The banking sector has seen many new changes and developments in the recent past, especially with the increased focus on the digital economy and the changing consumption patterns of the citizens. Today, a majority of transactions are carried out online and the need to visit a bank branch for regular banking transactions is virtually eliminated. Many from the younger generation have not even visited their home branch and carry out all the basic banking functions online. The latest revolution in the banking sector is the neo banks. These banks have broken the wheels of the traditional banking system and created a dynamic space for modern banking.
Given below is the meaning of neo banks and the key details of the same.
What is the meaning of neo banks?
The concept of neo banks is new and dynamic in the banking industry. To put it in simple words, neo banks are digital banks without a network of physical branches. The entire banking process is online through digital or mobile-based banking solutions. These banks meet most of the banking needs like making payments, personal finance solutions, money transfers, lending, etc.
Neo banks cater to the retail and SME (Small and Medium Entreprises) category of customers and aim to provide tailor-made products to meet the dynamic needs of their customers. In India, neo banks may or may not have full-fledged banking licenses on account of their 100% digital banking. In the latter case, neo banks will have to depend on the traditional banking giants in the country like HDFC, ICICI, Kotak, etc. as their banking partners and have a tie-up of their technology and artificial intelligence to provide customized banking solutions.
What is the need for neo banks?
India has been gradually moving towards a digital economy over the few past years. The vision of the digital economy was given a further push in the demonetization era as well as the introduction of UPI as a payments interface. Furthermore, The Indian start-up sector has generated many unicorns in the fintech space that have become global names over time. This growing importance of the fintech sector and the need and reliance on digital banking has given rise to the neo banks in the country.
The average Indian today is making more online payments than relying on cash for their basic needs to bigger financial transactions. The growth of giants like PayTM, Google Pay, Phone Pe, Bharat Pe has shown the categorical shift in the banking expectations of the consumers and has further increased the presence of neo banks in the country.
What are the advantages of neo banks?
The key advantages of neo banks that have contributed to its rise are mentioned below.
- Hasslefree account opening
Traditional banking systems have a very cumbersome account opening process even in the current dynamic banking scenario. Neo banks are a better alternative to the traditional banking system as they do not have a tedious account opening process. Customers can open their accounts instantly and also avail the advanced benefits available with the neo banking system.
- User-friendly interface
The USP of the neo banks is the smoother customer experience and hassle-free banking services. Neo banking is app-based and removes all the glitches often experienced by customers, especially in the digital banking of public sector banks. The ease of use ensures a wider acceptance from the users and a better banking experience.
- Lower costs
The costs of operating a neo bank are quite less as compared to traditional banks as the need for physical branches and related infrastructure is eliminated. This is also reflected in the banking costs for the ultimate consumers in the form of reduced banking costs. The reduction in banking costs is often translated into the form of higher interest for the customers which is an added advantage.
- Faster loan processing
One of the unique features of neo banks is the faster loan approval and disbursal. Customers need to meet the basic KYC requirements and some are also eligible for pre-approved loans. Neo banks usually have a structured process for online verification and KYC submission that reduces the time taken for processing the loan as well as qualifying for the same. Therefore, customers can benefit from the availability of instant loans.
- Better technology and security
Fintech platforms have technology and security as their greatest advantage. The level of security therefore available on the neo bank platforms provides a safe and secure banking experience and many layers of security that is a necessity in today’s digital banking in the form of passwords, biometric verification, encryption, 2-factor authentication, etc. The USP of neo banks in the face of technological advancements is the use of AI (artificial intelligence), cloud analytics, and robotic process automation (RPA) which make it a unique banking experience for the average customer as well as mitigate any potential threats of data breach and malware.
Challenges of neobanks
Some of the key challenges faced by neobanks in India are highlighted below.
