The Rise of Neobanks - Exploring The New AML and Compliance Challenges in 2025

The neobanking sector is expanding quickly in 2025, gaining attention for both its innovation and rising compliance concerns. As digital-only banks grow, they face greater regulatory pressure, more complex AML risks, and the need to strengthen monitoring.

Recent projections estimate that by 2032, neobanks will process over $3.4 trillion in global transactions, with the market growing at an average annual rate of 48.9%. These banks emphasize simplicity and speed, but regulators are tightening expectations. 

Recently, the UK’s Financial Conduct Authority (FCA) fined a prominent neobank £28.9 million after identifying failures in AML and sanctions screening. This event highlights the growing cost of inadequate controls.

This blog examines the key AML and compliance challenges for neobanks in 2025. It examines the specific risks tied to their digital-first models, reviews the latest regulatory developments in the United States, United Kingdom, and European Union, and outlines how advanced technologies and risk-based strategies can help address these challenges.

Core Compliance Challenges Facing Neobanks in 2025

Neobanks have become more advanced, globally present, and integral to modern banking than traditional banking systems. However, this rapid growth has exposed fundamental weaknesses in how these institutions manage compliance.

The push to offer seamless, real-time services without traditional infrastructure often conflicts with growing regulatory demands. Below are the most important AML compliance challenges neobanks face today:

1. Identity Verification and Digital KYC Gaps

KYC remains a key control in financial services, but digital verification brings new risks. Many systems depend on document scans or biometric data, which aren’t always reliable in detecting fake or altered identities.

Fraudsters can use synthetic information that passes through these checks undetected. Regulators are increasingly examining how neobanks perform ongoing identity checks, especially when onboarding customers across borders.

2. Monitoring and Investigations Under Pressure

Large volumes of transactions often lead to a high frequency of compliance alerts. Most neobanks use static, rule-based systems to detect suspicious behavior, and in some cases, false positive rates exceed 95 percent. With small teams and limited automation, important alerts may be delayed, increasing the risk of missed suspicious activity reports or failed regulatory reviews.

Investigating flagged cases also remains a challenge. Many neobanks lack access to behavioral analytics or tools that help map transaction flows. They often depend on basic dashboards that provide limited context. Without detailed insights, tracing complex patterns like layering or mule activity becomes difficult and time-consuming.

3. Global Regulation and Jurisdictional Fragmentation

Neobanks frequently operate across various regions, each governed by different regulatory requirements. The FDIC issued updated guidance for fintech oversight in the United States, while the EU continued its push toward open finance regulation. These changes require financial institutions to keep pace with changing licensing, reporting, and data-sharing standards.

A notable example of enforcement came when the UK’s Financial Conduct Authority fined Starling neobank £28.9 million for failing to meet AML obligations. Incidents like this show that regulators now hold digital banks to the same standards as large traditional institutions, regardless of their size or growth stage.

4. Technology Dependencies and Third-Party Risk

Many neobanks use third-party tools for compliance, onboarding, and reporting to reduce their expenses. While this enables faster deployment, it also introduces complexity. APIs can fail, data might not sync correctly, and outsourced tools may not always meet regulatory requirements. White-label banking models add another layer of responsibility. 

When companies use external platforms to offer financial services under their brand, the legal accountability for AML and data protection still rests with them. Last year, data breaches cost organizations an average of $4.88 million, and a significant share of these were linked to third-party systems. Without rigorous service-level agreements, audit rights, and contingency plans, the brand faces both financial and reputational risk.

Regulatory Developments Driving Compliance Challenges Around The World

The compliance burden for neobanks is no longer defined by general banking rules. In 2025, regulators are applying sharper, more targeted oversight on digital financial services. This transformation is happening across major regions, with new frameworks and enforcement actions reshaping how neobanks must approach anti-money laundering (AML), Know Your Customer (KYC), and transaction reporting requirements.

