Photo courtesy Vectorjuice-Freepik.
Traditionally we are used to the services of a bank that has many physical branches in all parts of the country and provides services like loans, deposits, insurance, credit, and debit cards. But the business of a neobank can be offered online without a physical branch network. The digital online units provide services that are structured to enhance the banking experience of the customer. This is done through the use of AI, Robotics, and machine learning that provide solutions to the issues faced by the customers of traditional banks.
Neobanks are fintech firms providing services like digital financial solutions, money transfers, and money lending. They have created resources to easily implement innovations and have a tech-savvy decision-making model that gathers data and comes out with results. There is a lot of gap between what the traditional banks offer and what the customers expect. The SMEs require advanced technologies like payment gateway, invoicing software, and a host of other services. There is an eruption of mobile technology and it has become imperative that the banking services can blend with the other services and neobanks can help in filling the gap.
India is moving towards an era of Fintech and the number of people transacting digitally is ever increasing. People are now comfortable with making online payments through Paytm, PhonePe, and there is lots of potential for these neobanks too. The business models of these banks are different and the services they provide to the customers are driven by technology and in doing this they collect lots of data, analyze it, and try to understand the behavior of customers, and find solutions.
The world over neobanks may have one of the three operation models as detailed below-
- Non-licensed fintechs that collaborate with traditional banks to provide mobile/web services.
- Traditional banks that have their own digital services.
- Licenced neo banks that exist with digital banking in countries that allow it, without tie up with traditional banks.
Only a few neo banks carry banking licenses while a majority of the others partner with traditional banks. In the case where they partner with traditional banks; the banking partner provides a platform for managing customer account and holding customer funds, while the neo bank is involved in product distribution and customer acquisition and servicing.
The world over in many cases the neobank is fully digitized; but in India, the regulation doesn’t permit it, so the neobanks offer services that are built on top of traditional banking services. At present, the neobanks are not allowed to hold customer deposits and are not granted a virtual license by the RBI as it maintains the stand for physical availability. In Asia, there are countries like South Korea and Singapore that have provided a separate license for digital banks but India does not allow digital-only banks. There are a total of 246 neobanks in the world.
The account in these neobanks is hosted by the financial institutions that RBI has granted licenses to like the HDFC, ICICI, Axis, IndusInd, and Yes bank. The money that you deposit in a neobank account is controlled by the partner bank and the thing that neobank does is make everything easier for you by their support system and modern apps. The top neobanks in India in the banking space are InstantPay, Niyo, Open, Walrus, RazorpayX, and Yono.
According to a report by Zion Market Research, the neobank market that was 18.6 billion in 2018 was likely to grow to 395 billion by 2026 thereby growing at a CAGR of 46.5%
The advantages of neo banks are-
1) A simple account creation process-
When you go to a traditional bank you will find that there is paperwork and form-filling to open an account. This takes some time and you have to visit the nearest branch. The whole process is made very simple with the account opening process in the neobanks.
There are no branches of the neobanks and you don’t have to go anywhere and in a few simple steps, you can create an account from the comfort of your home or even on your mobile phone. The front and back end operations are fully digital and app-driven and you can get the job done sitting on your couch as the operations are quick and paperless. The account is opened in two to three simple steps.
2) Fewer costs-
The neobanks don’t have branches so there are lots of savings as compared to the traditional banks that have opened physical branches. So these advantages can be passed on to the customers and there are no fees charged on withdrawals or the other annual maintenance charge.
3) Interface is user friendly-
Neo banks try to simplify the financial management process for the users and in working with their banking partners they build the products and services on top of the banking products and payment infrastructure. They also have tie-ups for cross-selling value-added products which allows them to focus on the user experience of their products.
With their superior technologies, they try to provide magnificent customer service. This enhances the customer experience and their websites are very responsive unlike the websites mobile apps of traditional banks. The ease of operation makes them useful to the customer.
4) Better Finance Overview-
The main differentiator of the neo banks is the use of technology. The transactions that you make are displayed immediately and you get the latest update of the balance in your account. It provides you with an outline of your expenses and your finances can be managed better. The powerful dashboard is of great help and shows all types of money movement.
5) Great for small businesses-
The neobanks simplify the whole process of disbursals to vendors, customers, and employees reducing the manual processes through financial CRM, unlike the traditional banks where the whole process is slow and takes a lot of time. This is done by providing a platform to monitor the movement of money, and other services like budgeting and accounting are also offered at low cost to MSEs and SMEs.
6) Easier International payments-
In the case of traditional banks if you use a debit card it is not always possible to use it everywhere in the world and we have to often ask for an upgrade to an international debit card. But with the neobank, you can use the card to make purchases even abroad.
In spite of all the advantages, there are some other aspects of neo banks that a person needs to consider in India. The RBI has not yet granted banking licenses to companies to act like a bank without the branches. These neobanks offer some digital banking services but the products offered are lesser and some basic facilities like sending wire transfers or accepting cash deposits are not there.
The HNIs who like to do business in person is not attracted to these types of banks. The banks may be popular with the younger generation but the large population is worried about the safety and security aspects.
There is a huge market out there for the neobanks to conquer. There are 6.3 crore MSMEs in India and less than half of them are able to access tools for payments and disbursals. The gig economy in India is also growing and only 67% have access to innovative technology that helps in money management. Neobanks can help them with customer management and banking services.
The track record of neobanks is not very old and they could fail like a startup. But the numbers suggest that the neo banks have a great potential in India for growth. Trust is important for any bank to succeed so this is the reason why the government has put in place strict requirements for these banks. If banking convenience is your main objective then neobanks could be a preferable choice for you.