neobanks: Explained: Neobanks, the next evolution in banking

Neobanks bridge the gap between the services traditional banks offer and the changing expectations of customers in the digital age. They are changing faces and could one day eclipse traditional banks.

Many could confuse neobanks with digital banks. Both are similar in that they offer banking services through smartphones and other devices. But that’s where the similarities end.

What are neobanks?

Neobanks are financial institutions that offer customers a cheaper alternative to traditional banks. You could think of them as digital banks with no physical branches, offering services that traditional banks do not, and doing so efficiently. They use technology and artificial intelligence to offer their customers personalized services while minimizing operating costs.

In India, these companies do not have their own banking license, but rely on banking partners who offer licensed services. This is because the Reserve Bank of India (RBI) is not yet allowing banks to be 100% digital (although some overseas banks only offer digital products through their local units). talked about the need for providers of digital banking services to have a certain physical presence.

Neo banks vs. traditional banks

Traditional banks have many advantages over neobanks, such as financing and, above all, customer confidence. However, legacy systems put a strain on them and find it difficult to adapt to the growing needs of a tech-savvy generation.

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Neobanks may not have the resources or the customer base to overthrow traditional banks, but they have something special in their arsenal – innovation. They can roll out features and build partnerships to serve their customers much faster than traditional banks.

Neobanks are aimed at retail customers as well as small and medium-sized businesses that are generally underserved by traditional banks. You use the mobile-first model to differentiate yourself through the introduction of innovative products and excellent customer service.

Venture capital and private equity investors keep a close eye on the market opportunities of such banks and are increasingly interested in them. India’s neo-banking startups raised more than $ 230 million in 2020, according to a report from a fintech research firm.

In 2020 India had a smartphone penetration rate of 54%, which is expected to increase to 96% by 2040. Although 80% of the population has access to at least one bank account, the level of financial inclusion has yet to improve, according to a PwC report released in September 2021.

Challenges for neobanks

The size of the global neo banking market is projected to reach $ 333.4 billion by 2026, with an average annual growth rate (CAGR) of 47.1%. But like all financial institutions, neobanks have their advantages and disadvantages. The key to their success lies in meeting the needs of a market segment and adopting the right technology, business strategy and work culture.

But none of these are as crucial as building trust. Neo banks are at a disadvantage compared to traditional banks. Hence, models like freemium subscriptions and memberships in neobanking are common in India as they allow customers to experience the service before paying for it.

India’s top neo banks

RazorpayX

Started: November 2018

Primarily used by business owners and online merchants to automate manual, repetitive financial tasks and provide insight into cash flow. Simplifies withdrawals, offers credit solutions, offers ledger support for checking accounts.

Started: 2019

It offers services such as money transfers, cash withdrawals, savings accounts and NFC-enabled prepaid cards for individual bank customers. It provides a dashboard for monitoring transactions and viewing balances.

Niyo

Started: 2015

Offers zero balance accounts with facilities such as salary advances and free accidental death insurance. Also offers forex cards and tax savings cards to help users track, manage, and claim employee benefits.

Open minded

Started: 2017

Open is a neobank for companies and startups that offers services such as deposit accounts, money transfers, debit cards for online / offline purchases, expense management and invoice management.

EpiFi

Started: 2019

Provides digital banking services to individuals such as savings accounts, prepaid cards, bill payments, and money transfers. It also enables savings with interest and insights into money management.

Advantages of neobanks

Low costs: Less regulation and the lack of credit risk allow neobanks to keep their costs down. Products are usually inexpensive and there are no monthly maintenance fees.

Convenience: These banks offer their customers most (if not all) banking services through an app.

Speed: Neobanks enable customers to set up accounts quickly and process inquiries quickly. Those who offer loans can skip the usual time-consuming application process in favor of innovative credit assessment strategies.

Disadvantages of neobanks

Regulatory hurdles: Since RBI does not yet recognize neobanks as such, customers officially have no legal recourse or a defined process in the event of an issue.

Impersonal: Since Neobanks do not have a physical branch, customers do not have access to personal support.

Restricted services: Neobanks generally offer fewer services than traditional banks.

Ashwin Manikadan contributed to this story.

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