Neobank Security Best Practices: Safeguarding Digital Banks in Fintech and DeFi

Introduction

Neobanks, fully digital banks operating via mobile apps and web platforms, are reshaping financial services with speed and convenience. But with this agility come unique security challenges. Unlike traditional banks anchored by legacy systems, neobanks often rely on cloud native architectures and extensive third party API integrations, blending fintech and sometimes DeFi components. This expands the attack surface because cloud misconfigurations, API exploits, smart contract bugs, and mobile app vulnerabilities can all expose a neobank to breaches or fraud.

For example, cloud scans found that 22% of neobank companies were still affected by the notorious Log4Shell vulnerability, leaving them open to remote code execution. High profile incidents underscore the risks. In early 2025, Infini, a Hong Kong based crypto neobank, lost about $49.5 million when a former developer abused lingering access to siphon funds. Such incidents erode customer trust and invite regulatory scrutiny.

This article outlines top security best practices for neobanks, spanning API integrations, custodial crypto risks, mobile app hardening, regulatory compliance, cloud security, and more, to help founders and CISOs fortify their digital banking platforms. We blend insights from smart contract auditing for DeFi elements and web security for fintech infrastructure, offering real world examples and proactive recommendations. By addressing these common pitfalls, neobanks can build customer trust, meet regulatory obligations, and stay a step ahead of cyber threats.

1. Third Party APIs and Integrations: Manage External Dependencies and Risks

Modern neobanks thrive by not reinventing every wheel; they integrate with payment processors, identity verification services, core banking APIs, and DeFi protocols to deliver rich functionality quickly. However, each integration is a potential trust boundary that must be secured. A breach in a vendor’s system or an insecure API call can directly impact your platform. In fact, a 2024 incident saw a major payment processor’s cloud provider compromised, exposing millions of cardholder records, underscoring how third party failures cascade into first party breaches. Similarly, a digital banking platform’s 2023 breach stemmed from exploitable API endpoints, highlighting the need for rigorous secure coding and input validation on all external interfaces.

Best Practices:

• Treat third party APIs as untrusted even if the vendor is reputable.
• Use stringent authentication like OAuth 2.0, mutual TLS, and securely stored API keys along with rate limiting and schema validation for all incoming and outgoing API calls.
• Implement sandbox and monitoring for external services. For example, if integrating a banking as a service API, enforce response integrity checks such as cryptographic signatures on payloads.
• Plan for resilience. If a partner API is down or returns bad data, your system should fail safely.
• Architecturally, consider patterns to isolate third party failures. An open banking reference notes that when relying on multiple fintech API providers, one must invest in robustness patterns like circuit breakers, fallbacks, and thorough testing to handle bugs or downtime in any dependency.
• Finally, perform due diligence and periodic security reviews of vendors (Spearbit can assist with third party code audits and penetration tests). By holding partners to high security standards and containing their access, neobanks can innovate quickly without inheriting unacceptable risk.

2. Custodial Assets and Key Management: Protect Funds Like Crown Jewels

Whether a neobank deals in traditional currency or cryptocurrency, it must decide how to custody assets, and both choices carry security implications. Custodial neobanks, those holding user balances or private keys on behalf of customers, assume tremendous responsibility for securing those assets. If private keys or core banking credentials are stolen, attackers can directly drain accounts. Conversely, non custodial or DeFi integrated neobanks require users to hold their own crypto keys, but the platform still must ensure the integrity of transactions and help users avoid loss. In DeFi contexts, smart contracts may control pooled funds like liquidity or yield products, introducing risks of hacks if contracts are not airtight.

