Is Neo-Banking The Future Of Banking?

Neobanks bridge the gap between the services that traditional banks offer and the evolving expectations of customers in the digital age. They are changing the face of fintech and could one day take over traditional banks.

What are Neobanks?

Virtual or digital banking platforms that operate in partnership with licensed banking institutions while providing unique products and experiences in a customer-friendly interface. Sometimes, it may seem unreal – no hassle of physical branches, lean cost structure, end-to-end digital processes and easy access through smartphones – but all this is the exact reason for neo banks to exist. While globally neo banks have been around for almost a decade, it is a relatively recent, albeit fast-growing industry in India, riding on high penetration of the internet and the changing banking preferences and consumption patterns of customers.

Will India Have a Neo-Banking License?

Some countries have allowed digital banking licences that go by different names: “Virtual Banks” in HK, “Internet-Only Banks” in Korea and Taiwan & “Digital Banks” in Singapore. In India- a neobanking license looks difficult as

(1) Indian banks are fairly digitised especially with ramp-up of India stack (payments, identification & consent) and

(2) RBI may prefer banks to build branches to meet objective of financial inclusion.

India offers licences for Universal Bank, Small Finance Bank and Payments Bank. So, Neo Banks in India are forging partnership with banks to build their platform. Interestingly, most Indian Neo Banks don’t use the word “Bank” in their name to avoid confusion among customers or discomfort at RBI.

Neobank vs Traditional Bank

Neobanks complement traditional banks. They are differentiating themselves from online banking services and digital banking by providing a superior customer experience. They are not directly regulated in India. They are likely to latch onto the banking system to develop their products, e.g. in case of customer onboarding, neo banks will lock on to the API (application programming interface) of the bank instead of their own customer acquisition. Customer ownership, in this case, will be co-owned and neo banks will then leverage by offering products like virtual debit cards/credit cards, downloading of account statements and cross-selling products.

There is a clear division of responsibilities – banks would focus on trust, money management, core banking procedures, retail franchise, risk/compliance and data security, while neo banks would focus on adding an experience layer, nonbanking products, actionable insights, digital services and marketing. Additionally, neo banks can have one to many partnerships with various banking channels and vice versa. The banks have acknowledged the development of neo banks in their recent reports as they understand their products, agility and end-to-end customer experience.

Monetisation Prospects For Neo Banks

Neo Banks in India currently focus either on Millennials or SME segments. Millennial (or individual customer) focussed Neo Banks offer a superior app-experience, ecommerce partnerships, reward/loyalty programmes & loan/BNPL products. The challenge here is that payment fees are negligible in India, BNPL (Buy Now Pay Later) is still small & mostly gets non-prime clients. Quality of relationship and leveraging of partnerships for cross-sell will drive success. On the other hand, SME-focussed Neo Banks are building engagement with business clients through their ability to provide solutions like automated invoicing, collections/payments, accounting, inventory and sales mgt., taxes and in some cases interest on current deposits as well (banks can’t pay interest). This may help to rampup and upfront their monetisation prospects.

Players In The Space

Some leading Neo Banks in India are Open, Razorpay X (focussed on business/ SME clients), whereas Jupiter (Nu Bank owns stake), Fi, Niyo, Freo, Walrus and Slice are mostly focussed on Millennials. Large platforms like GooglePay, PhonePe and Amazon are also moving to expand services purely beyond payments. GooglePay tied-up with Equitas Bank to source fixed deposits. Amazon Pay has partnered with Kuvera to facilitate investments into mutual funds, fixed deposits etc. PhonePe’s platform is well diversified to showcase financial services and has taken licenses for Account Aggregators, broking, distribution of insurance products. Cred’s founder Kunal Shah (Cred operates as India’s largest card-repayment platform) recently invested in Winvesta – a UK-based Neo-Bank that focusses on cross-border remittances.

Pros of Neobank

• Low costs: 

Fewer regulations and the absence of credit risk allows neobanks to keep their costs low. Products are typically inexpensive, with no monthly maintenance fees.

• Convenient: 

Neobanks allow you to do the majority (if not the entirety) of your banking through a smartphone app. In addition to basic banking tasks, you should be able to manage your finances and predict activity in your accounts to prevent problems.

• Quick processing time: 

These tech-savvy institutions allow customers to quickly set up accounts and process requests. Neobanks that offer loans may skip the rigid and time-consuming loan application processes in favor of innovative strategies for evaluating your credit and speeding up the process.

Cons of Neobank

• Requires comfort with technology: 

If you don’t like keeping up with technology trends, you might want to avoid banking with cutting-edge institutions like neobanks. You won’t be able to take full advantage of the offerings if you aren’t comfortable tapping and swiping your way through brand new apps. Some people enjoy exploring new technology, but if you don’t, neobanks might not be right for you.

• Less regulated than traditional banks: 

Since neobanks aren’t legally considered banks, you might not have any legal recourse or well-defined processes to follow if there’s a problem with an app, services, or non-regulated third-party service providers. There may be confusion as to who will be responsible for potential fraud and errors. Customers are also on the hook for ensuring that their neobank offers some sort of deposit insurance, such as through the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Share Insurance Fund (NCUSIF).

• No physical bank branches: 

It’s becoming increasingly easy to do everything online, and neobanks often maintain partnerships with ATM networks, but some people want the ability to visit a branch and bank in person. This is especially true when it comes to complex transactions. While many neobanks offer robust customer service tools, some customers may prefer to ask questions in person.