Our second edition of Strata Research is focused on crypto neobanks, a sector that has exploded in attention over the past year. If there’s a specific topic or theme you want us to cover, simply reply to this email.
Introduction
For most of crypto's history, building a financial product was like jumping a series of hurdles. Offering services like dollar accounts, cards, payments and yield required companies to assemble each piece from scratch, negotiate banking relationships, and operate in a legal gray area.
Thankfully, that is no longer the case. Processors like Lithic, Marqeta and Rain let you issue cards easily, and yield products can be built via plug-and-play DeFi vaults built on Aave and Morpho. Custody, on- and off-ramps, and compliance tooling are all managed services, while exchanges can route trading to venues like Hyperliquid without having to build a matching engine.
The regulatory picture has also begun clearing up. The GENIUS Act in the United States and MiCA in the European Union have given stablecoins a legal definition. The frameworks are still incomplete and vary by jurisdiction, but the basic question of whether a compliant stablecoin business can exist has been answered.
Additionally, demand has finally arrived. Stablecoin supply has nearly doubled to $298.35 billion over the past two years, and onchain usage is trending similarly, as stablecoins go from being a trading-and-settlement tool to a mode of currency facilitating payments, remittances, and savings. As part of this shift, crypto neobanks have emerged as one of the most viable products for consumer banking.
What’s a crypto neobank?
Crypto neobanks are banking apps built on stablecoin rails. They usually offer some combination of the core banking functions, like virtual dollar accounts, cards, payments, trading, or savings, but settle transactions on public blockchains rather than via correspondent banks.
These apps orient toward one of three markets:
B2C banks serve people who want to hold and spend their money. These often target regions where local banking networks are weak, or the local currency is unstable.
B2B banks target companies that need treasury, vendor payments, or cross-border settlements.
C2C banks help people send each other money, internationally or otherwise.
In essence, the distinction between a traditional neobank and its crypto counterpart comes down to the rails they use.
Traditional neobanks like Chime, Revolut and Nubank primarily use legacy banking infrastructure, such as card networks, ACH, SWIFT and partner banks. Crypto neobanks replace that backend with stablecoins and blockchains, which enables them to move money faster, introduce programmability, and expands their reach across the world.
Success is measured the way it is for any deposit business. The primary metric is deposits, or float, under management, since that base of capital both dictates the bank’s borrowing ability, and through yield, a significant source of revenue. Monthly active users, revenue and gross margin, and retention are other important measures of performance.
The Business Model
Float and yield capture: Deposits held in stablecoins, or the reserves backing them, generate yield, and the bank keeps some or all of the profit. This is often the single largest source of revenue, and it scales directly with deposits rather than activity, which is why float under management is the metric that matters most for crypto neobanks.
Interchange fees: Every card transaction requires merchants to pay a fee to the card issuer. This is the engine behind most consumer fintech neobanks, and it carries over cleanly to crypto neobanks that issue cards on these networks. Unlike float, interchange fees scale with spending, which rewards products that become a user's primary spend card.
FX spreads: The margin earned when one currency is exchanged for another. For neobanks that move money across borders, stablecoins make the transfer itself fast and nearly free, so the money is made on the conversion instead.
Trading fees: Commissions on in-app trading and swaps depend on how much trading the product encourages, and which venues it routes to. This source of revenue tends to be the largest for crypto-native audiences already inclined to trade.
Subscriptions: This model is a strong source of recurring revenue, though it requires neobanks to offer added features, higher limits, or better rates to subscribers. This is rarely a core part of neobanks’ revenue strategy, but it can be useful since it’s independent of interest rates, spending patterns and market cycles, and can improve user retention.
A float-heavy model is the most profitable in a high-rate environment but the most exposed to falling rates and to regulators who may restrict passing yield to consumers. An interchange-heavy model needs users to fully adopt their card and gain real spend volume to work. FX- and trading-led models depend on volume in a specific corridor or audience. In practice, most neobanks employ several of these streams at once as a way to mitigate risk and ensure revenue in the event that any specific stream dries up.
Requirements For Growth
Now that we have a firm understanding of what neobanks are and their business model, here’s what we believe is still required to grow the sector.
Finding a Niche
A product aimed at everyone has no reason for any specific user to switch to it, no concentrated audience to market against, and no edge once a better-capitalized competitor ships the same feature set. This is why the teams that break through typically start narrow.
The target is a sector where two things are true at once: 1) it is not saturated with competition, and 2) it still holds enough total addressable market to be profitable.
Opportunities tend to fall into two shapes:
Underserved payment corridors: these include cross-border flows large enough to matter but too small for incumbents to prioritize, where a Spain-to-Nicaragua remittance route is more winnable than a crowded US-to-Mexico one.
Specific user segments with shared, unmet needs: examples include retail businesses, online commerce, students, gig workers, underbanked communities.
In both cases the niche supplies a clear user, a clear problem, and a defensible reason to exist.
This lesson can be taken from the previous generation of fintech neobanks, most of which started small, with a clear focus, then expanded into other sectors of the market.
