neobanks: Explained: Neobanks, the next evolution of banking
Many might 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 give customers a cheaper alternative to traditional banks. You could think of them as digital banks without any physical branches, offering services that traditional banks don’t, and doing so efficiently. They leverage technology and artificial intelligence to offer personalised services to customers while minimising operating costs.
In India, these firms don’t have a bank licence of their own but rely on bank partners to offer licensed services. That’s because the Reserve Bank of India (RBI) doesn’t allow banks to be 100% digital yet (though some foreign banks offer digital-only products through their local units.) The RBI remains unwavering in prioritising banks’ physical presence, and has spoken about the need for digital banking service providers to have some physical presence as well.
Neobanks vs traditional banks
Traditional banks have many advantages over neobanks, such as funding and — most importantly — customers’ trust. However, legacy systems are weighing them down and they find it difficult to adapt to the growing needs of a tech-savvy generation.
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While neobanks don’t have the funds or customer base to overthrow traditional banks, they have something special in their arsenal — innovation. They can launch features and develop partnerships to serve their customers much more quickly than traditional banks.
Neobanks cater to retail customers, and small and medium businesses, which are generally underserved by traditional banks. They leverage the mobile-first model to differentiate themselves by introducing innovative products and providing superior customer service.
Venture capital and private equity investors have been keeping a keen eye on the market opportunities for such banks and are taking an increasing interest in them. India’s neobank startups raised more than $230 million in 2020, according to a report by a fintech research firm.
As of 2020, India had a smartphone penetration rate of 54%, which is estimated to increase to 96% by 2040. Even though 80% of the population has access to at least one bank account, financial inclusion levels are yet to improve, according to a September 2021 PwC report.
Challenges for neobanks
The size of the global neobanking market is expected to hit $333.4 billion by 2026, at a compound annual growth rate (CAGR) of 47.1%. But like all financial institutions, neobanks have their pros and cons. The key to their success lies in fulfilling the needs of a segment of the market, and adopting the right technology, business strategy and work culture.
But none of these are as crucial as building trust. Neobanks are at a disadvantage here when compared to traditional banks. Hence, models such as freemium subscriptions and memberships are common in neobanking in India, as they allow customers to experience the service before paying for it.
India’s top neobanks
Launched: November 2018
Predominantly for business owners and online merchants to automate manual, repetitive financial tasks and provide insights into money flow. Simplifies payouts, offers credit solutions, provides ledger support on current accounts.
It provides services such as money transfer, cash withdrawal, savings account and NFC-enabled prepaid cards for individual bank customers. It offers a dashboard for monitoring transactions and viewing balances.
Offers zero-balance accounts with facilities such as salary advance and free accidental death insurance. Also offers forex cards and tax-saver cards that help users track, manage and claim employee benefits.
Open is a neo bank for businesses and startups that offers services such as deposit accounts, money transfers, debit cards for online/offline purchases, expense management and invoice management.
Offers digital banking services for individuals, such as savings accounts, prepaid cards, bill payments and money transfers. It also allows savings with interest and insights on money management.
Pros of neobanks
Low costs: Fewer regulations and the absence of credit risk allows neobanks to keep their costs low. Products are typically inexpensive, with no monthly maintenance fees.
Convenience: These banks offer customers the majority (if not all) of banking services through an app.
Speed: Neobanks allow customers to set up accounts quickly and process requests speedily. Those that offer loans may skip the usual time-consuming application processes in favour of innovative strategies for evaluating your credit.
Cons of neobanks
Regulatory hurdles: Since the RBI doesn’t yet recognise neobanks as such, officially customers may not have any legal recourse or a defined process in case of an issue.
Impersonal: Since neobanks don’t have a physical branch, customers don’t have access to in-person assistance.
Limited services: Neobanks generally offer fewer services than traditional banks.
Ashwin Manikandan contributed to this story.