Best Practices:

• For custodial models, invest in industrial grade key management. Use Hardware Security Modules (HSMs) or secure enclaves to store encryption keys. Never leave private keys in plain software memory or hardcoded in apps.
• Enable multisignature or quorum based approvals for large transfers by requiring multiple systems or personnel to sign transactions.
• Isolate and strictly limit access to production wallets. Follow least privilege so that even if one server or account is compromised, attackers cannot access the master keys. Many crypto exchanges and neobanks use tiered wallet architectures: most funds in cold storage (offline, multisig wallets) and only a limited float in hot wallets for liquidity. Keys that must remain online (hot keys for signing) should be managed by a dedicated KMS service with signing policies. For example, Cosmos based chains advise keeping validator keys in an HSM and using a Key Management System, so even a hacked server cannot extract the key material.
• If integrating DeFi smart contracts for yield or lending, audit those contracts thoroughly and enable runtime safeguards like circuit breakers that pause operations on suspicious activity. Many Solidity exploits such as reentrancy, integer overflow, and flash loan abuse have led to customer fund losses; however, newer smart contract platforms like CosmWasm in Cosmos were designed to prevent certain bugs like reentrancy and overflow by default.
• Logic errors can occur, so ensure rigorous code review and testing. If you are using Provenance Blockchain’s Marker tokens or similar on chain assets, leverage their built in controls like governance and permissions on Markers to reduce custom code risk.

In sum, treat custodial assets as the crown jewels by protecting them with strong cryptography, physical security, and layered approvals. Customers entrust neobanks with their money, and earning that trust means adopting the same hardened practices as the world’s top financial institutions.

3. Secure Mobile and Web Frontends: Hardening Apps and APIs Against Attack

The primary interface to a neobank is often a mobile app or web application. These frontends connect to backend APIs to handle sensitive operations like authentication, balance queries, and transactions. If the app or API is insecure, attackers can exploit it regardless of how strong your backend systems are. Common pitfalls include hardcoded secrets in mobile apps, vulnerable API endpoints (SQL injection, IDOR), inadequate SSL/TLS enforcement, and exploitable logic in client side code. A 2023 analysis of neobank mobile apps found alarming issues where 13% of the apps had API keys or secret tokens simply base64 encoded in the code, effectively plaintext, and some even exposed open cloud storage like public S3 buckets leaking sensitive customer data. Additionally, 74% of tested apps had WebView components with JavaScript enabled, which could allow malicious code injection if an attacker tricked the app into loading a hostile web page.

Best Practices:

• Employ a rigorous Secure Development Lifecycle for all client applications. Never hardcode API keys or secrets in the mobile app. Assume attackers will reverse engineer your APK or IPA. Instead, keep secrets on secure servers, and have the app retrieve tokens after authenticating the user.
• Use certificate pinning and robust encryption for all communications to prevent man in the middle interception.
• On the API side, implement strong authentication, such as OAuth with short lived tokens, and perform server side authorization checks for every request. Do not rely solely on client side checks, which can be bypassed.
• Perform regular penetration testing focusing on your mobile and web apps. Automated tools and mobile security frameworks can catch low hanging fruit. For instance, use static analysis to detect hardcoded credentials or keys in the code, and dynamic testing to ensure no debug endpoints or verbose error messages are leaking info.
• Pay special attention to API design. Follow REST security best practices or GraphQL security guidelines as appropriate. Throttle requests to prevent brute force or scraping, and use anomaly detection to spot abnormal API calls.
• Input validation is paramount. For example, if an API takes a bank account ID as a parameter, ensure the session user is allowed to access that account to prevent IDOR attacks. In one breach, an insecure fintech API allowed attackers to enumerate user account details because the API lacked proper access control.
• Use frameworks or API gateways that provide security features out of the box like authentication middleware, schema validation, and rate limiting.
• On mobile, take advantage of platform security. Store sensitive data in the secure keystore or keychain, enable jailbreak and root detection, and utilize biometric auth features provided by iOS and Android rather than reinventing them.
• Finally, keep dependencies updated because many neobank apps were found using outdated libraries (e.g. a significant portion still had Log4j vulnerabilities in backend services), so maintain an inventory of third party components in your frontend and backend and patch them promptly.

By treating the frontend as a first class security concern, neobanks can close easy avenues for attackers and protect the gateway to their services.

4. Strong Authentication and Identity Verification: No Single Points of Failure in Logins

Because neobanks operate entirely online, authentication is the front door to every customer account. Weak authentication or identity proofing can lead to account takeovers, fraud, and regulatory non compliance. Neobanks face constant credential stuffing and phishing attacks, as well as fraudsters exploiting lax KYC to open mule accounts. Thus, implementing robust customer and employee authentication is non negotiable. Common pitfalls include relying only on passwords or SMS OTPs, which can be SIM swapped, not enforcing multi factor authentication (MFA), and failing to monitor login anomalies.

