What is a Neobank? How is a Neo bank different from a traditional bank?

In the financial sector, there are several buzzwords going about, one of which is Neobanking. Neobanks, according to reports, are sweeping the fintech sector by storm on a worldwide scale. 

 

But, exactly, what is a neobank? Let's find out in this article together. 

 

What is a Neobank?

 

A neobank is a type of digital bank that does not have any physical locations. 

 

Neobanking does not require you to be physically present at a certain place. It's a broad category of financial service companies begging today's tech-savvy clients to use their services.

 

Fintech organizations that provide digital and mobile-first financial solutions such as payments and money transfers, money loans, and more are known as neobanks. Neobanks lack their bank license and rely on bank partners to deliver bank-licensed services.

 

These companies don't have their bank licenses in India, thus they rely on bank partners to provide licensed services. Because the Reserve Bank of India (RBI) does not yet enable banks to be fully digital, this is the case. The RBI has stated that banks' physical presence should be prioritized and that digital banking service providers should have some physical presence as well.

 

Neobanks is a relatively recent notion in the financial sector. Many customers have opted for this new tech-driven and inventive way of banking in recent years since it provides something different, something more user-friendly. But it isn't simply the novelty that has prompted consumers to give neo banking a try, resulting in the creation of thousands of virtual bank accounts in India.

 

How is a Neobank different from a traditional bank?

 

Neo-banks are upending the old banking system by using technology and artificial intelligence (AI) to provide consumers with a variety of personalized services. 

 

Traditional banks, on the other hand, use an omni-channel approach to offer a wide range of goods and services, which includes having both physical (via branches and ATMs) and digital banking presence.

 

Neo-banks provide a wide range of services to consumers in the retail and small-to-medium business (SME) sectors, ranging from customer acquisition to standard banking services such as remittances, money transfers, utility payments, and personal finance. 

 

Neo-banks often use a design thinking approach to a certain banking sector and modify their goods and services to make banking easier and more comfortable for end users.

 

Can neobank replace traditional banks?

 

Not totally, at least. Neo-banks have a limited product and service offering compared to regular banks, which provide a wide range of services. Furthermore, because neo-banks are heavily focused on digital, they may not be able to meet the banking demands of non-tech savvy customers or those from rural areas of the nation who prefer face-to-face engagement with their financial advisors. In 2020, India's smartphone penetration rate was estimated to be at 54%.

 

To what extent do neobanks pose a challenge to incumbents?

 

In comparison to neobanks, incumbents have a number of advantages, including finance and client trust. However, with old systems dragging companies down, it's been difficult for them to create novel user experiences. While neo banks may not have the funds or client base to completely replace traditional banking overnight, they can offer services and partnerships that consumers desire much more quickly.

 

This combination of strengths and limitations results in an intriguing knowledge transfer. Neobanks have pushed conventional banks to improve their customer service and assistance in some cases. 

 

For example, Barclays rapidly followed Monzo in allowing customers to restrict specific sorts of expenditure, such as gaming, on their accounts.

 

How does a neobank work?

 

Neobanks, in contrast to regular banks, operate on a completely new business model. Neobanks, like regular banks, make money on the margins of money inflow and lending. Furthermore, because there is no physical facility and everything is done online, the client costs are significantly reduced.

 

Digital banking and neo banking are not the same thing. They're both banking services that leverage mobile and other devices to cut fixed overhead expenses and use technological solutions to do so. But that's where the parallels end. 

 

The way neo banks are set up and what they provide are noticeably different: a more straightforward, intuitive, and delightful user experience.

 

Neobanks are customer-centric, which means they offer individualized services to their consumers that are powered by technology. A neobank's decision-making process is driven by data-driven decisions. Because their systems are also quite updated, collecting and analyzing data and understanding how their consumers act in the neobanking ecosystem becomes easier for them. Rather than adhering to one or two data points, they develop cohorts of clients depending on their behaviors based on these findings.

 

In terms of business models, neo banks can go one of three paths:

 

• Fintechs that work with traditional banks and provide a mobile/web interface and wrapper over their partners' products but are not licensed.

 

• Traditional banks are launching digital projects of their own.

 

• Neo banks are licensed financial institutions that operate independently of regular banks. In nations that allow it, this is frequently the case with digital banking licenses. Freestanding licensed neo banks are yet to be permitted in India.

 

In India, neo banking primarily fits towards the first type. While some neo banks have banking licenses, the bulk of them work with regular banks rather than gaining their own. The banking partner offers a comprehensive platform for handling client accounts, keeping customer cash, and providing the rails for interbank payments and settlements in this operational model. The neo bank is in charge of product distribution as well as handling the whole customer experience from acquisition to servicing.

 

How do Neobanks make money?

 

Neobanks, as previously said, operate on a different business model than traditional banks. Interchange fees paid by merchants when customers use their debit card account for a large portion of their revenue. 

 

Neobanks can have interchange percentages up to seven times greater than banks with more than $10 billion in assets since they are smaller. 

