By: Tavaga Research
Traditionally, all our financial needs, including loans, deposit accounts, debit and credit cards, insurance, have been taken care of by banks. Banks, with the help of its branches spread across the world, have catered to the requirements of most of its customers.
However, fintech start-ups and companies have now come up with a convenient, hassle-free new age banking experience by launching the neo-banks. The usage of robotics, machine learning, and artificial intelligence has helped the fintech companies to offer a wide range of solutions to the problems faced by the customers of traditional banks.
What is Neo Banking?
The bank which operates without having any physical branch network, that is, the banking business which is carried out in the online-only model, is referred to as neo banking. Typically, neo banks offer a wide range of services like traditional banks. From opening accounts to assessing the creditworthiness of an individual or an enterprise, neo banks facilitate almost everything.
Many times, neo-banks and digital banks are used interchangeably. However, it is important to note that even though both the type of banks offer digital services only, the digital bank is generally an online-only partner or a subsidiary of a traditional bank. On the other hand, neo-bank is an independent financial technology company carrying out is business without any physical branch.
The concept of neo-banks has become an attraction for tech-savvy people who prefer managing their money through mobile phones or tablets as neo-banks offer higher interest rates and lower fees.
What Factors can contribute a Neo-Bank to Fail?
- Regulatory and compliance factors can become primary reasons for neo banks to not succeed in the financial space. For example, in India, the banking regulator RBI has not yet granted a banking license to any independent company to solely act like a bank without a branch
- The products offered by neo-banks are generally fewer. Sometimes due to administrative complications, neo banks are unable to offer mortgages and other lending facilities
- Neo banks do not offer the core banking facility and hence, HNI customers, who prefer to do business in person are not attracted to this kind of bank
- While neo-bank has become a buzz word and a fascination among millennials, it is still not being used by large masses because of safety and security concerns
How does a Neo-Bank Work?
As the differences in business operations, the business model of neo-banks too is quite different from that of a traditional bank. Artificial intelligence with the help of data analytics mainly drives the decision-making process of a neo-bank.
With no physical presence, the fees are considerably lower than traditional banks. However, like traditional banks, they make money for themselves from the net interest collections. Sometimes, the services rendered are better than traditional banks because of the latest technological improvements.
What are the Advantages of Neo-Banking?
- Simple Account-Opening Procedure: Even though the procedure to open a traditional bank account is less complex than before, there is enough paperwork and form filling required to open a bank account, and some banks even ask the customers to visit the nearest bank branch to open a deposit account. With neo-banks, the process is hassle-free and there is no question of customers visiting any branch to open an account, as it doesn’t exist! The account can be opened on a mobile phone in two to three steps.
- Fewer costs: Neo-banks save a lot of resources as there are no physical branches to take care of. Hence, there is no fee levied on withdrawals or any kind of annual or monthly maintenance charge
- Simple and User-Friendly Interface: With superior technologies, neo-banks provide an enhanced customer experience. The applications and websites are very responsive, unlike that of the traditional banks where the net-banking websites are often filled with glitches and the mobile applications lag many times
- A boon for MSMEs: The process of disbursals to vendors and other stakeholders is long, tiresome, and sometimes a bit tedious. Neo-banks bring in simplicity; demystify the entire process by reducing the manual efforts required, and by providing unified platforms to monitor the money movement. Not only this, other services such as taxation, budgeting, and accounting to MSMEs are also rendered at low costs
Prominent Neo-Banks:
| Name of the Neo-Bank | Services Rendered |
| PayZello | Uni Cards, Forex Cards, Loans, and Money Transfer, Account Opening, Virtual Debit Card, Expense Management |
| InstaDApp | Smart Contracts, Crypto Currencies, and Other Blockchain Assets Deposit Account, Decentralised Asset Lending and Borrowing |
| 0.5Bn FinHealth | Credit Payment, Banking, Payment Solutions, and Remittance, Goal-Based Savings, Consumer Durables, Gold, Health Care, and Government Benefits |
| Niyo Solutions | Foreign Exchange Card with Savings Account, Employee Benefits System, Travel loans and Early Salary Advance |
| Open | Automated Account, Current Account, Payment Gateway, Cash-Flow Management, Tax, and Compliance Management Solutions |
| Razorpay X | Payments, Current Accounts, Cheque Book, Cheque Book, Credit Card, Payroll Management, Customer Relationship Management |
| Walrus | Payments, Savings, and Debit Cards |
| Forex-Kart | Forex Services, Multi-Currency Foreign Exchange Card, Traveller Cheques |
| Neo-Bank | Credit, Savings, and Investment Products |
Source: Company Data, BloombergQuint, Tavaga Research
Institutional Investors Funding India’s Neo-Banks:
| Name of the Neo-Bank | Institutional Investors |
| Niyo Solutions | Horizons Ventures, Tencent, JS Capital, Social Capital, and others |
| Open | Tiger Global Management, Tanglin Venture Partners, ICICI Bank, and Others |
| PayZello | Axilor Accelerator and Iii Consulting |
| InstaDApp | Pantera Capital, IDEO CoLab, Robot Ventures, and Coinbase Ventures |
| 0.5Bn Fin Health | Matrix Partners India, Omidyar Network, Fair Finance Fund, and AngelList |
Source: Tracxn Technologies Pvt Ltd, Tavaga Research, BloombergQuint
What new forms of Banking have emerged in India?
With the motive of financial inclusion, and access to financial services, on the recommendation of the Nachiket Mor committee constituted by the RBI in 2013, the regulator commenced issuing licenses to two types of banks (other than traditional banks) :
- Small Finance Banks: To offer deposit and lending facilities to low-income groups including credit deprived farmers, small shopkeepers, MSMEs, and unorganized businesses
- Payments Banks: To offer payments for utilities, fund transfers, and small savings with fewer costs and the latest technology
The Future of Neo-Banking in India and the World:
Neo-banks are at the forefront to revolutionize the financial services space, globally.
- Between 2016-2020, the neo-banking market has registered a CAGR of 50.6%
- By the end of 2030, the neo-banking market is projected to reach $2.05 trillion. CAGR of 53.4%
- The regions of Indo-Pacific and Europe are poised to provide excellent business opportunities for neo-banks if regulatory relaxations are provided by central bankers
- China is predicted to be the best country for the neo-banking business to thrive by 2025
Source: Razorpay
Digital transactions grew to 90%, from 232,000 to over 430,000 in the last three years from FY19 to FY21. These numbers only suggest that neo-banks have a great potential to grow in India, however, it is also important to understand the approach of neo-banks towards managing the hindrance concerning regulatory norms, data security, and API integration.
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