Best Practices:

• Deploy multi factor authentication for both customers and internal administrators. As of 2023, regulators and industry standards strongly push MFA. For instance, Europe’s PSD2 requires Strong Customer Authentication for electronic payments, which generally entails two factor auth.
• Use authenticator apps or hardware keys for MFA instead of SMS where possible, as these are phishing resistant. Many neobanks also incorporate biometric authentication (fingerprints, Face ID) in their mobile apps for convenient MFA. These leverage device security modules to confirm the user’s identity. Just ensure biometrics are paired with fallback PINs or passwords and rate limited to prevent abuse.
• On the identity verification side (KYC/KYB), strengthen your onboarding checks. Use reputable verification services for document upload and face match, and consider additional proof of life or liveness detection to thwart deepfakes.
• Step up authentication for high risk actions. For example, require MFA reconfirmation or biometric reauth when a user initiates a large transfer or changes a linked account.
• Internally, apply the principle of least privilege with Role Based Access Control (RBAC) for your staff and admins. Each admin should only have the minimal access necessary. For example, support reps can view account details but need higher approval to initiate refunds. Protect admin consoles with MFA and VPN restrictions, as these can be a juicy target for attackers.
• Monitoring plays a role here too. Implement systems to detect suspicious login patterns such as impossible travel, multiple accounts using the same device, or failed logins spikes, and respond with step up challenges or locking. Modern fraud management systems and behavioral analytics can flag account takeovers in real time.
• User education is also key. Ensure customers know how to spot phishing and encourage use of your security features. Many neobanks now provide in app prompts for enabling 2FA, and some even let users set limits or get alerts for unusual account activity.

By weaving strong authentication into the neobank experience, you not only prevent breaches but also comply with regulatory mandates and build customer confidence that their accounts are safe.

5. Regulatory Compliance and Data Protection: Embrace Standards as Security Allies

In the rush to disrupt finance, neobanks must remember that security and compliance go hand in hand. Regulatory obligations like PCI DSS, GDPR, and AML/KYC laws are not just checkboxes; they often outline security best practices that protect your business. For example, PCI DSS (for handling payment cards) requires strict controls like encryption of card data, regular vulnerability scans, web application firewalls, and secure software development processes. These are good practices for any sensitive financial data, not just cards. In one case, a neobank that suffered a data breach of thousands of users faced not only customer attrition but also regulatory scrutiny and fines for potential GDPR and PSD2 violations. Compliance failures can thus compound the damage of a security incident.

Best Practices:

• Treat compliance requirements as a baseline for security, not a ceiling. Encrypt sensitive data at rest and in transit universally, not just because GDPR or PCI demand it, but because it renders stolen data far less useful.
• Implement strong access controls and audit trails on customer data regarding who accessed what and when, supporting both security monitoring and privacy accountability.
• Leverage frameworks like ISO 27001 or SOC 2 as guiding checklists for your infosec program. These emphasize risk assessment, access management, incident response plans, and continuous improvement.
• Neobanks operating in multiple jurisdictions should aim to exceed the strictest applicable standard. For instance, if you handle EU customers, GDPR’s principles of data minimization and purpose limitation should influence how you design data collection in your app by collecting only what is needed and allowing customers to control their data.
• Regular compliance audits, internal or external, can actually bolster security by forcing reviews of controls. It is wise to integrate compliance checks into your development lifecycle too. For example, use code analysis to ensure no credit card numbers are logged (PCI requirement) or that personal data fields are encrypted in databases.
• Keep an eye on emerging regulations. For example, the Digital Operational Resilience Act (DORA) in the EU will require financial entities to implement stringent ICT security measures and incident reporting. Being proactive on compliance avoids last minute scrambles and fines.
• Notably, meeting AML/KYC obligations has a security dimension because robust KYC processes prevent bad actors from anonymously exploiting your platform, and transaction monitoring to meet AML laws doubles as a fraud detection mechanism.

In summary, aligning with regulatory standards will not only keep your neobank out of legal trouble but also enforce a security first culture that benefits the business and its customers. Use compliance as a strategic tool to drive investment in security controls and to assure customers and regulators that you operate safely.

