Many might confuse neobanks with digital banks. The two are similar in that they offer banking services through smartphones and other devices. But that’s where the similarities end.
What are neobanks?
Neobanks are financial institutions that offer customers a cheaper alternative to traditional banks. You could think of them as digital banks with no physical branches, offering services that traditional banks don’t and doing so efficiently. They leverage technology and artificial intelligence to deliver personalized services to customers while minimizing operating costs.
In India, these companies do not have a banking license but rely on banking partners to offer licensed services. This is because the Reserve Bank of India (RBI) does not yet allow banks to be 100% digital (although some foreign banks offer digital-only products through their local units.) The RBI remains steadfast in prioritizing presence physical presence of banks, and spoke of the need for digital banking providers to have some physical presence as well.
Neobanks vs traditional banks
Traditional banks have many advantages over neobanks, such as funding and, most importantly, customer trust. However, existing systems weigh them down and they struggle to adapt to the growing needs of a tech-savvy generation.
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While neobanks don’t have the funds or the customers to overthrow traditional banks, they have something special in their arsenal: innovation. They can launch features and develop partnerships to serve their customers much faster than traditional banks.
Neobanks are aimed at individuals and small and medium-sized businesses, which are generally underserved by traditional banks. They are leveraging the mobile-first model to differentiate themselves by introducing innovative products and providing superior customer service.
Venture capital and private equity investors are closely monitoring and increasingly interested in market opportunities for these banks. Indian neobank startups raised more than $ 230 million in 2020, according to a report from a fintech research firm.
In 2020, India had a smartphone penetration rate of 54%, which is expected to increase to 96% by 2040. Even though 80% of the population has access to at least one bank account, levels of financial inclusion are not improving yet, according to a PwC report from September 2021.
Challenges for neobanks
The global neobank market size is expected to reach $ 333.4 billion by 2026, at a compound annual growth rate (CAGR) of 47.1%. But like all financial institutions, neobanks have their advantages and disadvantages. The key to their success is meeting the needs of a market segment and embracing the right technology, the right business strategy and the right work culture.
But none of these things are as crucial as building trust. Neobanks are here at a disadvantage compared to traditional banks. Therefore, models like subscriptions and freemium memberships are common in neobanks in India because they allow customers to experience the service before paying for it.
The best Indian neobanks
Launch: November 2018
Primarily for business owners and online traders to automate manual and repetitive financial tasks and provide information on money flow. Simplifies payments, offers credit solutions, provides accounting support on current accounts.
It provides services like money transfer, cash withdrawal, savings account, and NFC-enabled prepaid cards for individual bank customers. It offers a dashboard for monitoring transactions and viewing balances.
Offers zero balance accounts with facilities such as payday advance and free accidental death insurance. Also offers forex cards and tax saving cards that help users track, manage and claim employee benefits.
Open is a neo-bank for businesses and startups that offers services like deposit accounts, money transfers, debit cards for online / offline purchases, expense management, and expense management. invoices.
Offers digital banking services for individuals, such as savings accounts, prepaid cards, bill payments and money transfers. It also saves money with interest and money management information.
Benefits of neobanks
Low costs: Fewer regulations and the absence of credit risk allow neobanks to keep costs low. The products are generally inexpensive with no monthly maintenance costs.
Convenience: These banks provide customers with the majority (if not all) of banking services through an app.
Speed: Neobanks allow customers to create accounts quickly and process requests quickly. Those who offer loans can skip the usual and tedious application processes in favor of innovative strategies to assess your credit.
Disadvantages of neobanks
Regulatory obstacles: Since the RBI does not yet recognize neobanks as such, officially clients cannot have any legal recourse or a defined process if something goes wrong.
Impersonal: As neobanks do not have a physical agency, clients do not have access to in-person assistance.
Limited services: Neobanks generally offer fewer services than traditional banks.
Ashwin Manikandan contributed to this story.