NeoBanks – Changing the way India banks

Modern technologies have made our lives easier and more convenient for the better. Now, you can manage your expenses, send or receive money, make smaller investments, check credit scores, and much more, all of it with a single touch of your finger. All of this demonstrates the power of Neobanking- the true digital revolution of the decade!

Definition

For those unknown, Neobanking is a word used to refer to fintech services without any physical branches. In addition to offering some or all of the services and products offered by conventional banks, such as financing facilities, bank accounts, deposit facilities, and so on, they also offer you the ability to manage your money via a smart device. Read further to find out what a Neobank is, how it operates, its key benefits and disadvantages, its market position, and the emerging trends and future growth.

What is Neo banks

Neobanks are digital banking platforms created by fintech corporations or start-ups whose offerings are similar to conventional banks but through streamlined software such as a website platform and/or a mobile application. These digital-only banks facilitate bank account management, offer technology-driven alternatives to services such as current accounts, loans, credit cards, or trade finance, and offer round-the-clock help, conquering the constraints of traditional banks. Open, Jupiter, Niyo, INDMoney, and Fi are some of the popular Neobanks in India.

How do Neo banks operate

Types of Neo banks

Neobanks operate under the “Banking as a Service” paradigm, which can include any of the following-

1. Non-licensed fintech startups partner with established banks to offer the products and services of the partner bank.
2. Neobanks are traditional banks’ own digital-only ventures.
3. Neobanks that have received their own digital banking licences.

Difference Between Traditional and Neo banks

Neo banks could be differentiated from standard banking services by-

1. Service Platform-Neobanks exclusively conduct business online, whereas conventional banks maintain a physical location.
2. Closer Client Relationship- Traditional banks have long-lasting relationships with their clients that hardly ever alter over time and are frequently in-person. Client relationships in neobanks are transient, virtual, and flexible.
3. Licensing- Traditional banks are fully licenced to do banking. Neobanks might have these licences, however, the majority of more recent banks only have partial or no licences. As a result, they collaborate with conventional banks to operate.

Market Size and Key Growth Drivers

As compared to established markets like the European Union (EU) and China, the Indian neo-banking sector is still in its infancy, with all significant businesses launching products within the last two years. According to a Statista report, the value of transactions conducted through neobanks is projected to grow at a rate of 19.21% per year (CAGR 2023–2027), attaining a total estimated amount of US$155.50 b by 2027. Further, the transaction value in the Neobanking market is expected to reach US$76.99 b in 2023. Further, according to an Inc42 report, the quick adoption of the UPI stack and digital loans have made UPI a huge success, with cumulative transactions totaling $2.4 trillion. By 2027, the Indian neo-banking industry is anticipated to have 21.19 million users, with an average user penetration rate of 1.4%, compared with 1.0% in 2023. This year too, Neobanks has grown in prominence as a result of significant digital payment trends luring masses to them for their financial needs.

Benefits

• Lower Fees- Since neobanks do not have physical branches, businesses save money on operating and administrative expenses such as rent, electricity, and infrastructure, causing lower fees and higher interest rates for customers.
• Ease of Use– Convenience of banking has emerged as a crucial component. These digital banks offer online user creation providing a digital substitute for traditional banks. With a full-fledged range of services to be offered in the comfort of their homes, Neobanks have gained immense popularity during and post Covid environment.
• Smoother User Interface- Neobank aims to develop digital banking solutions with the primary intention to enhance customer experience while eliminating the challenges faced by traditional banks. Neobank can design smooth, fintech-driven banking services by recruiting top talent assuring an effortless switch for the customers.
• Highly secure in nature- Neobanks prefer to use strict security, privacy, and platform safety controls because they don’t rely on antiquated, legacy technology. Data security for customers becomes a top priority.
• Easy international payments-Unlike traditional banks which are subject to certain restrictions, Neobanks offer multiple currency accounts with easier access to virtual debit cards for smoother global transactions without any extra fees or charges levied for foreign purchases.

Disadvantages

• Due to the fast-paced nature of the services and the continuous shift in rules may lead to the continuous shift in rules & regulations, Neobanks may find it challenging to fulfill the compliances.
• Given the large volume of customer-sensitive information being shared online, data security is one of the key challenges for Neobanks.
• Neobanks, unlike traditional banks, lack a physical location, which may be problematic for consumers who prefer personal assistance with their financial requirements.
• Since Neobanks are only in-app services they require a smart device (smartphones and laptops) along with a stable connection without which it is not possible to be used.

Emerging Opportunities in Neobanking

Improved Access to Financial Services- Compared to regular banks, neobanks provide a greater range of services.  In addition to providing tools for improved money management, they democratize financial services by not requiring minimal balance, checks on credit, or physical presence.

More personalised banking- With the use of advanced technologies such as data analytics and intuitive design, Neobanks offer more personalised experiences for customers based on factors such as credit score, spending patterns, income, and credit score which has the effect of improving communications and boosting client loyalty.

Higher Transparency- Neobanks strive for transparency by disclosing their terms in fair straightforward language, and offering real-time notifications to raise accountability and trust.

Additional sources of income for enterprises- Neobanks may provide cost-saving and loyalty programs to businesses, supporting growth in the economy and the generation of employment. They could collaborate with businesses to offer SMEs little in the way of collateral or credit history lending or credit facilities.

Neobank’s Business Automation and Expected Future Growth

• Provide Personalised Advice- Neobanking and artificial intelligence (AI) offer clients personalized advice for improving their financial health. This helps them make well-informed decisions.
• Automate business procedures- AI streamlines neo banking’s accuracy and efficiency by automating processes such as loan application, processing, and fraud detection processes ultimately reducing the scope for errors and expenses.
• Better Risk Management – Neobanking and AI help manage risk by spotting patterns in data, detecting financial crimes like money laundering, and offering monitoring in real-time.
• Offering a personalised user experience – Neobanking and AI enhance the user experience by analyzing data, offering personalized recommendations, and improving customer support through chatbots and virtual assistants which reduces the need for human interaction and thus higher satisfaction.

Closing Thoughts

Therefore, with the advent of technologies such as data analytics and blockchain technologies, and increasing usage of AI in line with the expansion of digital banking services, Neobanks have a bright future in the banking industry. With larger margins and superior customer service compared to established banks, neobanks are anticipated to play a big role in the Indian banking industry in the upcoming years.