6. Secure Cloud Architecture and DevOps: Build on a Hardened Foundation

Nearly all neobanks are built as cloud native applications, leveraging services like AWS, GCP, or Azure for scalability and agility. But cloud misconfigurations are a leading cause of breaches in tech startups, including fintechs. From open storage buckets to leaky public endpoints, a single mistake in infrastructure as code can expose millions of records. Neobanks must also handle infrastructure as code (IaC), CI/CD pipelines, container orchestration like Kubernetes, and more. Each layer needs security controls. A recent analysis of neobank apps revealed that some stored private data in public cloud buckets or Firebase databases by accident. And misconfigured cloud servers can be exploited, as was likely the case in a digital bank API breach where an endpoint wasn’t locked down. Moreover, relying on cloud means you are exposed to shared infrastructure risks such as vulnerabilities like the 2021 Azure Cosmos DB flaw or cloud supply chain attacks.

Best Practices:

• Apply secure by design principles to your cloud architecture. Start with network segmentation by isolating critical systems like databases and core banking services in private subnets with no direct internet access.
• Use cloud firewall rules and security groups to allow only necessary traffic between tiers. For example, only the app servers can talk to the database on the specific port.
• All cloud resources should use the principle of least privilege: IAM roles and service accounts with minimal permissions. It is common to see an over permissive IAM role lead to escalation. For example, an app server compromised might have an IAM role that allowed full S3 access, letting an attacker read and write sensitive data.
• Regularly audit your cloud IAM policies and keys; AWS Access Analyzer and GCP’s IAM recommender can help identify overly broad access.
• Infrastructure as Code (IaC) is a double edged sword as it allows consistency and versioning, but mistakes get replicated. Use IaC security scanners like Checkov or Tfsec to catch misconfigs before deployment. For instance, flagging an S3 bucket that is publicly readable or an Azure blob container without encryption.
• Embrace DevSecOps: integrate security tests into your CI/CD pipeline, such as container image scans to prevent known vulnerable libraries from reaching production.
• Neobanks often use containerization and orchestration (Docker, Kubernetes) for scalability. Ensure you are following Kubernetes security best practices: restrict pod privileges, regularly patch the cluster, and use tools like network policies and audit logs to monitor activity.
• If you use managed services like DBaaS or serverless functions, do not assume they are automatically secure. Configure things like database encryption, backup access, and secret storage properly.
• Monitoring and response are also part of cloud security. Implement centralized logging and a Security Information and Event Management (SIEM) system to get visibility into your cloud environment. For example, ingest CloudTrail (AWS) or Audit Logs (GCP) into your SIEM to catch anomalous actions like someone creating an access key or modifying network settings at odd hours.
• Some neobanks partner with cloud native MDR (Managed Detection & Response) services to watch for cloud intrusions.
• Regularly simulate disaster recovery and incident scenarios. What if your cloud region goes down, or if an attacker deploys cryptominers in your environment? Being prepared to quickly redeploy infrastructure or rotate credentials at scale is key to resilience.

By treating your cloud like the critical part of the banking stack that it is, and not just an IT convenience, you can avoid the mistakes that have downed or breached many digital first companies. In short: lock down your cloud, automate security checks in DevOps, and keep a watchful eye on your infrastructure 24/7.

7. Smart Contract and DeFi Risks: Audit Blockchain Components Thoroughly

An emerging class of neobanks straddles the line between traditional fintech and decentralized finance. These platforms may offer crypto wallets, DeFi yield products, or integrate with blockchain networks (e.g. stablecoins for payments or lending protocols for interest). While this innovation is powerful, it introduces the well known risks of smart contracts and blockchain operations into the neobank’s threat model. Vulnerabilities in smart contracts can lead to instantaneous loss of funds with no central authority to reverse transactions, which is a very different risk profile from traditional banking errors. Furthermore, integrating on chain and off chain systems can create complex failure modes. For instance, if your neobank uses an Ethereum smart contract to hold collateral, a flaw like a reentrancy bug or price oracle manipulation could be exploited by attackers to drain those funds or cause insolvency events.

