NeoBanks – The Relatively New Kid on the Block

-Penned by Rajdeep Sil and Shelly Singh

Right from the era of traditional banking, practices such as going to the bank for every little thing, many of such facilities have now become a cakewalk with the advent of technological advancements and all such facilities are now offered by neobanks

WHAT ARE NEOBANKS?

Put very simply, Neobanks are the new-age type of direct banks that operate entirely online without the traditional brick and mortar network. Technically speaking, the Neobanks are primarily fintech firms providing digital and contact-less financial solutions and services to modern tech-savvy customers. Some of these services include opening and monitoring savings accounts, payments, money lending, and money transfers taking place through online platforms and apps. In a broader sense, Neobanks are here to reinvent the processes and practices that have been associated with the traditional banks. This is brought about by the use of new-age technologies such as the Cloud and Data Analytics, which helps increase the efficiency of the entire process.

Since NeoBanks manages to conduct the entire banking process online, this allows them to save the expenses that a traditional bank would incur. At the same time, their focus is fixated on ensuring a unique customer experience by offering seamless and paperless operations and customized products and services. Keeping in mind the nature of their operations, Neobanks tend to be more agile in their way of business. Their main target segments are the niche customer segments such as SME’s, Millenials, low salaried individuals, which generally are not the main focus of traditional banks.

HOW DO NEOBANKS OPERATE?

Since NeoBanks operate solely in an online mode without any physical branches, technology is their primary asset. However, apart from technology, there are certainly more aspects that govern their mode of operation in India. The main factors are discussed below :

1. Technology :

State of the art technological infrastructure is at the heart of all the NeoBanks. Especially technologies such as artificial intelligence, data mining techniques, mobile applications, application programming interfaces help Neobanks achieve superiority in digital transactions while representing the customer convenience and speed that banking in the digital age promises.

2. Collaborating with Traditional Banks :

With NeoBanks having only an online presence, coupled with the fact that the regulatory bodies not permitting full-fledged licences to the NeoBanks for their operation, Neobanks often have to collaborate with the existing traditional banks to function. Even while continuing with the collaboration with the traditional banks, neobanks can continue to offer their personalized services to the customers, which is not biased with respect to the bank that they have collaborated with.

Examples :

3. Working with Local Partners:

Neo banks may also team up with local shops to offer last-mile physical presence to facilitate over the counter transactions.

NOTE:

Neobanks do not replace traditional banks for all customers. Some neobanks allow you to link your traditional bank accounts to the neobank so you can enjoy the best of both worlds.

IS NEOBANK ANY DIFFERENT FROM A TRADITIONAL BANK?

Since the time the traditional banks have been established, they have evolved and have bifurcated their business operations into siloed departments. Consequently, their systems, processes and culture all function as distinct entities. While the traditional banks have heavily employed the common “physical touch model”, which basically means the conventional style of a feet-on-street sales force, physical branches, and physical distribution channels as part of their day-to-day operations, Neobanks have adopted an entirely different approach. Neobanks have mainly modelled their business on scalable open platforms, resembling that adopted by giants such as Netflix or Airbnb, and at the same time have laid significant emphasis on improving the customer experience.

Here is presenting a comparative study:

	Traditional Bank	NeoBank
Service Platform	Physical Banking Institution	Primarily Digital Apps
Time Established	Decades ago	Within the last five years
Support	In-Person, Telephone	Telephone, Online, In-App, ChatBot
Fees	Complicated, Ongoing costs	Transparent, Few Costs
Banking License	Full	None, partial or full
Bank Branches	Yes	No
Approval Processes	Lengthy, Manual	Quick, Automatic

ADVANTAGES OF NEOBANK:

Since Neobanks are completely digital in their operations, this enables them to offer multiple benefits ranging from monetary benefits to improving the banking experience. Some of the benefits are listed below :

1. Hassle free Account Creation: It is quite well known about the hassles that one has to go through while creating an account in a traditional bank which includes factors like multiple visits, incomplete documents at every stage etc. Although the process has simplified greatly over the years, yet the rigidity still remains.

With NeoBanks, the process is shifted completely online, and every step of the process can be completed right from the comfort of the home within a very short duration of time.

2. User-Friendly Interface: NeoBank’s primary goal is on improving the customer experience, and a major factor where this goal is achieved is by enhancing the UI/UX of the application. NeoBanks have invested heavily invested on this aspect so that not only is the responsive interface improved, but the convenience of interaction with the application is also improved with the usage of technologies such as Big Data for faster processing of data, NLP for implementing the chatbot facility and many more.

