Neo-banks are revolutionising the financial technology industry as we know it by helping to close the gap between the services provided by traditional banks and the ever-changing expectations of clients living in the digital era.
What are Neo-banks?
- Neo-banks are financial technology (fin-tech) enterprises that only conduct their business online or through mobile applications and are not traditional banks.
- Neo-banks are online banks that don’t have any physical locations and offer services that conventional banks don’t.
- In India, these companies do not have their own bank licences; rather, they rely on bank partners to supply permitted services. This is because the Reserve
- Bank of India (RBI) does not yet permit banks to be 100% digital (though some foreign banks offer digital-only products through their local units).
What are the advantgaes of neo-banks?
- Low costs – Fewer regulations and the absence of credit risk allow neo-banks to keep their costs low. Products are typically less expensive, with no monthly maintenance fees.
- Personalised services– These banks offer customers personalised services according to the needs of customers by leveraging technologies
- Speed – Neo-banks allow customers to set up accounts quickly and process requests speedily. Innovative strategies are employed to determine the credit value of the person while offering loans thereby cutting the usual time-consuming verification process.
Can Neo-Banks replace traditional banks?
- Not entirely. Neo-banks offer only a small range of products and services as compared to a whole gamut of services that traditional banks offer.
- Besides, since neo-banks are highly digital focused, they may not be able to cater to the banking needs of non-tech savvy consumers or people from the rural parts of the country, who believe in face-to-face interaction with their financial custodians.
- As of 2020, India had a smartphone penetration rate of just about 54 per cent.
How are Neo-Banks are different from other types of banks?
- Neo-banks leverage technology and artificial intelligence (AI) to offer a range of personalised services to customers, whereas traditional banks follow an omni-channel approach through both physical (branches and ATMs) and digital banking presence. Neo-banks leverage technology and AI to offer personalised services, whereas traditional banks follow an omni-channel approach.
- Neo-banks are propelled by innovation, which allows them to launch services and build partnerships to serve their clients more quickly than traditional banks. Neo-banks don’t have the capital or customer base to overthrow traditional banks, but they do have the ability to deploy features.
- Neo-banks are designed to meet the financial needs of retail clients as well as those of small and medium businesses, which are typically not well met by traditional banks.
- Investors in venture capital and private equity have been keeping a close eye on the potential market opportunities presented by such banks and are showing a growing interest in those banks rather than traditional banks.
- Neo-bank vs Digital bank- There are some key differences between a digital bank and a neobank.
Neo-banks are primarily present online and do not have any physical branches, whereas digital banks are typically the internet-only subsidiary of an established and regulated participant in the banking sector. Independently or in conjunction with traditional banks, digital banks may also operate as neo-banks.
What are the pros of neo-banks?
- Low costs – Fewer regulations and the absence of credit risk allow neo-banks 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 – Neo-banks 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 the credit.
What are the challenges that they face?
- Digital illiteracy – Since neo-banks are highly digital-focused, they may not be able to cater to the banking needs of non-tech-savvy consumers or people from the rural parts of India.
- Mobile penetration – As of 2020, India had a smartphone penetration rate of just about 54% which will exclude the rest of the people from neo banks purview.
- Services offered – Neo-banks offer only a small range of products and services as compared to a whole gamut of services that traditional banks offer.
- Building trust – Unlike traditional banks, neo-banks don’t have a physical presence, so customers cannot literally bank upon them in case of any issues/challenges.
- Hence, models such as freemium subscriptions and memberships are common in neo-banking in India, as they allow customers to experience the service before paying for it.
- Regulatory hurdles – Neo-banks are yet to be recognized by the RBI.
- Due to the absence of enabling regulations, neo-banks cannot accept deposits or offer lending products on their own books.
- Dependence on other financial institutions– Some fin-techs have a non-banking financial company (NBFC) as their parent to engage in lending activities while most others partner with banks and financial institutions.
- Hence, neo-banks can complement traditional banks but cannot replace them.
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