Neobanks

In News

• With about 58.4% population underbanked in India, Neobanks have immense potential for growth in tier-II and- III rural segments of the countries per the “The Evolution of Neobanks in India” Report. 

About

• 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 eclipse traditional banks.

 What are Neobanks?

• A neobank is a kind of digital bank without any branches. Rather than being physically present at a specific location, neobanking is entirely online.  
• Neobanks are financial institutions that give customers a cheaper alternative to traditional banks.
• They leverage technology and artificial intelligence to offer personalised services to customers while minimising operating costs.
• In India, these firms don’t have a bank licence of their own but rely on bank partners to offer licensed services.
  • That’s because the Reserve Bank of India (RBI) doesn’t allow banks to be 100% digital yet.
  • The RBI remains unwavering in prioritising banks’ physical presence, and has spoken about the need for digital banking service providers to have some physical presence as well.

Though neo-banks may adopt a variety of operating models, these falls under three major categories:

• Non-licensed FinTech firms that collaborate with conventional banks to have a mobile/Web platform and a wrapper around their partner banks’ products.
• Traditional banks that are undertaking their digital initiatives.
• Licensed neo-banks (usually with digital banking licences in those countries that allow it)

Image Courtesy: PWC 

Neobanks vs Traditional Banks

• Funding and customers’ trust: Traditional banks have many advantages over neobanks, such as funding and most importantly customers’ trust.
  • However, legacy systems are weighing them down and they find it difficult to adapt to the growing needs of a tech-savvy generation.
• Innovation: While neobanks don’t have the funds or customer base to overthrow traditional banks, they have something special in their arsenal – innovation.
  • They can launch features and develop partnerships to serve their customers much more quickly than traditional banks.
• Underserved by traditional banks: Neobanks cater to retail customers, and small and medium businesses, which are generally underserved by traditional banks.
  • They leverage the mobile-first model to differentiate themselves by introducing innovative products and providing superior customer service.
• Venture capital and private equity investors: have been keeping a keen eye on the market opportunities for such banks and are taking an increasing interest in them.
• Smartphone penetration: As of 2020, India had a Smartphone penetration rate of 54%, which is estimated to increase to 96% by 2040.
  • Even though 80% of the population has access to at least one bank account, financial inclusion levels are yet to improve.

Image Courtesy: PWC

Challenges for Neobanks

• Fulfilling the needs of a segment of the market: The key to their success lies in fulfilling the needs of a segment of the market, and adopting the right technology, business strategy and work culture.
• Regulatory hurdles: Since the RBI doesn’t yet recognise neobanks as such, officially customers may not have any legal recourse or a defined process in case of an issue.
• Impersonal: Since neobanks don’t have a physical branch, customers don’t have access to in-person assistance.
• Limited services: Neobanks generally offer fewer services than traditional banks.

Advantages of Neobanks

• Low costs: Fewer regulations and the absence of credit risk allow neobanks to keep their costs low. Products are typically inexpensive, with no monthly maintenance fees.
• Convenience: These banks offer customers the majority (if not all) of banking services through an app.
• Speed: Neobanks allow customers to set up accounts quickly and process requests speedily. Those that offer loans may skip the usual time-consuming application processes in favour of innovative strategies for evaluating your credit.
• Transparency: Neobanks are transparent and strive to provide real-time notifications and explanations of any charges and penalties incurred by the customer.
• Easy-to-use APIs: Most neobanks provide easy-to-deploy and operate APIs to integrate banking into the accounting and payment infrastructure.
• Deep insights: Most neobanks provide dashboard solutions with highly enhanced interfaces and easy to understand and valuable insights for services such as payments, payables and receivables, and bank statements.

Source: ET