Opinion

Neo bank — the new disruptor on the block

Kapil Rana | Updated on March 17, 2021

Leveraging tech for smart banking   -  istock.com/ipopba

These digital, online-only entities provide a variety of services tailored to maximise customer banking experience

Neo banks are digital and operate online, and they do not have any physical branches. They are usually mobile-first, leveraging technology to minimise operating costs and offer a customer-friendly interface.

Though neo-banks may adopt a variety of operating models, these fall under three major categories:

Non-licensed FinTech firms that collaborate with conventional banks to have a mobile/Web platform and a wrapper around their partner banks’ products.

Traditional banks that are undertaking their digital initiatives.

Licensed neo-banks (usually with digital banking licences in those countries that allow it)

There is a range of top financial industry software offering similar or smarter benefits at competitive prices. By choosing the neo-apps that best meet your business requirement, these smart applications can help empower your operations.

Some financial technology (FinTech) start-ups are introducing neo banks for retail clients in India to make banking easy, comfortable, and meaningful. They partner with conventional banks and deliver better solutions with the use of technology such as artificial intelligence and machine learning. Initially, only business clients were targeted by the neo-banks that were introduced in India, including Open by Open Financial Technology and RazorpayX.

Neo banks have created resources that help to move quickly and easily and implement innovations. The benefits of online banking have forced consumers worldwide to accept neo-banks.

The characteristics of neo-banks include convenience, cost-effectiveness, various banking and financial functionalities under one umbrella, and personalisation.

Also, FinTechs create specialised offerings that concentrate on the under-served demands of blue-collar employees and MSMEs, which is the path forward.

Neo banks have changed the business model of traditional banking

But the major pain points of neo banking include: complex IT legacy; inadequate data architecture; higher cost management; lacking advanced technology; and organisational resistance

Consumer experience concerns that financial services firms consider to be trivial not only contribute to customer losses but also spread negative views that can have a direct effect on the image of the business.

The neo bank tends to work as a tech-savvy decision-making model and handle cash more easily and openly. These banks gather and assess data, understand the trends, try to quantify the behaviour of their customers, and then come out with predictions/results.

Neo banks offer wider choices and better customer experiences with the following features: (a) a new account online can be opened in just a few minutes; (b) connecting of existing bank accounts; (c) receive payments immediately with integrated payment gateways; (e) pay bills through multiple options.

Global market size

According to Zion Market Research, worldwide, the neo-bank sector was worth $18.6 billion in 2018 and was projected to grow at a CAGR (compounded annual growth rate) of 46.5 per cent between 2019 and 2026, generating about $394 billion by 2026.

The major players in this segment are InstantPay, Niyo, Open, and RazorpayX.

Although foreign banks are providing digital-only products through their Indian subsidiaries, virtual banking licences are still not issued in India. The Reserve Bank of India recently strengthened the criteria for providers of digital banking services, giving priority to physical presence.

Neo banks are AI-driven and incorporate the entire financial portfolio onto a single platform. It keeps you in the know of your entire banking operations — receipts, payments and transactions — 24x7 and in real-time. When viewing cash status, you can compare your financial balances automatically with your accounts.

There are 10 neo banks in India currently, and a couple of more are in the process of entering the market. ICICI Bank took the lead in the segment and partnered with three neo banks: Free, Instant Pay, and Yelo.

The profit margins of neo banks are slim, and the regulators are encouraging more entrants and competition. There is no room for anyone now, and rivals have started to merge. More M&A activity is expected as the neo sector matures. Neo banks are expected to see higher growth in the SME market.

Trust is vital for innovations like neo banks. If the thought of app-based banks leaves you nervous, rest assured that the regulators have set in place stringent requirements, much like for other financial institutions.

The writer is Founder and Chairman, HostBooks Ltd

Published on March 17, 2021

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