Neo Banks – Disrupting The Traditional Banking Landscape

Recent years have witnessed a massive drift in the financial sector. Indian customers are embracing digital means of transactions and moving away from traditional banking methods. The integration of technology and banking services has changed the banking landscape, making transactions quicker, cheaper and more customer-oriented. One of the latest buzz words in the fintech sector is ‘Neo Banks’

What is Neo-banking?

Neo banks are like digital banks, with an entirely online presence. These are fintech firms that leverage technology and artificial intelligence (AI) to provide personalised services to their customers. They provide complete digital banking experience through mobile applications.

How do they operate?

Neo-banks can be classified under 3 different categories depending on their style of operations –

1. The first type features those non-licensed fintech companies that have partnered with a traditional bank. Usually, these banks have outdated infrastructure and legacy systems. Neo-banks put a layer of its digital services and products over these legacy systems to make banking services flexible, accessible and scalable.
2. The second type is when a traditional bank launches its digital-only initiative in the form of neo-banks.
3. The third type is the neo-bank that has its own digital banking licenses. However, these type of neo-banks exist only in those countries that permit stand-alone digital entities. (Currently, RBI does not provide banking license to any entity which does not have a physical presence)

How are Neo-banks regulated?

The Indian regulatory regime does not allow for the grant of virtual banking licenses. RBI (through its 2015 circular) has mandated the requirement for digital banking service providers to have some physical presence. As a result, neo-banks can provide banking related services only by partnering with licensed banking institutions and non-banking financial companies. RBI has also issued circulars in 2006 and 2010 which deal with outsourcing of financial services by banks and use of business correspondents by banks, which are relevant for neo-banks

In addition to these, since neo-banks are in possession of users’ personal data, they need to comply with India’s Information Technology Act & Rules.

Regulations:

1. Neo banks must be constantly monitored and evaluated by their partner banks.
2. The Reserve Bank of India reserves the right to monitor and track neo bank features and processes.
3. The Reserve Bank of India has complete access to a neo bank’s records of transactions and accounts.
4. The KYC regulations as followed by traditional banks when opening an account must be followed by neo banks.
5. Neo banks should be able to address grievances on time just as their traditional partner banks are obligated to do.
6. Payment/ Settlement: Like their partner banks, Neo banks must adhere to the provisions of Payment and Settlement Systems Act of 2007.

Why Neo-Banking?

While the earlier generations might be satisfied with the traditional banking system, the tech-savvy new generations are an impatient lot and want things done at the click of a button. Some of the key benefits associated with neo-banks are:

1.  Hassle free account opening: Since neo banks do not have a physical presence, opening up an account can be managed online / over an app within a few minutes by performing a couple of simple steps.
2. International transactions: Traditional banks do not always issue a card with which we can transact internationally. We might have to request for this facility / request for an upgrade. However, with neo banks you can execute international transactions or transact while you’re abroad, seamlessly.
3. User friendly interface: Neo banking is all about being a customer friendly facility which is easy to understand & operate and easily accessible. While in traditional banking you might spend time reaching out to customer support executives, in neo-banking you can simply contact the neo-bank representative through digital mediums. The issues are resolved much faster and require fewer efforts from the user.
4. Cost effective: Since there’s no physical infrastructure involved, the transaction costs are a fraction of those charged by the traditional banks, thereby offering cheaper banking solutions
5. Holistic view of your finances: Neo banks provide you with expense reports, investment data,  to give you insights into your spending patterns and help track and budget your spending.
6. Value added services: Neo-banks do not restrict themselves to just enabling faster banking transactions. By leveraging technology, the neo banks have started offering commission-free mutual funds, expense management tools, instant loans, and other financial planning mechanisms with a customer-centric focus. Chatbots and AI are making it possible to analyse customer patterns, credit history, and other data to create realistic data models for recommending financial services based on customers’ lifestyle choices.

These neo banks are creating specialised offerings that concentrate on the under-served demands of blue-collar employees and MSMEs, which is the path forward and a much needed impetus in the current situation.

How safe is Neo-banking?

Security is the number one 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. The applications are built to ensure compliance with anti-money laundering laws, complete privacy of customers and to prevent malware attacks.

Which are the Neo-banks in India?

InstantPay, Niyo, Open, Fi Money and RazorpayX are some of the major players in this segment.

There are more than 12 neo banks in India currently, and few more are in the process of entering the market.

Growth Prospects:

• The global neo banking market size was valued at USD 66.82 billion in 2022 and is expected to grow at a compound annual growth rate (CAGR) of 54.8% from 2023 to 2030.
• In India, Transaction value is expected to show an annual growth rate (CAGR 2023-2027) of 17.77% resulting in a projected total amount of USD131.80bn by 2027
• The average transaction value per user in the Neobanking segment amounts to USD 4.97k in 2023.

About the Author

Darshana Chauhan

Senior Associate | darshana.c@treelife.in

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