Neobanking is the next generation of banking that promises to alter how the world uses money. In a short span of time, neo bank startups have disrupted a lending market that had long been dominated by large public and private sector banks with extensive networks of branches and millions of customers. Neobanks are truly digital and do not have a physical presence. While online banking services are also offered by traditional banks, they only complement the brick and mortar branches that are at the core of their operations.
With the rapid growth of the digital economy, the time is ripe for neobanks to make an entry into the Indian financial services landscape. Following close on the heels of payment banks, small finance banks, and FinTechs, neobanks aim to exploit the existing gaps in low cost, value-added banking.
According to Traxcn, a market research firm, 8 neo-banks operate in the country presently. Having already raised $90 million in VC funding, they seem to be poised for aggressive expansion in the years to come. The easing of restrictions by the RBI on applying for banking licenses in 2016 has no doubt helped more players enter the fray.
What is Neo Banking?
In a nutshell, Neo banking is virtual banking. It revolves around an all-digital banking experience through a mobile app. From account opening to generating monthly usage summary, neo-banks have completely digitized and streamlined their operations in ways that traditional banks cannot match. The result is a seamless customer experience that makes it possible for customers to integrate their entire financial portfolio onto a single platform.
Whatever traditional banks can do, neo-banks do many times faster and cheaper. Although the RBI does not issue licenses to them currently, neobanks have forged partnerships with a number of leading banks to offer complementary services. This gives neobanks a wider reach even as they develop a long term positioning strategy for the future.
Services Offered by Neo Banks
Unlike the ‘one size fits all’ approach taken by mainstream banks, Neobanks have taken a niche focussed route when it comes to marketing strategy. While some offer consumers products such as savings accounts, personal and consumer durable loans, others are targeting business clients ranging from SMEs to corporates.
International money transfer, debit cards, merchant cash advance and integrated payment gateways are some of the B2B services being offered by neobanks.
Why are Neo Banks Different?
The integration of technology with banking services has changed the industry beyond recognition. At a time when traditional banks are themselves scaling down plans to open new branches and ATMs to control costs, neobanks have done away with the need for the customer to visit a branch entirely. Automated financial advice provided by in-app Robo-advisors or chatbots help customers make better choices when it comes to investing.
The role played by chatbots is not unlike relationship bankers in traditional brick and mortar banks who try to recommend financial services based on the customer’s lifestyle aspirations. Real-time spending reports generated by AI can help neobank customers manage their budgets and save for the long term. AI is also making it possible for them to analyze customer purchase patterns, credit history, and demographic data to create realistic data models, making room for better value propositions across the customer lifecycle.
What Are the Biggest Advantages of Neobanks?
Better User Experience:
One of the biggest USPs of Neobanks is their focus on customer experience.
According to a survey by global telecom major Avaya, 37% of Indians agreed when asked whether they would change banks if they had a poor experience.
As marketing budgets shrink, banks across the spectrum are looking for ways to leverage user experience to differentiate themselves. However, net banking services offered by traditional banks still rely on legacy Core Banking System (CBS) technology that is suited for today’s needs.
Neobank apps are designed to be easy to use and provide one-touch access to a whole range of financial services. They cut down the average time to open a savings account from more than 7 hours, as in the case of traditional banks, to mere minutes.
Low Transaction Fees:
Revenue from fees and penalties constitute a large share of income for traditional banks. A recent report by the RBI revealed that public and private sector banks earned as much as INR 10,000 crores in minimum balance penalties between 2016 and 2019. While banks are entitled to charge fees for the services they offer, neobanks are gaining popularity because many of their basic services are free of cost.
Traditional banks find it hard to compete on cost grounds because of their much higher operating costs and mounting losses. Bypassing on their cost savings to customers in the form of higher deposit rates and cashback, neobanks are positioning themselves as a promising alternative.
Risk and Compliance:
The spike in the numbers of loan defaults points to a gap in compliance in traditional banks. The increasing burden of NPAs and their impact on the bottom line has cost many banks a lot of goodwill in the market. While digital-only neobanks are new entrants to the scene, their unique approach to credit risk management may help traditional banks overcome some of the systemic flaws in their own processes.
Moreover, neobanks use biometric identity verification technology to ensure compliance with anti-money laundering laws and to curb benami accounts.
The RBI has mandated changes in the risk and compliance policies of Indian banks including the appointment of dedicated officers to advise senior management on navigating the various regulatory frameworks governing lending.
Indian banks were among the biggest targets of online hackers in 2019. Unconfirmed reports indicate that personal data belonging to more than 1.3 million Indians has been compromised. Both human error and lack of adequate firewall protection are responsible for these breaches of data.
Given the vast amounts of sensitive information handled by banks on a daily basis, the alarming regularity with which these attacks occur is a cause for concern.
Though neobanks are not known to have been targeted by hackers so far, their data is based on the cloud. On the customer end, neobanks use a variety of security measures including two-factor authentication and Role-Based Access Control (RBAC) protocols to ensure that customer data cannot be accessed by unauthorised individuals. The enterprise end of neobanking apps is secured using end to end encryption technology.
If the early popularity of neobanks in India is any indication, they may be on their way to capturing a large share of the market by the end of the 2020s. The advantages of financial inclusion and an overall decrease in costs for consumers will only spur savings, investments and economic growth in the country. Neobanks could play a key role in facilitating this.
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