Neo-banks are totally online, digital banking institutions. Simply put, they are not physically present. Customers may find traditional banking transactions time-consuming and labour-intensive. Neobanks add a digital and experiential layer on top of traditional banking to make online banking smooth. Customers can quickly create accounts on their website or app and use their services because they are tech-driven. Neo-banks are becoming more and more popular as a customer alternative because they offer a number of benefits that meet the changing needs of modern consumers. They want to make banking services easy to use and respond swiftly to customer demands.
Internet use and the number of people with smartphones are growing faster in India than in many other countries. Neo-banks have benefited from this situation by providing services that are based on technology. This has drawn a lot of millennials and technologically advanced people. Neo-banks fill the gap between what traditional banks offer and what customers expect in the digital age. They are revolutionising the fintech sector and may someday surpass traditional banks.
Some people can confuse “neo-banks” with “digital banks.” They are equivalent in that they both provide financial services via smartphones and other mobile devices. The similarities stop there, though. Digital banks are typically the online-only sections of well-known and licenced players in the banking industry, even if the names are occasionally used interchangeably. A neo-bank, on the other hand, runs exclusively online; it has no physical branches and can work independently or alongside conventional banks. This allows them to comply with the regulations and manage the regulatory environment.
India has experienced a fintech boom over the past several years, with the emergence of hundreds of new fintech businesses. Neo banks are a big part of these fintech companies that are changing the way traditional banks work. By providing tech-first solutions, these investment companies are filling the void in the established banking sector.
What are Neo Banks?
Neo banks are financial institutions that exclusively have an online presence and operate electronically. Without having any physical branches, they provide standard banking services through a digital setup or mobile apps. These are a specific class of digital banks that meet the demands of the tech-savvy generation in terms of payments, lending, and other financial services, including instant money transfers.
However, it is vital to highlight that these neo-banks may not necessarily have their own banking licence, but rather rely on their banking partners to provide financial services and products. These banks are completely digital. These neo-banks are skilled at combining technology and artificial intelligence to provide customised financial services to customers. It is offered at a minimal cost.
How Are Neo Banks Different From Traditional Banks?
There are several physical ATM locations and bank branches for traditional banks like HDFC, ICICI, Kotak, Axis, and others. These conventional banks additionally provide online banking or digital banking services. This provides them with a slight advantage versus neo banks that are only present online. Neo banks’ customer bases are smaller than those of regular banks. Neobanks have a long way to go before they can compete on the same scale as traditional banks. In contrast to neo banks, which are still in the development stage in India, traditional banks have large financial resources and deep pockets, which neobanks lack. Neobanks have an advantage over conventional banks thanks to innovative app features. Neobanks, on the other hand, have modern technology, which traditional banks do not. Millennials, Gen Z, and young employees who desire cutting-edge fintech services that traditional banks do not currently offer make up a sizable portion of the clientele that neo-banks serve. However, because of services like personal banking, relationship managers, etc., the older generation, larger enterprises, and legacy companies are likely to continue using conventional banks.
How Do Neo-Banks Function?
A neo-bank operates considerably differently from a typical bank or a digital bank. These banks save a lot of money on operating and overhead expenses because they don’t have any physical premises, branches, or personnel working at these branches. A neo bank’s primary function is to provide its clients with tech-driven banking services. The banking partner offers to keep the customer’s funds while also providing access to those funds for lending. In addition, the neo bank manages customer service, end-to-end customer acquisition, and client servicing while running the app and distributing the product.
These fintech firms typically work with established banks to offer new-age banking services through sleek, user-friendly apps. Neobanks are very data-driven. To better understand client behaviour and provide them with improved services, they gather and analyse customer data.
Neo banks seek to enhance the customer journey based on current consumer actions. These banks provide lending services to young students who wish to establish credit as well as no-fee customer accounts that are advantageous for those who are just starting out in the workforce.
Compared to traditional banks, neo-banks operate under a completely different business model. However, just like regular banks, neo-banks do generate a small profit from deposits and loans. The client fees have also been greatly reduced as a result of them being fully online and without a physical location. Neobanks are customer-focused and offer their clients individualized services supported by technology.
Neo-banks base their decisions primarily on data. They are better able to keep an eye on and analyse client behaviour in the neo-banking system because of the sophisticated nature of their platforms. They group clients depending on their behaviour rather than merely using one or two data points.
Neobanks vs. Digital Banks vs. Traditional Banks: What’s the Difference?
Neobanks are distinct from conventional banks in many ways. However, given how similar neo-banks and digital banks are, it can be challenging to tell them apart. Digital banks are an extension or online-only division of conventional banks. They support conventional banks, but they also provide customers with suitable online digital services. Neobanks, in contrast, exist primarily independently of traditional banks and are entirely digital. Unlike banking institutions, they don’t have any physical branches. While traditional banks use a combination of physical branches and an online presence, they also offer a variety of personalized services online. Compared to traditional banks, neobanks only provide a limited number of services, but these services are frequently highly personalized because of cutting-edge technologies like AI.
Neobanks serve customers at around 1/3rd the cost of traditional banks. While Indian regulators are accepting and supportive of fintech developments, neobanks confront numerous compliance, safety, and regulatory challenges. They have some advantages and disadvantages, much like all financial institutions:
Pros
- Lower operational costs: They spend less on overhead because they don’t need any physical infrastructure to manage physical branches. This is partially passed on to clients in the form of no or cheap fees for certain transactions or services, as well as advantageous interest rates.
