A case for non-custodial neobanks

Imagine a neobank that operates entirely onchain, free from the constraints of traditional banking systems. What once seemed futuristic is now within reach. The question is—who will be the first to launch a truly non-custodial neobank? More importantly, why is this model better than the traditional ones?

Neobanks have revolutionized banking, making it more accessible and user-friendly. However, despite their modern interfaces and innovative features, they remain tethered to legacy financial systems. This dependency has exposed vulnerabilities, such as the recent account freezes at Synapse and Evolve Bank, which disrupted thousands of customers' lives. The problem is clear: these fintech companies are still reliant on outdated structures that limit their potential and expose them to unnecessary risks. As the saying goes, "Too many cooks spoil the broth," and in this case, the involvement of multiple layers in neobanking has complicated processes and ultimately increased the risk of failure.

As Angela Strange famously said, “Every Company Will be a Fintech Company,” but the transition hasn’t been smooth. We've seen firsthand how the Banking-as-a-Service (BaaS) model can introduce additional costs, delays, and complexities. Meanwhile, blockchain networks like Coinbase’s Base are enabling faster, more efficient development without the need for traditional banks.

So, why are non-custodial neobanks better? It comes down to independence, control, and security. Traditional neobanks, despite their advancements, are still dependent on third-party banks and the terms presented to end users aren't clear. Non-custodial neobanks, on the other hand, operate entirely onchain, eliminating these dependencies and putting control back into the hands of the users.

Cryptocurrency adoption has faced hurdles, such as currency volatility, high on-chain fees, and the lack of simple financial services consumers expect, like card payments. However, the rise of stablecoins, low-cost transactions, decentralized savings and lending, and Web3 card payments is changing that. These innovations now provide everything a typical neobank does—but with the added benefits of blockchain technology. This evolution is timely, as consumers grow increasingly frustrated with inflation and the limitations of fintechs tied to traditional financial systems.

The state of neobanking

Neobanks are immensely popular, with over 1 billion users worldwide, according to Simon-Kucher. Companies like NuBank, Revolut, and Monzo have achieved remarkable success by focusing on customer experience and leveraging innovative operating models to achieve profitability and generate impressive revenues.

However, the neobank market is facing significant challenges. Regulatory hurdles and economic conditions have slowed the expansion of neobanks in some regions, and profitability remains elusive for many players. Adding to these challenges, research from Simon-Kucher reveals that the pace of new neobank launches is declining, with closures potentially outnumbering new openings. Between January 2022 and July 2023, 36 new neobanks were launched globally, while 34 shut down. In the U.S., eight neobanks opened, but five were forced to close.

The FDIC has recently issued a cautionary warning to consumers about the risks associated with using neobanks and fintech companies for banking services. This warning is particularly relevant as millions of Americans depend on these platforms for their banking needs, often without fully understanding the limitations of FDIC insurance in these contexts. This underscores a key vulnerability in the traditional neobank model, which remains tied to the legacy financial infrastructure and its associated risks.

The rising appeal of non-custodial wallets and stablecoins

Non-custodial wallets, also known as self-custody wallets, are rising in popularity as they offer users full control—referred to as "custody"—over their digital assets. Unlike wallets provided by centralized exchanges, where the provider controls your private keys, non-custodial wallets ensure that only the owner has access to their private keys and, consequently, their assets. This level of control is a significant advantage over traditional banking models, where users are always dependent on third-party institutions.

Robinhood and Coinbase have set the stage by launching their own Web3 products separate from their main apps, signaling a shift toward providing users with more control over their digital assets. From an innovation perspective, non-custodial wallets are easier to develop for, as they currently benefit from a more flexible regulatory environment and involve less overhead. However, non-custodial wallets have traditionally been more geared toward advanced users due to the responsibility of managing private keys. But recent UX innovations are making these wallets more accessible, paving the way for mainstream adoption.

The rise of stablecoins like USDC has addressed the volatility issues that once hindered blockchain’s potential. Stablecoins offer instant global transactions with a stable value, which is crucial for everyday financial activities. PayPal's introduction of its U.S. dollar-backed stablecoin, PayPal USD (PYUSD), issued on the Ethereum blockchain in August 2023, underscores the growing importance of stablecoins in global finance.

Visa’s stablecoin portal shows the rapid growth of these assets, with use cases expanding to retail trading in DeFi and cross-border remittances.

Mastercard’s Web3 Card: A key to the future

Mastercard’s Web3 Card represents a significant innovation, enabling users to spend digital assets while retaining full control over their funds. This advancement, combined with stablecoins and non-custodial wallets, makes non-custodial neobanks a compelling alternative to traditional banking models.

Mastercard has partnered with industry leaders like MetaMask to launch card programs for non-custodial wallets. This includes Mastercard’s dispute management process, chargeback protections, and the integration of know-your-customer (KYC) and anti-money-laundering (AML) protocols.

Why now is the perfect time for non-custodial neobanks 

• Frustration with BaaS: Traditional Banking-as-a-Service models are causing delays, adding costs, and creating headaches for fintechs looking to innovate.
• Rising stablecoin adoption: Stablecoins are providing stable value and enabling low-cost global transactions, addressing the volatility that once hindered blockchain adoption.
• Improved usability of self-custody solutions: Non-custodial wallets are becoming more user-friendly, making it easier for users to manage their digital assets.
• Built-in yield opportunities: DeFi protocols are offering yield-generating opportunities, making non-custodial wallets more attractive.
• Low-cost transactions on Layer 2 networks: Layer 2 solutions are reducing transaction costs, making blockchain-based services more viable.
• Frustration with high inflationary currencies: As inflation erodes the value of traditional currencies, more people are seeking stable, decentralized alternatives.
• Innovations like the Web3 Card: New products, like Mastercard’s Web3 card, are bridging the gap between digital assets and everyday spending.
• Evolving regulatory landscape: Non-custodial wallets currently benefit from a more flexible regulatory environment, allowing for quicker innovation and adaptation to new financial technologies.

Embracing the future of finance

As the financial landscape continues to evolve, the advantages of non-custodial neobanks are becoming increasingly clear. With greater control, lower costs, and enhanced security, these new-age financial platforms are not just an alternative—they represent the next logical step in the evolution of banking.

For consumers and businesses alike, the shift towards non-custodial banking offers a way to break free from the constraints of traditional systems and embrace a future where financial services are more decentralized, secure, and accessible globally. The momentum behind non-custodial solutions is growing, and it’s only a matter of time before they become the standard for how we manage and interact with our finances.

In my opinion, as we move forward, the question is no longer whether non-custodial neobanks will become mainstream—but how quickly they will reshape the financial landscape.