Neo bank is a kind of digital bank without any branches. Neo bank has no physical presence at any location but provides services online i.e. digital or mobile or through any other mode online. Neo bank hasn’t a banking license but provides services through trusted partners who have banking licenses. Neo bank is a more agile version of traditional and old fashioned banking which is more appealing to tech-savvy young generation.
Neo bank provides all types of banking services to the consumer and small business needs of the consumers. At present more than 5000 startups are providing new as well as traditional financial services. Neo bank provides infrastructure that makes banking services cheap and easy from their phone. It is also known as fintech company which offers various banking services from mobile, like opening of deposit account, loan account, payments and other banking services without the burden of a physical network. Apart from it, Neo bank also does lead generation. RBI doesn’t permit license to open 100% digital banks. Neo banks now a day provides traditional banking services also. Neo banks are complementing banks with better user interfaces and services.
Neo banking started in India by many Indian startups Airtel payment bank, Fino payment bank, India post payment banks, Jio Payment bank, SBI YONO, Kotak 811 are some of the examples of Neo banks closest model in India.
Why Neo bank?
The population of India is approximately about 130 crore out of which more than 65 per cent are below the age of 35 years. Mobile penetration is more than 90 per cent within which nearly more than forty-four million people are using smartphones. More than 80% of Indians have a bank account now. It indicates that the youngsters are tech-savvy and digital banking is their choice. The government is also focusing to develop digital infrastructure for increasing mobile connectivity throughout India. Digital payments are embraced at such a large scale. Customers are moving away from physical cash and more towards online banking and wallets. Day to day Indian consumers transacts digitally and their numbers of transactions are increasing day by day. They feel more comfortable to avail online payments through the various apps like U Mobile, Google pay, YONO, PhonePe, Paytm etc.
If we think about numbers and amount, we can see the potential of neo banks in the country. Neo banks provide the flexibility that traditional banks don’t. The traditional banks have its own limitations, they can’t reach the far in rural areas, but Neo banks can reach these areas and provide basic banking services to them. They can easily sustain themselves and turn out to be profitable. Neo banks are completely digital.
Neo bank gives the consumer a wide variant of choice and better value for money while bringing the benefits of financial inclusion to all. The evolution of India’s banking sector shifted its focus after the RBI liberalizing bank licenses for corporate since 2016.
Functioning of Neo bank
Neo banks have a completely different business model, but like traditional banks, neo banks do make marginally between money inflow and lending. Neo bank hasn’t a physical location, they are completely online, and the customer fees are slashed by a significant amount. Neo banks are customer-centric; they provide personalized services to their customers through technology.
Data-driven decisions make the process of a Neo bank customer-centric. Their platforms are also much efficient. It is easier to collect and analyze data as also understand how their customers behave in the Neo banking ecosystem. Based on these observations and the customer’s action, they create cohorts of customers. Accordingly, they design their products rather than sticking on one or two products.
Neo banks focus on customized features for specific target groups like:
Freelancers: Neo banks provide additional support like tax calculations, withholding and employee benefits
Immigrants: Assist in quick online opening of accounts as a newcomer and having access to savings & credit
Small businesses: Support needed in managing receivable and payable in their accounts and expense monitoring
Customer-centric: An education-based bank for learning how to effectively budget, save and build credit. Customized support on access by the power of attorney, custodianship, family trust, wealth preservation, retirement benefits and insights on healthcare
Travelers: Ability to use a global account and card without additional fees or challenges.
Benefits of Neo banking
Time saving: In Traditional banking, customer has to visit a branch multiple times to open an account, Neo banks fulfill this requirement through an app-based option. In terms of the total time you can expect to spend at a branch, there is simply no comparison between the two. According to a report by the RBI, on an average, a customer has to spend nearly a day to complete account opening formalities in a bank branch. However with Neo banks, if the customer has PAN and Aadhaar, through e-KYC account can be opened within a minute. For SME customers, Neo banks offer faster access to loans by leveraging advanced Artificial intelligence-based risk assessment tools while fully complying with Anti Money Laundering and other lending regulations specified by the RBI.
Lower charges: Low charges are one of the important criteria that lure customers look for today. Traditional banks have high operating costs in terms of workforce salary and rent incurred to maintain branches, ATMs and other infrastructure. These costs are passed to customers in the form of various charges for services like account statements, cheque book, transaction, alerts, debit/credit cards, processing charge etc.
Neo bank operates on a digital model, so operational cost is less and able to offer high-interest rates without any monthly charge. Customers can avail a wide range of services including mutual fund purchase, insurance, bill payments, money transfers etc. with their digital Neo bank account. Neo banks may enter in partnership with a traditional bank and leverage the latter’s extensive physical infrastructure to deliver services.
