of this movement is essential.

 

Offering digital financial services has become simple and possible thanks to the Banking as a Service (BaaS). This API-based solution allows any company or institution to have its own “bank”, with its own brand and business model, quickly and without major complications.

Furthermore, the possibility of offering a complete digital banking experience without becoming a banking institution is related to the phenomenon of Embedded Finance , which is causing a great evolution in the distribution of financial services not only in Latin America, but throughout the world.

However, more than addressing the theory behind this transformation, the idea of ​​this article is to talk in a more practical way about how to create a digital bank and its advantages.

 

What is a digital bank?

 

Digital banking is basically a bank with operation totalmente online and focused on financial and modern services. Due to their nature, these institutions do not usually have physical branches, but a technological infrastructure that allows you to provide financial services and products and serve your customers online – through aplicativos ou Internet banking - and more accessible.

As a synonym for digital banking, the term “neobanks”, which makes sense, since both are institutions that use technology and innovation to understand market demands and offer basic services without bureaucracy and at reduced costs.

However, it is worth mentioning that, in some cases, digital banks. may be linked to traditional banks or bank holding companies. Neobanks are independent fintechs. This means that a neobank is always a digital bank, but a digital bank is not always a neobank. In any case, here we are talking about creating a digital bank from scratch, so it is, indeed, the same concept.

 

What is the current scenario for digital banks in the market?

 

In addition to the number of digital banks having grown exponentially in recent years, businesses with this model have become increasingly larger and more robust. Thus, we have seen neobanks rise among the largest banks in terms of number of customers in different countries.

In Latin America, this evolution is especially evident and, in fact, the penetration of digital banks is one of the determining factors for banking in different nations in the region.

In Brazil, the study Overview of the Brazilian Banking System, recently carried out by Oliver Wyman, revealed that, in recent years, the average number of bank accounts per CPF or CNPJ in financial institutions in Brazil has grown significantly.

In 2015, the average was 2,1 accounts per individual or company, while in 2023, this number reached 5,5 accounts. This diversification has especially benefited digital banks, which even surpass traditional institutions in the number of account holders among young people from Generation Z.

 

Building a digital bank from scratch: The model enabling different players to take part in it

 

The concept of “as a service” is a major current trend, being used to identify services offered in a flexible way, contracted easily and quickly. In this model, there are solutions in several areas, which gave rise, for example, to Software as a Service, to Date as a Service and, of course, to the Banking as a Service.

Financial universe as a service Technology-as-a-service models for developing financial solutions allow you to accelerate go-to-market and scale operations at lower costs.

 

API platform

 

In the case of BaaS, it is accessible to the customer through Application Programming Interface (API) technologies. Application Programming Interface). With these open source API platforms, the data can be aggregated and cross-referenced in a simple way.

Therefore, customers pay for the solutions they use and are able to manage accounts they operate by providing services such as payment, credit or debit card purchases and other financial transactions.

 

Embedded Finance

 

As we know, thanks to the “technology as a service” model, we have witnessed the evolution of Embedded Finance , which describes this distribution capacity of financial solutions to companies that do not operate in this sector.

041023 - embedded finance infographic

So, the phenomenon is related to this huge transformation in the financial industry, which is bringing ‘traditional’ and new financial service providers even closer together—although those new providers are not banks, they also leverage BaaS.

In this last group, we have everything from retailers to technology companies, telephony and other segments that have started to enter the system as the technological and regulatory barrier is becoming more surmountable and service providers Banking as a Service, as the Dock, now provide this opportunity.

 

Discover use cases on how to create a digital bank in different segments

 

Step-by-step walkthrough: Building a digital bank

 

Fintechs operating exclusively in this area, as well as players from different industries looking to provide financial solutions, need to follow different steps in order to join the industry.

For this reason, it is important to know how to create a digital bank and the necessary steps in this process. In this article, we discuss some of the fundamental phases of this journey.

 

Understand how your business will operate

 

BaaS platforms based on open source APIs enable a customization very large of the solutions – which is currently called hyperpersonalization – and thus, they are able to meet different types of demands.

Therefore, it is important for the business to have in mind how it wants to act to stand out in this market or, if applicable, to meet the needs of an existing client portfolio.

In this sense, when thinking about how to create a digital bank, it will be necessary to define what services will be offered to users, since the range of possibilities is quite wide. It is possible, for example, to offer a complete digital account, like the one between the solutions of Banking da Dock, which allows bank transactions and even loans quickly and safely, in addition to including:

 

 

Find the ideal BaaS provider

 

Finding the ideal BaaS provider—one that has a platform tailored to your business model and offers everything your company needs—is also one of the essential steps for building a digital bank.

A Dock, for example, takes care of the entire company's treasury, including opening accounts, processing and monitoring transactions, from authorization to settlement, focusing on the quality and safety of operations. your platform Banking includes:

  • Onboarding digital customer data, including KYC, biometric authentication e background check;
  • anti systemsfraudand in each transaction;
  • Bill payment management (credit and debit ledger);
  • API gateways with complete, generally available documentation;
  • Full accounting and regulatory support;
  • Tools for financial reconciliation.

Have knowledge on regulatory issues

 

In addition to the technological issue, an important and challenging part that the entrepreneur also needs to know about how to create a digital bank concerns the regulatory issues involved in financial services.

It is necessary to have knowledge about the requirements of regulatory bodies, to understand whether the BaaS provider also guarantees the responsibility and apparatus necessary for regulatory compliance.

 

Read also | BaaS Regulation: Central Bank to regulate partnerships for offering financial and payment services

 

What are the regulations involved in creating a digital bank?

