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With the recent advancements in almost everything (plus the infamous ‘pandemic’), every industry has gone through changes (more or less, but yes). Although ‘banking’ didn’t need many changes, with digitalisation on the rise, even the banking industry has become a racing field for the survival of the latest.
In this conquest, banks are providing more and more features, transparency and benefits to their customers. They have to seek these changes; otherwise, they will be the reason behind their extinction!
With the changes in the customers’ behaviour and demands, we get to see new options in the market frequently. The million-dollar question here is whether this transition implies that the future of banking lies in the hands of neo banks (or not)?
What are neo banks?
For those who are unaware of the term ‘neo bank’, ― a neo bank is a bank that has no physical presence. They are just like a traditional bank but operate online.
Whether you need to make transfers, lend money or make payments, it can do it all. Neo banks do not possess a license of their own and are dependent on banking partners for their services.
According to some experts, they are the ‘future of the banking sector’.
Well, since traditional banks require a geographical location, maintenance cost, branches, and human resources, it all affects the overall cost of products and services provided to their customers.
Now that neo banks are disconnected from all these requirements, their processing is smooth and quick. They provide a flattering rate of interest on fixed deposits and savings, free-debit and credit card services, omnichannel presence, 24X7 support, and much more.
Global presence & future in India
A report by Zion Market Research stated that the neo bank industry was worth $18.6 billion in 2018. It is projected to grow at a CAGR (compounded annual growth rate) of 46.5% between 2019-2026, generating about $394.6 billion by 2026.
Neo banks in the UK have ~20M customers (almost one-third of the country’s population)!
Source: Neobanks in US and EU
In India, neo banking is on a significant rise too. These are some of the major players in the Indian market currently.
Source: Neobanks in India
Some other major players include Open and RazorpayX. Overall, there are a total of ten neo banks in India presently, and some more are preparing to enter the market.
According to an article in Livemint, “Neo banks raised $116 million in 2019, up seven times year-on-year. While the figure is not huge, what’s striking is that many of these firms have raised seed rounds of $5-20 mn on paper ideas alone.”
Reserve Bank of India (RBI) governor Shaktikanta Das talked about the effect of digitalisation on the economic services in India. He stated that they are going to be a crucial segment of the economy in the upcoming years. He sought an example of UPI payments citing that the first monthly billion transactions on UPI took almost three years while the next billion was completed within a year.
“In fact, digital players would increasingly emerge as critical pieces across all segments,” he added.
This implies that we need exponentially scalable systems and not incremental systems to replace our conventional systems.
“In finance, small is seldom beautiful.” – Niall Ferguson, The Ascent of Money
Benefits with neo banks
Banks in India are very well-known for offering average customer satisfaction throughout the country. Even with so many advancements over the past decade, a little has changed in the work-culture of our traditional banking system. Neo banks have a great opportunity to guarantee an enhanced Banking experience with their improved products and services in such a situation.
The best feature of neo banks is their transparency. While traditional banks are not very well reputed for their transparent services, often leading to various doubts in their customer’s mind, neo banks provide real-time updates and customer support.
Did you know: State Bank of India launched a fully digital offering, Yono, in November 2017, and by the end of 2019, had ~17M registered users and ~6M digital savings accounts. In fact, 63% of all SBI savings accounts are now opened through Yono.
While the conventionally operating banks will be seen struggling with this for many years to come, neo banks already have an edge with deep insight banking. Their interface is extremely user-friendly and is quick, thus helping you save money and time.
Well, for me, that’s twice the money since time = money.
Challenges for neo banks in India
Countries all over the world are changing at a faster rate, and we are yet to adapt to the neo banking system completely. The Government of India is yet to allow the 100 per cent key services role to these banks. Currently, the banks are working at their limited potentials only.
On the other hand, their global counterparts are progressing at an exponential rate.
The other big challenge is the necessity of a license. Neo banks are basically fintech firms, which rely on a banking partner to provide their banking services. With the external player coming into play, it affects both the reliability and speed of the bank’s services.
Disrupting the ‘conventional’
80% of India’s population still remains severely underbanked [Source: Global Findex Database], which clearly shows the untapped potential for mobile-based neo banking services.
Further, traditional banks could consider neo banks as an enemy of the financial structure of the economy. There is a need to understand that neo banks will be a crucial part ― sooner or later. In such a situation, collaborations will bring out the best of both; thus, enhancing customer satisfaction throughout the country. Moreover, it will strengthen our economy by many folds.
Some other hurdles include complex inadequate data architecture, IT legacy, lacking advanced technology, higher cost management, and organisational resistance.
The bottom line
Neo banks are currently struggling as they are more like a startup in our country. They need to secure funds to strengthen their base of operations. With funds in hand and the required support from the government, they will definitely change the face (literally the entire structure) of banking in India in the upcoming time.