3. Broadened Service deck: Almost all the NeoBank’s application showcases the feature of displaying all the relevant financial information in the form of the customizable dashboard so that the customer can be made more aware of the financial situation.

4. Lower Fees: Focussing solely on making the operations digital has allowed the NeoBanks to avoid incurring any costs related to the physical establishments, which forms a good part of the expenditure of the traditional banks. Due to this saving in costs, NeoBanks can afford to give good quality of service to the customers at relatively inexpensive fees.

For crucial services such as ATMs, NeoBanks partner with the existing traditional banks to use their ATM services in lieu of a certain amount of rent. This also saves the NeoBanks the amount that would have gone into the maintenance and operation of the ATMs.

5. Enhanced Security Features: Security is and always will be the most concerning factor when it comes to digital transactions. Neo bank application implements 2FA (2-factor authorization), Biometric verification, RBAC (Role-Based Access Control), encryption technology along with other security measures to protect customer data.

CHALLENGES FACED BY NEOBANKS CURRENTLY:
Finding the most appropriate Traditional Bank partner
Missing out on the Senior Citizen customer segment due to the intensive tech usage.
Possibility of stricter regulatory compliances being unveiled in Neobanks.
Creating awareness among the population about the utilities.

ROLE PLAYED BY NEOBANK DURING COVID-19

Apart from the transactions, one of the financial operations that needed immediate action to keep business afloat during the pandemic was quick access to capital.

MSMEs relied heavily on traditional banks to fulfil their needs of working capital. While securing loans was never an easy task, the pandemic only made it worse for small businesses.

The Indian Government did release many relief measures to uplift businesses during COVID-19, such as the Emergency Credit Line Guarantee Scheme (ECLGS).

Sadly, it wasn’t of much help.

That’s where NeoBanks proved to be the messiah for small businesses.

The alternative credit options provided by NeoBanks uniquely cater to the needs of SMEs & MSMEs during COVID-19 & beyond.

=> Real-Life Incident:

GroSuper, a Bangalore based startup, grew its business by 2X in the last six months with the help of Razorpay.

With uncertain sales, GroSuper could not pay vendors on time, which posed the threat of losing out on the inventory that was pivotal to GroSuper’s business.

To cater to this situation, RazorpayX provided loans by pre-approving businesses on past consumer transactions rather than a credit score or collateral, which was precisely what GroSuper needed to keep their business thriving during the uncertain times of a pandemic.

REGULATORY HICCUPS

In India, even today, virtual banking licences for NeoBanks are still not granted. The Reserve Bank of India(RBI) remains adamant in making it important for the banks to have a physical presence and lately reinforced the requirements for digital banking service providers to have some physical presence to go for a banking license.

As per RBI’s viewpoint, there is a need for the licensed banks to have brick-and-mortar branches so as to serve customers and redress their disputes and grievances in person.

As a result, neobanks have to work around new ideas to address these regulatory predicaments. In the current scenario, NeoBanks have to create strategic partnerships with the traditional banks to operate on their approved licenses, and for the same, they will be providing amplified services on behalf of.

Thus, for the end customer, very often, the financial and banking services are offered by the neobank, but from a regulatory perspective, monetary transactions are managed by their partner banks.

JUST A FIZZ OR HERE TO STAY?

The driving factors for NeoBanks in any part of the world will include offerings like accessibility, cost-effective multiple banking and financial functionalities under one umbrella, as well as personalization.

However, with the prevailing regulatory hurdles, NeoBanks have to limit their functionalities to a certain extent and have to work in tandem with the traditional partnering banks. Nevertheless, keeping narrow targets initially during this phase and working on the technological aspects, Neobanks can expand by adding more functionalities and services over time to consolidate their position further.

As a great morale boost to the NeoBanking community, from the graph below, it can be inferred that more and more people are getting ready to switch to the digital mode of finance. Thus, if explored properly, NeoBanks have plenty of opportunities in the market, but again it depends on their approach to the solution.

However, in the current situation, even with the hurdles, NeoBanks is definitely gathering momentum but still are yet to show sustained profitability. Nonetheless, they have great potential to be disruptors in banking and financial services.

With the increasing competition among traditional banks, new-age technological firms and non-banking entrants, it is yet to be seen whether the market is deep enough for NeoBanks to grow sustainably and equitably.

How NeoBanks go about the vital impediments in terms of regulation and compliance, data and cyber security, seamless API integration and expansion of their product portfolio and services will be the fundamental determinants of their success.