 

In this sense, it is essential to understand the concepts and rules of the Central Bank of the country where you intend to operate. For the Central Bank of Brazil, for example, “payment institution” is the legal entity that provides purchase and sale services and movement of resources, within the scope of the payment arrangement, without the possibility of granting loans and financing to its customers.

Still in relation to the Brazilian context, we can mention that the BC defines as “fintechs” Companies that introduce innovations in financial markets through intensive use of technology with the potential to create new business models. These organizations are characterized by operating through online platforms and offering innovative digital services related to the sector.

There are several categories of fintechs mentioned by the BC: credit, payment, financial management, loan, investment, financing, insurance, debt negotiation, exchange and multiservice fintechs.

Two types of credit fintechs may be authorized in the country, one for intermediation between creditors and debtors through negotiations carried out electronically – the Direct Credit Society (SCD) and the Society for Loans between People (SEP), whose operations will be included in the Credit Information System (SCR).

In this context, anyone who intends to work in the Brazilian scenario needs to be familiar with the following regulations:

  • BCB Resolution No. 80/2021: deals with the authorization processes related to the operation of IPs and their constitution and operation.
  • BCB Resolution No. 81/2021: regulates the authorization processes relating to the operation of IPs and the provision of payment services by other institutions authorized by the BC.
  • Circular 3.680/2013: provides for the types of payment accounts used by payment institutions and financial institutions to record payment transactions by end users.
  • Law No. 12.865 / 2013: deals with payment arrangements and payment institutions that are part of the Brazilian Payment System (SPB).
  • CMN Resolution No. 5.050/2022: regulates the organization and functioning of the SCD.
  • CMN Resolution No. 4.970/2021: provides information about the authorization process related to the operation of the SCD.

 

Important legal aspects for creating a digital bank

 

Obviously, to create a digital bank, it will be necessary to comply with all legal requirements for the adequacy of the business, according to the requirements of the Central Bank of each country. Another essential point is the creation of a compliance program that ensures compliance with these regulatory requirements.

The issue of data protection is also extremely relevant and deserves special attention, as the company may suffer penalties if it does not follow the provisions of the legislation.

 

What are the costs of creating a digital bank?

 

Opening a digital bank involves different costs, from capital and net worth required by the Central Bank for financial institutions, to technology, platforms and all other resources.

Therefore, stipulating a generic cost is an impossible task, as it varies from case to case, depending on the services to be offered and how they will be made available.

What we can say is that having a technology infrastructure and regulatory compliance provider, opting for the BaaS model, undoubtedly has lower costs than developing everything from scratch.

 

What do customers expect from a digital bank?

 

As we mentioned, one of the main characteristics of a digital bank is the aim to simplify and reduce bureaucracy in the processes involved in financial services for consumers.

Therefore, among the expectations of digital bank users are points such as ease of use of tools, transparency, security and efficient service.

These are precisely the characteristics that differentiate traditional banks from neobanks, which are more aligned with current consumer demands.

 

The advantages of building a digital bank

 

Now that we have covered the main points about how to create a digital bank, it is time to illustrate how having your own bank can be very advantageous in several aspects.

This applies to both fintechs that will have these services as their main activity, and businesses from other segments that decide to enter the financial system. Check it out!

 

Providing financial services without the need to become a financial institution

The BaaS model and the ability to build a digital bank is ideal for companies looking to provide financial services with very little investment and a limited timeframe.

By using this kind of platform, several steps in the process — that is usually time- and energy-consuming and expensive — are able to be performed more quickly. So, an organization now is able to operate by providing financial solutions without the bureaucracy and requirements applied to actual banking institutions.

 

Improving financial management for your business and reducing costs

By relying on the bank itself, your business is able to optimize financial management, while streamlining transactions and reducing costs. You can pay providers, channels and employees in a quick, dynamic way and control your finances in a more streamlined, affordable way.

 

Expanding the portfolio, attracting customers and having new sources of revenue

For businesses already operating in a different industry, such as retailers, building a bank enables the company to expand their portfolio by including financial services and, thus, attract new customers.

Besides, transactions users make, as well as their applied fees, are kept by the company — therefore, it is investing in a new source of revenue for the business.

 

Taking advantage of different market opportunities and contributing to the financial inclusion in Latin America

Being capable of delivering the best experience to the customer, who is increasingly demanding, meeting specific needs for certain niches and taking advantage of different market opportunities is another great advantage of building a digital bank.

In Latin America, where many people are still excluded from the financial system, the emergence and growth of digital banks have played a key role in the introduction of banking services. Therefore, entering this market also means actively participating in an important movement towards financial inclusion in the region.

Just like these, there are many other opportunities to be taken advantage of in the Latin American market. What are you waiting for to be part of this revolution with Dock? Get in touch with our team and let's go together!

 

Building a digital bank: Takeaways from this article

 

  • The Latin American financial market is going through a revolutionizing moment, and since there’s still plenty of space for new players to enter, understanding how to build a digital bank and taking part of this movement is essential.
  • Banking as a Service enables any company to quickly and affordably provide financial services without the need to become a financial institution. That is also possible thanks to Open-Source APIs.
  • Embedded Finance is a phenomenon that is transforming the industry, because it distributes financial services and enables new players to join the system.
  • To create a digital bank, it is necessary to understand the services your business will provide, find the ideal BaaS provider and understand the regulatory issues involved.
  • Among the numerous advantages of having your own bank are offering financial services without becoming a banking institution, expanding your portfolio, attracting customers and having a new source of income.
  • With BaaS it is possible to take advantage of different market opportunities and contribute to financial inclusion in LatAm.

 

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