None launched as full-stack banks. Each used a narrow wedge to earn a loyal base and a reputation, then expanded outward to attack other markets.
Regulatory Strategy
For neobanks, there are three main regulatory constraints to consider before building.
How customer assets must be custodied
What stablecoins can be used
How, and whether yield can be passed through to users
The first two points can typically be addressed through licensing and partnership choices, whether they choose to work with a banking-as-a-service or sponsor-bank partner. However, the last is often challenging. Yield is often the largest revenue line for crypto neobanks, yet several frameworks restrict or prohibit paying it to consumers, meaning the same product can be viable in one market and illegal in another.
For example, businesses opting for an EMI in Europe, money transmitter licenses in the US, or VASP registration in Brazil is a slow and expensive route but gives the company direct control over its products. Many teams start on a partner to reach the market quickly, then move licenses in-house as volume justifies the cost and as owning the stack becomes the more durable position.
Partnerships
A crypto neobank is really an assembly of separately-built products: cards, wallets, DeFi vaults, on- and off-ramps, an exchange.
Integrating existing protocols rather than building each piece in-house is the fastest route to a full offering. Partnerships also double as a distribution channel. A protocol that integrates a neobank gains a new surface for its product while the neobank gains the protocol's credibility and, often, a portion of its users.
Example partnerships include:
Exchanges: integrate trading, liquidity, and often on-ramp infrastructure, letting a neobank offer swaps and market access without operating a venue.
Stablecoin issuers: beyond the asset, issuers increasingly offer revenue-sharing on reserves and distribution support, which can turn a stablecoin choice into a commercial partnership rather than a passive integration.
DeFi vaults: provides a source for yield. Integrating a vault from Aave, Morpho, or a curator gives the neobank a deposit-and-earn product without running a lending desk.
Compliance teams: provide KYC, AML, and the licensing scaffolding, and are frequently the partner that makes operating in a given jurisdiction possible at all.
Banks and financial institutions: provide the fiat rails, sponsor-bank arrangements, account infrastructure, and the connections to legacy systems that on- and off-ramps depend on.
Neobanks need to choose their partnerships carefully, because every integration is also a point of failure the neobank does not fully control. A vault that gets exploited, an issuer whose stablecoin depegs, or a partner bank that changes terms pose serious threats to the neobanks business.
Risks and Potential Pitfalls
Yield sustainability
The first question to ask of any neobank is where the yield actually comes from. Yield backed by short-duration treasuries or genuine borrowing demand is real and durable while yield propped up by token incentives tends to evaporate in the down market.
A product that acquired its users with a headline rate it cannot sustain loses them the moment the rate drops. Distinguishing real yield from incentive-subsidized yield is the most important diligence a founder, or a user, can do.
Depeg and reserve risk
The product is only as sound as the stablecoins it holds. A stablecoin can break its peg, and reserve quality and transparency determine whether it holds under stress. A neobank built on a thinly-reserved or opaque stablecoin inherits that fragility directly.
The 2022 collapse of UST is the reminder of how quickly a "stable" asset can go to zero.
Smart-contract and vault risk
The DeFi protocols that supply yield are code, and code can be exploited. An integrated vault that is hacked is the neobank's loss to explain to its users, regardless of who wrote the contract. Audits, track record, and conservative exposure limits reduce the risk but never remove it.
Regulatory clampdown
The same frameworks clearing the path can tighten or reverse it. Licensing regimes can change, and the yield model is the most exposed line, since passing stablecoin yield to consumers is precisely the activity regulators have been most inclined to restrict.
Counterparty and partner risk
While strategic partnerships can vastly reduce the time it takes to assemble a product, they also come with drawbacks, as a neobank inherits the failures of its partners. A sponsor bank that loses its license, an issuer that freezes redemptions, or a vault curator that misprices risk can each become a problem for a neobank, and be costly to fix.
The deeper danger is that these risks are correlated. A downturn does not arrive as any one problem at a time, but several at once. Subsidized yield could dry up at the same time a strategic partner fails. The products that survive are the ones whose yield was real, whose stablecoins were sound, and whose partners were chosen to withstand market headwinds.
Conclusion
The last decade's neobanks won by reimagining the front end of banking. They put a clean mobile app in front of the same banks, card networks, and clearing systems that had always been there.
Crypto neobanks are attempting something more fundamental: keeping the familiar app and replacing the machinery behind it.
A lower barrier to entry, though, is not the same as a path to winning. The commoditization that lets a small team build a full product in months does the same for every competitor, so the contest moves to the things that are more difficult to replicate: a defensible niche, a trusted brand, dependable yield, and strong partnerships.
The first wave of neobanks changed how banking looked. This one is positioned to change what it runs on.
References
This report was authored by Institutional Research Analyst Alexander Beaudry and brought to you by StrataMedia (home to Token Relations, Talking Tokens & More).
This information is for educational purposes only. It should not be considered financial advice, nor should it be used to make investment decisions. Cryptocurrencies are high risk and you should consult a financial professional before making any financial decisions. Make sure you do your own research.