- Quicker processes: Neobanks are available 24/7. Simple daily tasks, like paying bills, can be completed anytime, anyplace. Their customer care is tailored, and the usage of AI enables real-time resolution of consumer issues.
- Highly secure: Neobanks tend to have strict policies for privacy, security, and the safety of their platforms because they don’t rely on outdated, legacy technology. Customer data security is given top importance.
Cons
- Impersonal assistance: Most users can find it frustrating since there isn’t face-to-face assistance available for complicated financial processes or transactions. Because they don’t provide the same variety of services as traditional banks, some segments of the population, such as senior citizens and less tech-savvy clients, might not feel comfortable using neobanks for specific types of transactions.
- Lack of reliability and trust: Neobanking is the contemporary substitute for traditional banking, but it lacks the latter’s decades of operational experience. Before deciding to pay up for premium services, users may need to use their services for a while—probably for free—to gain familiarity and confidence.
- Lack of well-defined protocols and legal structure: Neobanks cannot accept deposits or offer to lend products on their own books since they lack the independence necessary to do so. A lot less regulation applies to them than to traditional banks. Customers’ money may be in danger in the worst-case scenario of these banks going bankrupt because they do not have any legal remedy or established procedures in place to deal with the problem.
What Are the Advantages of NeoBanks?
Neobanks offer top-notch benefits to their customers. Let’s take a look at these benefits one by one.
- Low cost: The cost-effectiveness of neo-banking in comparison to traditional banks is one of its main advantages. Traditional banks must pay for staff and operational expenses since they have physical branches. Neo banks, in contrast, are exempt from having to cover the costs of maintaining physical branches. As a result, companies are able to charge minimal or no costs. Additionally, because there are no credit concerns and fewer regulations, neobanks are significantly more affordable.
- Convenience: Since they are fully digital, Neo banks are renowned for providing their customers with the best in convenience. Customers can utilise all banking services at their convenience using their smartphones thanks to the whole digital arrangement. One can easily reach a neo-bank representative through digital channels if users have any banking-related problems. In neo-banks, problems are solved much more quickly and with far less effort from the user. Neo banks give individuals the ability to effectively manage their accounts in addition to the advantages listed above.
- Customer orientation: Neo banks place a lot of emphasis on the look and feel of its platform. neo Banks seeks to create a user-friendly, intuitive solution that can outperform current banking infrastructure. The neo-bank apps are really clear, crisp, and tidy. Additionally, they are well-designed to meet the customer’s intricate requirements. One of the main USPs of neobanks is their user-friendliness.
- Smart reporting: Neo banks provide sophisticated and smart reporting. It’s because every time users check it, an updated account balance is provided. Users can do this to view all of the payments and transactions in detail on a single app. Users may also obtain a summary of all of the expenses and financial objectives with neo banks. Additionally, users can customize reports to suit their needs. Neo banks’ clever reporting gives customers a comprehensive picture of their money. Additionally, this enables individuals to make more informed selections.
- Fast processing time: Neo banks are known for processing transactions more quickly than regular banks. For instance, if a user wants to apply for a loan at a conventional bank, he must go through a number of rigid, time-consuming procedures. Neo banks, in contrast, avoid all these laborious procedures and use cutting-edge techniques to hasten the entire process.
- International payments at ease: Users must deal with challenges in traditional banking when it comes to sending money internationally. It’s because consumers may request an upgrade to an international debit card in order to make payments internationally. Users can use your card to make overseas purchases without asking for an upgrade, though, if your account is with a neo bank.
Conclusion
The banking industry is evolving quickly. Customers are getting their hands on more goods and services developed using disruptive technologies, and banks’ practices in terms of consumer convenience, pricing transparency, and customer service are changing. The business and operational models adapt as consumer behaviour and expectations evolve.
A non-banking service provider can now access every component of the banking value chain, from what customers can use and expect in terms of banking services, thanks to its technological capabilities and flexible and lean business models. Instead of using physical branches, these models typically supply retail and small and medium-sized enterprises (SME) banking services via the internet or other electronic means. Neobanks are these non-banking service providers, and by providing more affordable business models and very differentiated customer-centric experiences, they are upending the current dominance of traditional banks. Neobanks are unrestricted by legacy systems, tightly linked value chains, complicated administrative structures, and onerous regulatory restrictions, unlike their conventional counterparts. Neobanks in India relies on partners to provide services that require bank licenses, even though they do not yet have their own bank licences.
Underbanked or unbanked clients, such as freelancers and gig economy workers, as well as micro- and small businesses, find convenience in creating and maintaining accounts, seamless payments, transfer and remittance options, and alternative techniques for determining creditworthiness to be appealing. These market segments now have access to financial goods and services that were previously either hard to find or came with high costs and onerous terms.
In the upcoming years, the ideas of neo-banking and cryptocurrency banking as a service will “remain in the game” and may replace traditional banking as the new norm in the fintech industry. Customers are getting more savvy and aware of the enormous potential of developing neo-banks. Because of this, significant market players have already made investments in this dynamic sector and are expertly addressing the expectations of contemporary consumers. Cryptocurrencies are expected to have a significant impact on wealth management, monetary and fiscal policy, and global trade in the years to come as both an asset and a currency.
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