United States: FDIC’s Expanded Role in Fintech Oversight

In mid-2024, the Federal Deposit Insurance Corporation introduced proposed regulations that directly impact fintechs, including neobanks operating under banking-as-a-service models. 

These proposals require a clearer separation of responsibilities between banking partners and third-party fintechs, with direct liability for KYC and AML placed on the service provider. This means that neobanks need to work with reliable infrastructure and compliance providers to ensure standardised regulatory compliance.

The guidance further calls for enhanced measures in customer due diligence, more robust fraud detection capabilities, and improved processes for managing customer complaints. For newer or smaller neobanks, this represents a considerable operational adjustment, especially for those that have earlier relied on general vendor compliance.

United Kingdom: FCA’s Enforcement Actions and Policy Tightening

The Financial Conduct Authority in the U.K. has been particularly active. The penalties totalled $64.74 million last year due to failures in AML controls, specifically around ineffective sanctions screening and poor documentation of internal risk assessments.

Moreover, the FCA has also refined its regulatory approach, focusing more closely on how neobanks handle third-party risk and whether their AML programs reflect the pace and structure of their business models. Firms must now maintain clear audit trails, transparent workflows, and detailed risk assessments across all customer segments.

European Union: Broader Compliance under Open Finance

The EU’s shift toward an open finance framework brings significant compliance implications. While initially focused on data sharing, the new regulations now address the expanded role of digital financial services across sectors, including payment platforms, lending services, and digital wallets.

Neobanks that integrate with or provide embedded finance services must now show that their KYC, risk scoring, and reporting mechanisms align with these broader standards. This expansion in scope creates pressure on compliance systems that were built for narrower banking use cases.

Cross-Jurisdictional Complexity and Regulatory Convergence

A growing number of neobanks operate across two or more regions, making compliance a multi-layered challenge. Regulations often differ not just in detail but in enforcement style and documentation requirements. For example, reporting expectations under the EU AML Directive differ substantially from those in the U.S. Bank Secrecy Act.

However, there is a trend toward convergence. International bodies like the Financial Action Task Force (FATF) are working with local regulators to standardize expectations for digital onboarding, ongoing due diligence, and transaction monitoring. Neobanks that operate globally will need systems that can be adjusted for local laws but still maintain a consistent foundation for internal controls.

Practical Strategies to Tackle Compliance Challenges in Neobanking

Static policies and manual monitoring by neobanks are not enough to meet today’s compliance demands. With real-time expectations and changing regulations, they need adaptable, tech-based approaches that respond quickly to risk. The following section offers practical steps to improve compliance without sacrificing service efficiency.

1. Building Stronger AML Programs with AI Support

Artificial intelligence offers a path to faster and more accurate monitoring. AI can flag subtle forms of suspicious activity by analyzing transactional behavior in real time and learning from patterns that traditional rule-based systems often miss.

AI-supported triage systems also help reduce alert fatigue by scoring alerts based on risk and priority. This ensures that investigators focus on meaningful cases rather than wasting time on false positives.

2. Redesigning KYC with Integrated Digital Identity Tools

Modern KYC doesn’t stop at onboarding. Neobanks should invest in continuous identity verification, using biometric tools, real-time document validation, and geolocation checks to verify users at important points of interaction. 

Integrating these tools into a single workflow, instead of relying on fragmented vendors, reduces failure points and improves customer trust.

3. Creating Tiered Risk Frameworks for Customer Segments

Using identical compliance checks for every user leads to inefficiencies. A risk-based approach involves assigning different levels of scrutiny based on customer profiles, transaction volumes, and behavioral patterns. 

Low-risk customers may go through streamlined reviews, while high-risk users are flagged for enhanced due diligence. This tiered model aligns compliance efforts with actual exposure.

4. Establishing Oversight Protocols for Vendor Partnerships

For white-label neobanks or those using third-party services, vendor oversight is non-negotiable. Contracts should clearly outline compliance responsibilities, data handling practices, and incident reporting procedures. 