Best Practices:

• Treat every smart contract as mission critical code. Before launching any DeFi feature, get a professional security audit of the smart contracts (Spearbit’s network of auditors specializes in this).
• Even if using well known contracts, say an open source lending protocol, ensure you understand any config or integration nuances that could introduce risk.
• Follow best practices from the blockchain world: use up to date contract libraries, implement pausability or circuit breakers to halt operations on detecting abnormal activity, and have multisig control on upgradeable contracts so no single developer can push a malicious update.
• It is also wise to limit the blast radius of on chain components. For example, if you offer a yield farming integration, consider capping the amount a single user can put in or the total value locked (especially in beta stages) so that a bug does not cost unlimited funds.
• Pay special attention to oracles and price feeds in any crypto service as these have been a frequent point of failure. Ensure price data comes from reputable oracles and is validated. A lesson from Cosmos: the Comdex platform (a DeFi appchain) suffered an oracle exploit in 2023 when it accepted a price IBC packet from an unauthorized source because it didn’t verify the packet’s origin chain and channel. The attacker injected a fake price, manipulating the system. The takeaway is to authenticate all cross chain or off chain data inputs; treat them as untrusted until proven otherwise.
• On Ethereum, similar principles apply. If your stablecoin relies on an external price feed or an admin key, what happens if those are compromised? Plan and mitigate accordingly.
• Finally, bridge the gap between your on chain and off chain security operations. Ensure that your backend monitoring includes on chain events. If a large or unusual transfer happens in a smart contract, for example an abnormal number of tokens withdrawn, your SOC team should be alerted just as they would for a suspicious database query.
• Some neobanks set up watchdog scripts or use blockchain analytics services to monitor their contract addresses. Should the worst happen, have an incident response plan specifically for on chain incidents. For example, know how to use governance or emergency pauses on contracts, how to communicate with users in a crypto incident, and how to collaborate with the community or other affected projects. In decentralized systems, response time is critical.

By thoroughly auditing smart contracts, using defense in depth (like proxy patterns, admin multisigs, time locks), and actively monitoring blockchain activity, neobanks can safely harness DeFi’s benefits while minimizing the chances of a blockchain related bank run or hack.

8. Insider Threats and Access Control: Trust but Verify Your Team and Processes

While external hackers often take the spotlight, insider threats, whether malicious or accidental, are equally perilous for neobanks. The Infini neobank hack mentioned earlier was essentially an insider incident: a former developer retained access that should have been revoked and managed to use old credentials to steal nearly $50 million. This dramatic example highlights how a single insider with privileged access can undermine every other security control. Insider risks range from deliberate fraud, such as staff abusing access to customer data or funds, to inadvertent mistakes like an engineer pushing debug code to production or misconfiguring a firewall. Neobanks, especially in startup mode, often have small teams with broad access, which can increase risk if not carefully managed.

Best Practices:

• Implement strict identity and access management (IAM) for internal systems. Every employee and service account should have unique IDs, with 2FA enforced on their access.
• Use role based access or attribute based access so that, for instance, a developer in the mobile team does not automatically get access to the payments database or transaction signing keys.
• Critically, establish a solid offboarding process. When someone leaves or changes roles, immediately revoke their access and roll any credentials they possessed. The Infini case is a cautionary tale: had the ex developer’s access been promptly revoked and keys rotated, the breach might have been averted.
• Monitor internal activity with an eye for anomalies like employees accessing systems at odd hours, downloading large datasets, or querying accounts they shouldn’t.
• Implementing a “four eyes” principle for sensitive operations can help. For example, require dual approval for code pushing to production or for executing large fund transfers out of treasury.
• Many neobanks integrate with modern IAM tools and Privileged Access Management (PAM) solutions that provide session recording and just in time access, meaning an admin must request access that expires after a short window. This ensures there is not perpetual standing access that could be misused.
• Another angle is cultural: cultivate a security aware culture where employees understand that security is everyone’s job. This includes background checks for critical hires, NDAs, and security training that covers insider social engineering.
• Use technical measures like data loss prevention (DLP) software to prevent sensitive data exfiltration via email or downloads.
• Finally, consider zero trust architecture internally. Instead of assuming everyone on the corporate network is trustworthy, verify each access. Micro segmentation can ensure that even if one machine or account is compromised, the adversary cannot freely roam the crown jewels.

