Neo-banks are digital banks that do not have any physical branches and provide all financial services to their consumers through apps that can be accessed through a smartphone.
Changing consumer preferences that rely heavily on digital platforms have transformed the banking sector in the last 4-5 years. are beginning to face close competition with the new and emerging neo-banks that offer quick, convenient and cross-border financial services on a mobile phone through an app.
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Neo-banks are digital banks that do not have any physical branches and provide all financial services to their consumers through apps that can be accessed through a smartphone. They require minimum paperwork, are affordable, charge minimum to zero transaction fees, and are borderless, unlike traditional banks. They are also referred to as challenger banks because they have disrupted the entire traditional banking model with a tech-driven alternative mode of banking.
Among the increasing customer base of neo-banks are people who travel globally frequently, students, tech-savvy millennials and even the financially illiterate who can now easily access their bank accounts while on the go on their mobile phones.
Features and functionality
Neo banks have brought about a paradigm shift in the way Indians are managing their money and their banking requirements today. These digital financial institutions deploy the latest technology stack to enable safe and secure banking transactions for their consumers while also managing their finances and investment through personalized commitment and care — all through your mobile phone. They give you the flexibility to travel anywhere in the world without having to carry cash with you. They are paperless and have done away with the fees charged for withdrawing cash abroad or on every purchase made through an international debit card. You can open an account with a neo-bank in just 10 minutes with minimum paperwork, and you’re sent a virtual debit card for use immediately. Additionally, access to global investment opportunities, easy international student banking and low-cost global spending are a few more key features of a neo bank.
One might ask why someone who’s been banking the traditional way for generations switch to a neo-bank? Their USP lies in their unparalleled value propositions, with speed and convenience heading the list.
Convenience: Each of us would have had at least one traumatic experience in a physical bank with financial transactions — long queues, unending paperwork, multiple signatures, bank holidays, slow and inefficient banking officials, etc.
Neo-banks make life easy by offering consumers a hassle-free banking experience at their fingertips through a mobile app that gets their work done quickly and efficiently for them, irrespective of where they are placed in the world. Accounts are opened in 10 minutes after primary documents are furnished, and a quick KYC form has been filled.
Cost: Since their inception, neo-banks have been known for their cost-effective benefits compared to traditional banks. Considering these banks do not have any physical branches, the operational and labor costs are next to nil. Customers don’t have to pay any fees for opening an account with us — no account opening fees, monthly fees, wire fees or minimum balance requirement is mandated.
Financial Management: Neo banks leverage technology combining deposits, loans, debits, and credits all at one place with access to everything through just one tap on the mobile screen. Transparency is key to their success as they keep consumers apprised of their account status in real-time, even offering personalized advice on the best investment options.
Personalization: Neo-banks leverage technology and artificial intelligence to offer consumers a personalized service experience while minimizing operating costs.
Seamless multi-product: Offering a multi-pronged set of services, a digital neo bank is a one-stop-shop for availing borderless and efficient banking facilities. The suite of seamless services includes safe, easy and compliant borderless banking, Hassle-free transition to the functioning corridor for work, access to global investment opportunities, easy international student banking, low-cost global spending and so on.
Scope and Growth in India
In 2020, the penetration rate of smartphones in India reached 54 per cent and was estimated to reach 96 per cent in 2040, more than doubled from the financial year 2016, when only 22 per cent of the mobile subscribers were using a smartphone. In 2020, the volume of smartphone shipments across India was around 149.7 million.*
With the smartphone penetration in India set to grow multifold in the coming years, there is a vast scope of growth for Neo banks in India. Neo banks target three main classes of customers:
— The high-end consumers are always on the lookout for a better seamless experience that aligns across all their digital touchpoints, be it an Apple, Amazon or Facebook.
— The underbanked customers who don’t have access to quality banking and have unstable, irregular incomes yet can benefit from a digital financial platform.
— Customers with special needs, such as independent contractors, freelancers, Uber drivers, etc., may need very short-term loans to smoothen their cash flow.
In India, MSME’s account for about 95% of the country’s industrial units but have not been covered by conventional banks. Neo-banks give this MSMEs access to financial services through a formal banking and credit system.
The prime factor driving the growth of neo-banks in India is that traditional banks are yet unable to offer the range of services they offer safely and effectively on a digital platform. Going ahead, neo-banks are only going to get bigger and better with improvements in technology. Already neo-banks have real-time data and lego-blocks like architecture, making it very easy to roll out new features and products.
What is interesting is that it is the customers that are driving this wave of change in the business of banking as they become more demanding about the experience and the value, they expect from their banking experience.
As the neo-bank sector is still in its infancy, it faces teething troubles and growing pains due to operational constraints and regulatory barriers. Some of these include:
Lack of regulatory clarity: Neo-banks lack regulatory acceptance. The RBI does not recognize neo-banks entirely. To be accepted by the RBI, an institution is expected to have widespread retail outlets. To elaborate on the key challenge here, a wholly digital bank does not get a permit to set up a shop independently. They need to partner with a traditional bank.
Quality of management: Data privacy is a significant concern for any institution with technology at its helm. Given that neo-banks rely heavily on customer data with the possibility of cross-sell products staying afloat, failures and frauds are a cause of concern. There are chances of it being affected by the passage of the Personal Data Protection Bill, India’s GDPR equivalent.
The author, Venkat Gopalakrishnan, is COO at Aeldra. The views expressed are personal
First Published: IST