The digital age has caught up with Indian banks at last. If the rise in digital payment volumes is any indication, consumers seem to have developed a preference for app-based banking which gives them greater control over how they manage their money, without restrictions. Customer expectations regarding financial services are changing rapidly.
For example, penalties for non-maintenance of minimum account balance may be valid from the perspective of traditional banks, however, they are a major sticking point for consumers who are now looking for better alternatives.
According to the Consumer Digital Banking Survey conducted by PricewaterhouseCoopers in June 2019, more than 50% of respondents said that they were more likely to open an account with a new bank.
The growth of digital banking in India will give consumers a wider choice and better value for money while bringing the benefits of financial inclusion to all. While traditional banks still command a vast share of the consumer market, SMEs and institutional customers are likely to increasingly rely on Neobanks for their unmet credit needs.
The evolution of India’s banking sector shifted into top gear with the RBI liberalising bank licenses for corporates in 2016. Incidentally, this was also a time of change for the banking industry globally as European FinTech startups introduced Neobanking services for the first time.
Over the years, a number of Indian financial services startups have set up neobanking services, backed by Venture Capital (VC) funds. Mainstream banks are also actively exploring tie-ups with Neobanks to increase market share even as they continue to develop their digital banking solutions.
The arrival of Neobanks is poised to change the banking landscape in the country with customer experience becoming the key to success. To this end, banks across the spectrum are already rethinking the way they do business with an eye on the big prize: customer loyalty and revenue growth.
Here’s Why Neobanks are Better than Traditional Banks
If traditional banks expected customers to visit a branch multiple times to open an account, digital Neobanks only require them to fill an app-based opt-in form! In terms of the total time you can expect to spend at a branch, there is simply no comparison between the two.
According to a report by the RBI, customers end up spending nearly 7.5 hours on average to complete account opening formalities in a bank branch. This includes time spent filling forms, collecting documents and getting them verified by the bank’s clerical staff.
With Neobanks, all you need is Aadhar and PAN information to open an account. Through Aadhar linked e-KYC, Neobanks let you open a savings or current account in a matter of minutes. The in-app interface supports biometric identification with features such as facial recognition and identity verification.
For SME customers, Neobanks offer faster access to loans by leveraging advanced AI-based risk assessment tools while fully complying with Anti Money Laundering (AML) and other lending regulations specified by the RBI.
As discussed above, low fees are important criteria that customers look for today. Traditional banks have high operating costs in the form of labour and rent incurred on maintaining branches and ATMs. These costs are passed on to customers in the form of charges for services like account statements, chequebook, transaction alerts, debit/ credit cards, etc.
Although things like transaction alerts are important from a security point of view, the average customer ends up paying charges on an on-going basis which adds up to hundreds of rupees in extra fees over a period of time.
Neo banks operate on a digital-only model which allows them to offer high-interest rates and no monthly fees. Customers can avail of a wide range of services including international money transfers and travel insurance with their digital Neobank account. Since Neobanks are partnered with a traditional banking partner, they leverage the latter’s extensive physical infrastructure to deliver services.
While traditional banks offer standardised services for a broad audience, there is not much attention given to niche customer needs. The segmentation strategy used by traditional banks is coming under pressure due to falling profits and increased regulatory oversight.
Changing customer demographics, growing disposable incomes and a shift towards digital banking have made traditional product positioning strategies less effective. Traditional banks do little to address the long term financial needs of customers relative to their lifestyle aspirations and level of financial awareness.
Neobanks use historical account information and data analytics to recommend products to customers. The app interface includes a host of statistics and insights that can be leveraged by customers to identify products that will best suit their needs.
A growing number of millennials feel that they are capable of making their own investment decisions. Neobanks leverage customer profiles based on values, personality characteristics and interests to position products rather than relying only on demographics such as age, income levels, and education.
24X7 Customer Support
Neobanks provide round the clock customer support to its customers through the use of chatbots and robo advisors that provide automated recommendations to users based on their transaction histories. Artificial Intelligence (AI) based algorithms make it possible for neobanks to tap evolving customer needs and provide personalised solutions that best fit their needs in an unobtrusive manner.
Although traditional banks currently provide integrated omnichannel customer support, they take a generic ‘one size fits all’ approach to cross-selling or upselling based on predefined parameters. Relationship managers at brick and mortar banks rarely establish enough rapport with customers to truly understand their financial needs in order to provide tailored solutions.
At a time when the average Customer Lifetime Value (CLV) for consumer banking products is shrinking, this can have a huge impact on key performance indicators such as Net Promoter Score (NPS).
Advanced Security Features
Security is one of the key areas of concern for customers using digital banking products. Data protection regulations require banks and financial institutions to secure customer information from unauthorised access.
FinTech apps have multiple redundancies built in to ensure that users can operate their accounts in complete privacy. In addition to two-factor authentication, neobanks have implemented advanced Role-Based Access Control (RBAC) logic in their apps to prevent malware attacks. However, they are not completely immune to third party interference.
Since cyber threats are always evolving, traditional banks and neobanks need to evolve a comprehensive data protection architecture that is compliant with the latest encryption standards. A successful data breach can invite regulatory as well as civil liability for victim banks worth crores of rupees. The reputational risk is also grave.
Since many neo-banks partners with their traditional counterparts to offer services to customers, a cohesive cybersecurity strategy is imperative.
Neo banks are clearly the future of banking as we know it. Thanks to their unwavering customer focus, they have been able to carve a niche for themselves in a relatively short span of time. However, traditional banks are not going away anytime soon.
By seeking opportunities for collaboration, traditional banks can leverage their scale to bring a digitised suite of offerings to consumers. On the other hand, neobanks can bypass licensing restrictions to innovate further.
Finezza is a leading lending lifecycle and credit evaluation platform that helps banks and NBFCs streamline and optimise their performance. Contact us today at firstname.lastname@example.org to learn more about our customised solutions.