If you’re seeking a more modern and tech-enabled banking experience, you may want to explore neo banking for your money management. With the growing need to expand financial services, serve the underbanked and bring down banking costs, neo banks have emerged as the most exciting fintech trend in recent times. Their services range from mobile-only checking and savings accounts, to online lending, budgeting, and more. All of this, without a physical presence. The sector is generating significant buzz – a PwC report on neobank quotes an estimated CAGR at over 46% between 2018 and 2026. In this post, we unveil the reality behind the neo banking hype.

The Basics of Neo Banking

While digital banks are a traditional banks’ online arm, neo banks are independent and digital-only entities. Neo banks do not have a physical presence. So customers cannot walk in to resolve their problems. Relying on a party for your finances needs time to build that trust currency. Neo banks seek to address this challenge by relying on the simple, yet robust and reliable digital interfaces. These interfaces are critical to ensuring an equivalent, if not better customer experience vis-à-vis traditional banking, that often involves more manual experiences. To succeed, Neo banks must provide 24×7 customer support and generate a higher Customer Lifetime Value (CLV).  Therefore, processes like Aadhar linked e-KYC and biometric identification (with features such as facial recognition and identity verification) are crucial drivers at a neo bank today. 

Are Neobanks Safe?

Many tech savvy millennials have already moved almost exclusively to digital payments. However, when it comes to migrating to neo banking as your default option, trust can be an understandable area of concern. But as long as you’re doing your due diligence, you shouldn’t have much to worry about.  Neo banks operate in a regulated space, with licenses from the RBI. In India, payments banks are the closest model to 100 percent digital banks. They are a legal entity allowed to operate as an authorised deposit-taking institution. 

It’s also important to note that many neo banks providing relatively higher interest rates when compared to traditional and conventional rivals are currently not offering loans, credit cards or money management solutions such as future dated and recurring payments.  They use advanced Role-Based Access Control (RBAC) logic to prevent malware attacks. 

The Advantages of Neo Banks 

  1. Lower transaction Costs: With lesser overheads, transaction fees can be significantly lowered –  a benefit that can be passed on to customers in the form of higher interest rates on deposits and other products. Getting 4% on your deposits from your traditional retail bank? You can expect noticeably more from your neobank.
  2. Seamless Customer Experience: Convenience is the highlight of neo banks. With loan approval, instant payouts, one-click account management, etc. all delivered via technology, neo banks can be a significantly faster experience for most consumers. They can even offer personalized AI concierge services. 
  3. Personalised Financial Products with Analytics and AI: A deep reliance on technology to operate opens up interesting opportunities to study customers’ spending behavior and actions, often thanks to advanced AI and ML algorithms. This can be further used to offer personalised services. 
  4. Transparency: Neo banks offer balance tracking in real time, and eliminate pending payment worries. The more we move away from manual processes, the more likely we are to enjoy transparency in all operations. Neo banks are a great example.

The Challenges of Neo Banks

  1. Absence of In-Branch Services: While millennials may prefer digitised solutions over traditional financial setups, most baby boomers still prefer to deal face-to-face when negotiating significant financial business. This is more common for financial services for businesses. Neobanks can’t provide a sit-down meeting at a physical branch like the conventional banks, and this may be potentially problematic for some segments of the market.
  1. Variety of Service Options: There may be a lot that the neo banks may offer in future. However, a good chunk of it will depend on the regulatory environment and licenses. Traditional banks are able to offer a broad spectrum of services, such as term deposits, home loans, etc. which neo banks are currently unable to provide, due to their smaller scale and limited regulatory flexibility.

Neo Banking: The Future of Banking

While neo banks have been generating significant buzz already, with the current norms of social distancing likely to continue in the future, neo banks are now more favorably positioned than ever to have their presence felt in the financial sector. Mobile card processing, online payments, loan approval and disbursals will replace traditional banking for a large set of customers. 

Neobanks are going beyond the general banking offerings (of a deposit account, debit card, and payments) and focusing on customized features for specific target groups. The outlook is bright and expansive for niche user segments. This includes provision of services such as:

  • Support with tax calculations
  • Withholding, employee benefits; 
  • Customer-driven features such as zero or low overdraft rates, fees; 
  • Support needed in managing accounts receivable and payable and expense monitoring; 
  • Invoicing and automated bookkeeping; 
  • Customized support on access by power of attorney, custodianship, familytrust, wealth preservation, retirement benefits, etc. 

The shift to neo banks may also be a result of larger banks losing the trust of consumers and entrepreneurs. This is due to the market approach of most banks, which are sales or commercially led instead of being product and customer led. The key to being customer centric is centred around data and giving back to them in multiple forms.

Indian neo banks have raised more than $90 million from venture capital investors over the last year. The banking value chain is fragmenting into product ownership and distribution. Neo banks are capable of both. With crowded payment segments and lending platforms up against the realities of India’s tight credit markets, the buzz, the money, and most importantly – the customers, are all set to move in favour of neo banks.