Decoding Neobanks: Disrupting Traditional Banks

The word “Neo” means “new’. Neobanks work like every other bank, except that they lack a physical presence. They are completely on-line banking systems. With the growth of various fintech firms in India, aided by Covid-19 pandemic, neobanks have grown by leaps and bounds. There are over 2000 fintech firms in India and many of them are neobanks with a compounded annual growth rate (CAGR) of more than 14%. Read what Tanisha Singh says while decoding neobanks against the traditional banks.

How Do Neobanks Work?

Neobanks are basically banks having a widespread digital presence without having any physical branches as in the case of traditional banks like HDFC bank, ICICI bank etc. They are responsible for simplifying financial services for today’s tech-savvy generation while providing the comfort of transacting digitally. These are fintech firms which provide digital and mobile first services like payments, debit cards, money transfers, lending etc. However, they are very different from digital banks as digital banks have some level of physical presence and are also subsets of some traditional banks.

Banking has to work when and where you need it. The best advice and the best service in financial services happens in real-time and is based on customer behavior, using principles of Big data, Mobility and Gamification.

Brett King

Neo Banks Partnering with traditional banks

These banks are very different from traditional and digital banks, their functions also vary a lot from the former. The primary function of neo banks is to offer customer tech-led banking services. The banking partner provides access to funds for lending and even offers to hold the customer’s funds. These Neobanks don’t have a bank license of their own, and instead, they rely on the partner banks for the banking services. The Reserve Bank of India (RBI) doesn’t allow banks to be 100% digital yet and is stringent on ensuring the physical presence of banks, at least for now.

Perks for going Fully ‘Neo’

There are various benefits of neo banks, especially the heavy slashing of costs, and hence charges to customers, because of their negligible physical presence. Their fixed and overhead costs are cut by a huge percentage, hence there is a considerable decrease in the customers’ fees. The firms are fully online so they have smooth and efficient online platforms which allow the customers to navigate through the portal easily and money transfers and transactions are done easily. The account creation is also carried out pretty easily, as opposed to the cumbersome procedure followed at traditional banks. Given the technology driven KYC process, a new account can be operational in just a few minutes.

By partnering with Fintech startups, banks will give their account holders the right measure of security and speed, Account holders can know that their money is safe and they can enjoy the latest financial technology.

Chris Skinner

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Comparing Neobanks with traditional banks

Customer Base of Neobanks

These banks have an advantage over traditional banks due to their cutting edge technology, which makes them more efficient and innovative. However, they still lag behind traditional banks in the customer base, as they are still in the nascent stage, and they also have lesser funds. A massive chunk of the customers of neobanks belong to the youth segment such as millennials, Gen Z, etc. The older generation, bigger companies and legacy corporations are likely to continue with conventional banks due to many factors, including sentimental reasons.

The SMEs and MSMEs (Micro, Small and Medium Enterprises) however, are not much in the favor of traditional banks as they have the least access to basic financial services offered by traditional and challenger banks. Neobanks provide very easy access to financial services and access to secure networks. This helps the MSMEs obtain credit easily and expand their business horizons without facing disruptions. In India, almost 95% of the companies are SMEs or MSMEs, so this might be a very lucrative option for neobanks to capitalize upon.

Advantages of Traditional Banks

However attractive they may sound, neobanks come with some disadvantages as well. Here are some areas where traditional banks score over neobanks.

Personal Touch

Traditional banks are famous and add a personal touch because of the facilitation of direct contact with the customers. This adds a very personal touch, which is not the case with neobanks due to the non availability of physical branches.

Range of Services Offered

The range of services offered by neo banks is also limited, as most of them lack a banking license. Only individuals requiring limited transactions or SMEs and MSMEs can rely solely upon the services of neobanks. Larger corporations which have heavy and frequent transactions cannot rely on the facilities of neo banks and hence require traditional banks.

Regulatory Environment

Apart from trust, since neo banks aren’t regulated by the RBI, the customers may not have a legal process to follow in case of any issues faced.

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A New Era of Finance

Neobanking has introduced a new wave of banking. It is helping individuals and businesses leverage smart banking activities using new and upcoming technologies and methods. These innovative and new age financial services are another reason behind the tremendous growth of neobanks in India.

Future Outlook for Neobanks

Even though they might face some hurdles on account of the above mentioned factors, the simplicity and modernity which comes along with the services of neobanks are helping them excel.

All in all, these banks have a pretty good chance of capturing the Indian market.

The major winners will be financial services companies that embrace technology.

Alexander Peh

About The Author

Tanisha Singh is a final year undergraduate student pursuing B.Com(Hons) at Shri Ram College of Commerce. She has a deep interest in learning more about finance, geopolitics and economics.

Tanisha loves watching Formula 1, reading books, painting and listening to music.

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