Build vs Buy Core Banking System: Decisions for Neobank Founders

Every fintech founder who is starting a digital bank will eventually face the same question: should they buy a core banking system, or build their own? These two options will dictate the launch of their bank, alongside how much of their engineering resources will be dedicated to product development vs. compliance.

What Counts as Core Banking in a Neobank Stack

The core banking system is the system that records all of a bank's customers' accounts, balances, and transactions.

All of the technology built upon and reliant upon the core banking system includes platforms for handling payments, foreign exchange (FX) transactions, card issuing, KYC and AML regulations, and a mobile banking application for their customers.

While all of these functions are necessary to a bank's operations, the one system that ties them all together is the core banking system. This is why the build vs buy decision is the most important one a bank's founder will have to make.

Why Most Neobanks Choose to Buy

The primary reason that most neobanks will opt to purchase a platform instead of building their own is to save time to market. By purchasing a platform, the founder can reduce the time it takes to get to market by 18 to 36 months. For a venture-funded company, this is the difference between having the runway to launch and running out of money during the development stage.

Another reason that most founders will opt to purchase instead of building in-house is for ease in fundraising. The cost to operate a bought platform will scale with the number of transactions processed by the bank. This makes it easier for the founders to present cost projections to investors. Creating a budget for a ground-up build that accounts for engineering salaries, infrastructure costs, and certification fees will be more challenging for a founder during a fundraising effort.

Finally, the out-of-the-box platform will include all of the compliance regulations and partnerships that are required to operate a bank:

Building these partnerships from the ground up will take a bank years to complete, and there will also be additional compliance efforts that will arise after the platform is live.

When Building In-House Starts to Make Sense

For certain types of neobanks, the business model will not work on an off-the-shelf platform. For example, a bank that plans to trade in an asset class that does not already have a standard platform for that trade will find that the in-house platform can be customised to that trade. Furthermore, if the founder recognises this need up front, they have an argument for purchasing an in-house system.

The other reason that a founder might choose to build in-house is that they must have an in-house engineering team dedicated to creating and maintaining the platform. An in-house banking platform will require experienced engineers with experience in banking, payments, security, and regulatory compliance. These individuals will be expensive to hire, and the bank will need to have them in place before purchasing the rights to build the bank.

Building an in-house platform also makes sense for those who are placing long-term bets on the value of the system. This only makes sense for the largest of neobanks or ventures with sufficient funds to weather the early product stages. For most founders of early-stage neobanks, this is not a recommended decision.

Key Trade-offs: Build vs Buy Core Banking System

There are a variety of factors to consider in the build vs buy decision for a core banking platform. However, there are some that are more important than others. For example, time to market and cost, control and customisation, and vendor lock-in and exit risk are three of the most important factors to consider in making a decision.

Time to Market and Cost

Buying a platform will reduce the time to market and move the founder closer to receiving their revenue. Furthermore, the cost will be tied directly to the number of transactions their bank processes. The cost of building a core banking system in-house will take years to recover and requires up-front investment in engineering salaries, infrastructure costs, and regulatory certification fees.

Another cost difference between the two options is that a bought platform will include costs for reliability, security, and compliance that will be reflected in its subscription fees. For in-house platforms, those costs will continue to show up on the P&L statement as the bank grows.

Control and Customisation

Buying a platform will mean accepting the features included with the vendor's product.

However, building a bank in-house means accepting the risks of having to handle all of the regulatory and operational aspects of banking. For example, if a regulation changes, the platform will have to be updated. If the system crashes, the in-house engineers must respond to the situation.

Vendor Lock-in and Exit Risk

For both established banks and growing neobanks, vendor lock-in is a concern. The process of changing vendors can take years and expose banks to the risk of crashing transactions.

For neobanks, the answer is not to avoid vendors altogether but to approach the vendor purchase carefully, with an understanding of the vendor's capabilities and the architecture of the bank's technologies from the beginning.

The Hybrid "Buy and Build" Approach

The most effective approach for neobanks with serious ambitions is to buy a lot of the heavy lifting and build only what you differentiate on. Components like ledger, payments, card issuing, KYC and compliance are best bought in from a vendor that can provide these functions. Building your own versions of these does not provide a competitive advantage and consumes engineering resources that could otherwise be used in building valuable features elsewhere in the product.

Build the elements in which you compete. This includes elements like customer experience, products and services, onboarding, and transaction details. These are the features that will provide a competitive advantage and take your product to the market, and which will ultimately limit your ability to scale if they are dependent upon third-party vendors.

For many neobanks, especially cross-border and crypto-based banks, the "buy and build" approach is the standard approach. For example, Tempo operates as a B2B cross-border payment platform that connects emerging market companies to European companies. For Tempo, the company bought a regulated banking platform with cross-border compliance and payment capabilities, and built its own product that enabled real-time stablecoin-to-fiat currency transfers.

How a Neobank Should Decide

To work through the build vs buy decision, first determine which aspects of your product are differentiated and which are not. Buy the non-differentiated components of your product. Next, determine which aspects you compete in the market. Consider only building those components of your platform. If a component does not provide a competitive advantage when built in-house, buy that component instead.

Additionally, other factors to consider include:

A plan that sounds great on paper may not work with your available funding, engineering team, or launch date.

Consider also that many in-house components can be bought at scale once your product is live and generating revenue. Many of the initial in-house components will be replaced by vendors at some point in the future. Consider this when forming your initial platform and product design.

How DECTA Supports the Buy and Buy-and-Build Paths

DECTA provides a white-labeled digital banking platform covering the components most neobanks should not build themselves: ledger, accounts and payments, card issuing and acquiring, FX, onboarding, and AML. It is delivered as cloud SaaS with 24/7 monitoring and PSD2, DORA, and PCI DSS compliance built in, and ships pre-integrated with KYC, e-signature, card scheme, general ledger, and crypto infrastructure partners. Co-hosting of custom plug-ins makes the platform workable for the hybrid model, where a founder buys the regulated foundation and builds their own differentiated product layer on top.

Tempo France is a working example. Tempo runs a B2B international payment system between emerging markets and Europe, and its product depends on real-time stablecoin-to-fiat conversion. The bought components handle accounts, compliance, FX, settlement, and reporting; the built layer handles the crypto-specific logic and wallet validation that define the product. Tempo avoids a multi-year infrastructure build and keeps its engineering focus on the part of the stack that actually differentiates it.