Neobanks should also run regular audits and require access to key compliance metrics from their partners. Establishing fallback systems in case of service failure helps reduce dependency-related risks.

How Lucinity Helps Neobanks Overcome AML Compliance Challenges

Neobanks face increasingly complex AML compliance requirements, often without traditional banks' legacy infrastructure or staff depth. Lucinity offers a focused solution to this challenge by providing tools that reduce operational waste, accelerate investigations, and maintain regulatory standards. Here’s how each part of the Lucinity platform is built to support AML compliance for digital banks.

Case Manager: Lucinity’s Case Manager enables neobanks to manage investigations more efficiently by unifying alerts from KYC, transaction monitoring, and sanctions systems in one centralized workspace. This removes the hassle of jumping between separate tools or sifting through fragmented records. 

Teams can follow each case through organized workflows, providing clear and consistent handling from the initial alert to the outcome. Investigations become faster and reliable, with a fully auditable history that satisfies regulatory demands.

Luci Agent: Luci, Lucinity’s generative AI agent, turns raw data into usable insights to support faster, more efficient compliance work. When a case is opened, it quickly summarizes key details, flags possible risks, and outlines money movement clearly. 

This accelerates decisions and reduces the need for manual documentation. It further supports SAR narrative creation, conducts adverse media checks in multiple languages, and identifies hidden connections within the data. This kind of automation supports consistent and scalable case management in the case of smaller teams.

Luci Plug-In: Many neobanks operate with several standalone systems via CRM, Excel-based dashboards, or custom transaction interfaces. The Luci plug-in makes it possible to bring AI-powered AML support directly into any of these environments. Analysts can review transactions, request information, or flag cases without switching platforms.

This improves productivity and ensures that AML processes are followed at every step, even in systems not originally designed for compliance work. For neobanks offering white-label services, this flexibility helps maintain strong controls without slowing down service delivery.

Luci Studio: As regulations evolve or business models expand, neobanks need to adapt their compliance processes quickly. Luci Studio supports this by offering a no-code platform where teams can build and modify their compliance workflows. 

Institutions can tailor Luci’s capabilities to suit local risk profiles or changing jurisdictional rules, connect with specific data sources, and control how the system interacts with cases. This level of configurability allows automation to reflect and align directly with internal policies.

Wrapping Up

In 2025, neobanks operate in a regulatory environment that requires them to be both accurate and adaptable. The increasing complexity of AML expectations, paired with customer demands for seamless digital service, places unique pressure on these institutions. Staying compliant requires transforming operations to be proactive, transparent, and technology-driven.

Here are four quick takeaways from this blog:

1. Neobanks like Starling have faced £28.9 million penalties for weak screening and oversight.
2. Over 95% of alerts may be false, which puts compliance teams under immense pressure.
3. Neobanks must adapt to different rules in the U.S., U.K., and EU without breaking consistency.
4. Automated case reviews and smart integrations reduce investigation time and improve outcomes.

To meet rising regulatory expectations, streamline AML compliance, reduce manual work, and stay audit-ready at every stage, visit Lucinity!

FAQs

1. What are the main compliance challenges neobanks face in 2025?
Neobanks face high alert volumes, fragmented tech systems, evolving regulations, and limited team capacity to manage AML and KYC requirements effectively.

2. What impact do compliance issues have on white-label neobanking models?
White-label neobanking creates added compliance challenges because the business offering the service remains legally responsible for AML, KYC, and data security, even if those services are powered by third-party infrastructure.

3. Can AI help solve compliance challenges in neobanking?
Yes, AI tools reduce false positives, speed up investigations, and support consistent reporting, which helps neobanks manage rising workloads.

4. Why is real-time monitoring important to compliance challenges in 2025?
With faster payments and more fraud attempts, regulators expect neobanks to detect and act on suspicious activity instantly, not after delays.