Insider threat may never be completely eliminated (humans will be humans), but with layered controls and vigilant monitoring, you can drastically reduce the likelihood and impact. As the old adage goes: trust but verify.

9. Continuous Monitoring and Incident Response: Prepare for the Inevitable

In cybersecurity, prevention is ideal, but detection and response are a must, both to catch stealthy threats and to meet regulatory reporting duties as many jurisdictions require prompt disclosure of incidents. A strong monitoring program ties together many threads: log collection from cloud infrastructure, application monitoring, fraud detection systems, and blockchain analytics if crypto is in use. The goal is to create a unified view for a Security Operations Center (SOC) or at least a security team to investigate alerts. Unfortunately, many fast growing startups lack mature monitoring and learn of breaches only when external parties or customers notice suspicious activity.

Best Practices:

• Implement a SIEM (Security Information and Event Management) platform early, even if starting with something simple or managed. Ingest logs from critical sources like cloud admin actions, API access logs, authentication events, and firewall and WAF logs.
• Augment this with specialized monitoring. For example, employ an AML/fraud detection system to flag unusual transaction patterns (Flagright, as one example, provides real time transaction monitoring tuned for fintech fraud).
• If you have smart contracts, subscribe to events or use a service that can alert you to large or abnormal on chain movements involving your contracts.
• Automated anomaly detection using machine learning or heuristics can help identify issues like data exfiltration or a compromised account behaving oddly.
• Crucially, define an Incident Response Plan (IRP) and practice it. This plan should detail how to contain and eradicate different incident types, from a stolen API key to a DDoS attack to a smart contract exploit. Assign roles: who takes charge, who communicates to customers, and who collects forensics.
• Conduct drills, such as red team/blue team exercises or at least tabletop simulations, so that your team isn’t meeting for the first time during an actual crisis.
• Part of IR is also disaster recovery (DR). Ensure you have backups of critical data, and test restoring them. A DR plan might involve spinning up your services in a fresh environment if the primary one is compromised or unavailable.
• Do not forget compliance aspects: know the legal requirements for incident reporting, such as the GDPR 72 hour breach notification rule, or local regulators expecting notification. Having draft communication templates ready can save precious time and ensure transparency with customers and authorities when something goes wrong. Neobanks operate on customer trust, and a bungled incident response can damage that trust as much as the breach itself. In contrast, a swift and transparent response can actually reinforce confidence. For example, when neobanks have quickly frozen fraudulent transactions and reimbursed affected users, customers appreciated the proactive stance.
• Finally, leverage threat intelligence and community resources. Subscribe to intel feeds about the latest fraud schemes targeting fintechs and TTPs (tactics, techniques, procedures) hackers use against banking apps. Participate in information sharing groups if available for financial services or crypto security. The faster you learn about a new threat, the faster you can hunt in your environment to ensure you are not impacted.

By closing the loop via monitoring, detection, response, recovery, and improvement, neobanks can stay resilient in the face of ever evolving cyber threats.

Conclusion

Neobanks live at the cutting edge of finance and tech, which means security must be top notch to protect customers and sustain trust. From locking down third party integrations and cloud infrastructure, to auditing smart contracts and implementing strong authentication, the best practices above help digital banks avoid the common pitfalls that attackers prey on. The fast pace of feature delivery in fintech can tempt teams to push security to the back burner, but as we have seen, the cost of a breach, financially and reputationally, far outweighs the cost of building security in from the start.

Spearbit’s security expertise enables neobanks to blend Web2 and Web3 security rigor for this exact reason. Our network of researchers can validate your smart contracts, harden your APIs and mobile apps, and review your cloud architecture to ensure defense in depth. We help organizations building digital banking platforms to identify gaps, test their controls, and fortify systems against both modern cyberattacks and fraud. With the right security partner and mindset, neobanks can deliver cutting edge services without cutting corners on safety.

Contact Spearbit to scope a comprehensive security program, from code audits to cloud penetration testing, and let us help you build a resilient, compliant, and secure neobank that customers trust.