Value added services: Traditional banks offer standardized services for a broad audience, there is not much attention given to niche customer needs. The segmentation strategy used by traditional banks is coming under pressure due to falling profits and increased regulatory oversight. Neo bank use historical account information and data analytics to recommend products to customers. The app interface includes a host of statistics and insights that can be leveraged by customers to identify products that will best suit their needs. Neo banks leverage customer profiles based on values, personality characteristics and interests to position products rather than relying only on demographics such as age, income levels and education.
24*7 customer support: Neo banks provide round the clock customer support to their customers through the use of chatbots and robo advisors that provide automated recommendations to users based on their transaction histories. Artificial Intelligence (AI) based algorithms make it possible for Neo banks to tap evolving customer needs and provide personalized solutions that best fit their needs in an unobtrusive manner.
Advanced security features: Security is one of the key areas of concern for customers using digital banking products.
Data protection regulations require banks and financial institutions to secure customer information from unauthorized access.
Fintech apps have multiple redundancies built in to ensure that users can operate their accounts in complete privacy. In addition to two factors authentication, Neo banks have implemented advanced role-based control logic in their apps to prevent malware attacks. However, they are not completely immune to third party interference.
User-friendly interface: Neo banks provide an excellent customer experience. Neo bank apps are very crisp, Clean and user friendly. They are highly responsive and well designed to suit the needs of a customer. The ease of use makes the app popular amongst its customers.
Smart reporting: Transactions made via neo banks are immediate. The transactions details are populated instantly provide and up to date balance on account any time anywhere. All transactions and payments appear on app and there is no need to go anywhere else for this information.
Ease of doing business: In traditional banking, businessman spend hours on manual efforts because of complex infra system. Money movement views can also be complex. But neo bank simplifies accelerate business environment. Neo banks provide hassle-free making and accepting payments, managing cash flow, reconciling transactions.
Able to serve to unserved / unbanked: Neo bank provides virtual banking, fulfils the needs of underserved market segments such as unbanked, immigrants, freelancers and independent contractors and small business. Neo banking endured monthly and annual fees due to low account balances or lack of direct deposit and lack of proper advice from large banks and their one size fit all models. Neo banks use the customer data in an innovative way and launch new products, partnerships and engaging customers- for the benefits of their clients. These banks emerge as nimble, agile and responsive to provide ever-changing needs of clients, consumers and regulators. It also takes initiative in sharing data for analysis of budgeting, spending habits and saving progress towards long term financial goals. This type of advanced support for a client’s financial health encourages customers to deepen emotional bonds with their financial service provider. Through this type of services, consumers are willing to pay a premium to quickly acquire new relationships and generate additional revenue. Neo banks fulfill evolving needs of customers
Regulatory considerations for Neo banks:
In India, virtual banking licenses are still not granted though there are foreign national banks offering digital-only products through their Indian subsidiaries. RBI remains stringent in physical presence of banks and recently reinforced the requirement for digital banking service providers to have some physical presence.
Presently neo banks in India are addressing the regulatory predicament by outsourcing their banking responsibilities to those with licenses, creating strategic partnerships with traditional banks and providing services on behalf of existing ones. This model is already being used worldwide for example Chime and Mongo a leading Neo bank in the US and Europe respectively. As a part of their business strategy and to overcome regulatory hindrances, neo banks partner with traditional banks. Neo banks are offering business and consumer banking services but from a regulatory perspective, monetary transactions are managed by their partner banks.
Road ahead for Neo banks: Attributes and offerings like accessibility, cost-effective multiple banking and financial functionalities under one umbrella and personalization are some of the driving factors for neo banks globally. Fintech companies are building niche solutions focusing on blue-collar workers and unbanked persons. MSMEs, which is the way forward for the economy. Neo banks will be an integral part of the progressive payment channels and financial solutions in digital India.
With the focus on digital payments and digital way of doing business, neo banking will be the fastest collaborator with the fairly evolved banking system we have currently, especially to cater the needs of SMEs as well as consumers across segments.
With competition mounting among traditional banks, new age Fintech, technology firms and non-banking entrants, it is yet to be seen whether the market is deep enough for neo banks to grow sustainably and equitably.
The above facts on demand and services clearly envisage that Neo banks are the future of banking. Neo banks have been slowly eroding the relationship of the customer from traditional banks. Neo banks are purely challenges for traditional banks. Neo banks open the doors to a new sector of business. Customers can carve a niche for themselves in a relatively short span of time. Neo banks give opportunities for collaboration, traditional banks can leverage their scale to bring a digitized suite of offerings to consumers. On the other hand, Neo banks can bypass licensing restrictions to innovate further. Neo banks help banks and NBFCs streamline and optimize their performance. Beyond traditional banking like offering deposit account, debit card and payments, in India Neo banks can help in MSME sector, account opening, providing financial services like insurance, banking, mutual funds to unbanked or underbanked people at affordable cost. So we can say that Neo bank able to provide the right/ customized product to the right people.