- Regulatory challenges
Neo banks are not as tightly regulated as traditional banks including obtaining a banking license from the RBI along with adhering to the various compliance regulations like maintaining mandatory ratios and capital base, etc. Therefore, it can create many legal issues for the banks as well as the customers. In order to find a solution to this issue, many neobanks tie up with traditional licensed banks in order to win customer trust.
- Lack of funding
One of the prime challenges of neobanks is the capital needed by the bank to establish themselves and also aid in customer acquisition. There is a severe lack of interchange on payments processed through these platforms, the majority of which are now through UPI. This lack of revenue sources further adds to the huge capital requirement to sustain in the competitive market and eventually grow.
- Technological challenges
Neo banks rely heavily on technology and therefore they must be backed by robust systems to ensure the security and privacy of customer data and hassle-free execution of transactions. This can be a significant challenge, as cyber threats are becoming increasingly sophisticated. Many banks that have partnered with traditional banks also face the challenges of obsolete or slow technology used by them which hamper the progress of these digital only banks.
- Limited awareness and lack of trust
Neobanks are still considered to be at a nascent stage in India as the majority of the population still relies on the traditional banking model despite the increasing digital push across the country. Therefore, one of the biggest challenges for neobanks is limited awareness among potential customers and the lack of trust in digital-only banks which lack human interaction.
- Competition with established banks and financial institutions
Another significant challenge faced by neobanks is the huge competition from established banks that have a wide customer base across the country and deep pockets to navigate the economic and market uncertainties.
What are the basic differences between traditional banks and neo banks?
Traditional banking and neo banking have their own set of pros and cons. The key factor that differentiates between them is the hybrid presence in the form of physical as well as online for the former and a complete digital presence of the latter. The other differences between the two are highlighted below.
|Category||Traditional banks||Neo Banks|
|Popularity||Traditional banks are more popular on account of better accessibility, awareness, and connectivity||Neo banks do not have this advantage as they are relatively new to the Indian market and do not have any physical presence.|
|Non-banking services||Traditional banks have established businesses and offer many non-banking services locker facilities, personal banking, relationship managers, factoring services, Demat accounts, ATMs, etc||Neo banks do not offer such non-banking services and hence, they are not preferred by customers who require a complete banking experience.|
|Banking license||Traditional banks have a clear banking license and enjoy the trust of the customers on account of their physical presence and better regulations imposed on these banks by the RBI and the parliamentary act, Banking Regulations Act.||Neo banks do not have this benefit as they are not directly regulated by the RBI or come under the purview of the Banking Regulations Act.|
|Popularity among the younger generation||Traditional banks are more popular with the older generation||The technology-driven format of the neo banks makes it popular among the younger generation but the older generation may not find it convenient.|
|Technology-driven format||Traditional banks have digital banking facilities but the technology may not be as sound as neo banks, especially in the case of public sector banks.||The app-based functions backed by the latest technology make neo banking a smoother and better banking experience as compared to traditional banks that may not be technologically as efficient and face many glitches giving the ultimate customer a bad banking experience.|
Neo banks are said to be the future of banking not only in India but across the globe. The Neo banking sector is expected to grow at a CAGR of 53.4% between the period 2022-2030 which is unprecedented growth for any sector. This assures that neo banks are here to stay but they do not have the framework and the structure to replace the traditional banking modal.
No neo banks are not the same as digital banks as they are online portals of traditional and established banking businesses to provide the customers with a better banking experience. Neo banks on the other hand are completely online.
The top neo banks in India include Razorpay, Jupiter, Fi Money, Kotak 811, Instapay, Niyo, etc.
Neo banks are a relatively new concept in the country and have been available for almost a decade.
Neo banks are not directly regulated by RBI but they are answerable to the apex bank for their operations. RBI has indirect control over neo banks through the network of their partnership with traditional banks that have a valid banking license.
Yes. Neo banks, although do not have a banking license, the money in the customer’s account with the neo bank is secure as it is parked with the partner traditional bank that is under strict banking regulations of RBI. Hence, it is safe to open an account and deposit money in neo banks.