What is Neo-Banking?

Neo-banks are digital-only, branchless banks offering an all-digital banking experience through a mobile app.

From account opening to generating monthly usage summary, neo-banks have completely digitised processes.

History of Neo-banking

Neo-banking was first set in motion in the UK around seven years ago by fintech companies such as Monzo and Atom. But they gained global prominence only around 2017. The word ‘neo’ comes from the Greek word νεος (neos), which means new, to describe fintech based financial providers that were challenging traditional banks.

Typically neo-banks can be classified into two categories:

Those which applied for Independent Banking License

Those which partnered with Traditional Banks for Operations

Are Neo-Banks better than Traditional Banks?

Owing to its digital-only experience, Neo Banks have come up with an innovative model of banking that is challenging the traditional banks. With this global phenomenon quickly transforming the banking sector, what are the factors that have fueled their success?

Comparison of Neo-Banks and Traditional banks

Speed of Operations

Neo-banks are designed to bypass elaborate manual application procedures through quick sign-ups and AI-enhanced verifications, which speeds up the process and saves some valuable time for the bank as well as the consumer.

Fees

While traditional banks are famous for their complicated, ongoing costs, Neo-banks offer a way out. Due to their reduced overhead costs, Neo-banks have lower fees and almost zero monthly charges. Their fee structure is more transparent and displayed up-front.

Value-Added Services

Neo-banks offer a standard set of services like loans, credit cards, prepaid cards, e-wallets, or virtual accounts. Depending on their licences, they also offer specific value added services that are directed towards students, women, or SMEs.

AI Powered Customer Support

In the case of traditional banks, customer support is mostly personal and manual, which makes it slower. Neo-banks use the latest AI-powered technological innovations to offer seamless, round-the-clock customer service supported by chatbots.

Security Features

Neo-banks tend to offer better security features, primarily owing its paperless and cashless nature. Some even implement additional bio-metric authentications, etc. Other features include locking and freezing cards & accounts anytime through the app.

Are Neo-banks poised to disrupt Traditional banking models?

Owing to the boost of numerous start-ups and Fintechs around the world, Neo-banks or digital-only banks have come up to challenge the traditional banking models. Neo-banks have no physical branches and rely on a completely paperless transaction procedure, which is something only a few traditional banks have started to adopt.

Neo-banks are often described as the future of global banking. Personalised offers and specialised features that are powered by AI and machine learning (ML)-enabled automation processes are posing a great challenge to regular banks who are struggling to retain their old customer base.

Challenges faced by Neo-banks

Despite the steady growth of Neo-banks, they are still budding, and there are quite a few hurdles that they have to overcome to truly challenge traditional banks.

Attracting customers and profitability are the primary challenges they face. Being relatively new players, a lot of people are skeptical of trusting a purely digital entity with their hard-earned money. So, security is another important concern.

Another major setback for Neo-banks is that they still can’t offer in-branch services like mortgages, car loans, housing loans, etc. Although with future innovations and ease in licensing, these features may also be up for grab soon.

Regulatory considerations for Neo-banks in India

The apex financial institution of India, RBI, has maintained a stern regulatory framework under which Neo-banks must work. The biggest restriction is the mandatory presence of a physical location within our country borders, which means that neo-banks in India are not truly digital-only and branchless.

Kotak 811 and SBI Yono, although being digital platforms, have actually branched out from existing traditional banks. This has prompted neo-banks to partner with banks, and while they offer the tech-based services, the actual monetary transactions are managed by their partner banks.

Are Neo-banks ideal for SMEs?

Alternate Risk Management

Neo-banks have the same security obligations as their traditional counterparts. Customers are required to submit the KYC documents which help these banks generate customer profile reports as per their past transactions. Owing to advanced technology, neo-banks also have alternative methods for risk assessment, without simply relying on credit scores.

Automating Books of Accounts

Neo-banks are fast, efficient, and easy-to-use. Powered by AI and machine learning (ML), they offer easy solutions to accounting hurdles. Bookkeeping, GST invoicing, bank reconciliation, balance sheets, P/L statements, etc. are easily accessible and mostly automated with the help of neo-banks.

Single Payment Gateway

Neo-banks offer a wide umbrella of financial services through a single app on your smartphone. For the SMEs, it is a single payment gateway solution for all their financial requirements. Another advantage is that these payment gateways are feature-rich and can be seamlessly integrated everywhere.

Accounting, Budgeting, Taxation, Analytics at fractional costs

Neo-banks specialise in delivering all banking services under one roof at fractional costs. Owing to the absence of physical branches and less overhead expenses, their services are charged at very less, without any monthly fees or any withdrawal costs.