 

There's also significant disagreement over how much money challenger banks gain from out-of-network ATM usage. Over the last decade, venture investors have also poured money into neobanks. However, not all challenger banks are a success story, and some doubters are skeptical of the exorbitant valuations. 

 

Some early European darlings, like Monzo, were severely harmed by the epidemic and its impact on consumer spending. Xinja, an Australian neobank, went bankrupt last year, blaming the Covid-19 issue and consequent cash shortages.

 

So, how do neobanks generate revenue? 

 

According to Research And Markets, the worldwide neobanking market is expected to reach $333.4 billion by 2026, growing at a 47.1 % annual pace. Given that they are relatively young, have no discernible physical structure, and have yet to establish a significant degree of confidence, the expected growth is astonishing. 

 

Neobanks have a different business strategy than traditional banks. Interchange fees are paid by companies whenever clients use a neobank debit card account for a substantial portion of their revenues. 

 

For example, Chime, a popular neobank platform in the United States, has a user base of about 12 million and provides registered customers with a physical debit card. Visa charges a 1.5 % fee whenever consumers use their Visa debit card to make a purchase. Visa, in turn, reimburses Chime Neobank for a portion of the fees.

 

Neobanks for business:

 

If you own a business, you're probably used to dealing with long, tiresome payment and disbursement processes. Because of many problematic software and complicated infra systems, you frequently wind up spending hours and hours on manual efforts every month. Because of their intricacy, money movement perspectives may be quite challenging. Oh, and don't forget that you won't have any information about payments to make important business choices.

 

Advantages of neobanking:
 

Because neobanks are entirely digital, they provide customers with a wide range of benefits. Here are some advantages of neobanking:

 

1. Creating an account is simple and painless.

 

We're all well aware of how difficult it is to open an account with a traditional bank. Although the procedure isn't as complicated as before, there are still some glitches. When you open an account with a neobank, this time-consuming process is totally removed.

 

 

2. International payments are quick and easy

 

Traditional banks do not often provide us with a debit card that can be used everywhere in the world or that allows us to transact globally. We may need to seek an upgrade, submit a request, and then obtain an overseas debit card. If you have a neobank account, you won't have to worry about any of that. With current currency rates, you can use your card to make purchases or transact when traveling overseas.

 

 

3. Interface is simple and easy to use

 

The goal of Neobanks is to provide great customer service. This also means you won't have to deal with a buggy internet banking site any more. You won't have to be concerned about a slow-loading mobile app. Neobank's applications are simple, straightforward, and easy to use. They're extremely responsive and well-designed to meet a customer's wants. The app's ease of use is what makes it so popular with its users.

 

 

4. Reporting with refinement

 

Neobank transactions are instantaneous. The transaction data are quickly entered, ensuring that you always have the most up-to-date amount on your account. Your app keeps track of all of your transactions and payments, so you don't have to go elsewhere for this information. The neo-app also gives you a breakdown of your spending, as well as a savings target that you can tailor to your own circumstances. This allows you to better manage your finances by providing you with more information.

 

Challenges of Neobanking:

 

Here are some challenges of neobanking:

 

1. If you don't enjoy keeping up with technology advancements, you should avoid banking with cutting-edge organizations such as neobanks. If you aren't comfortable tapping and swiping your way through brand-new applications, you won't be able to take full benefit of the possibilities. Some individuals appreciate learning about new technologies; but, if you don't, neobanks may not be for you.

 

2. Because neobanks aren't legally recognized banks, you may not have legal remedies or well-defined protocols to follow if you have an issue with an app, services, or non-regulated third-party service providers. It's possible that there could be some uncertainty about who will be held accountable for any potential fraud or mistakes. Customers must also check to see if their neobank offers deposit protection, such as via the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Share Insurance Fund (NCUSIF).

 

3. There are no real bank branches. While it's growing easier to accomplish everything online, and neobanks frequently cooperate with ATM networks, some customers prefer to visit a branch and bank in person, particularly for complex transactions. While many neobanks provide comprehensive customer care facilities, some clients may prefer to speak with a representative in person.

 

Top Examples of Neobanks:

 

Here are some examples of neobanks:

 

1. Razorpay:

 

Automate laborious, repetitive financial chores and give insights into money flow, mostly for business owners and online merchants. Payouts are made easier, credit solutions are available, and current account ledger assistance is available through Razorpay.

 

 

2. Jupiter:

 

Individual bank customers can use it for money transfers, cash withdrawals, savings accounts, and NFC-enabled prepaid cards. It has a dashboard where you can keep track of your transactions and balances.

 

 

3. Niyo:

 

Provides zero-balance accounts with features including salary advances and free accidental death insurance. Users may also track, administer, and collect employee benefits with the use of forex cards and tax-saver cards.

 

Also Read | Interview with Niyo CEO Vinay Bagri

 

4. EpiFi:

 

Individuals can use digital banking services including savings accounts, prepaid cards, bill payments, and money transfers. It also provides interest-bearing savings and money management information.

 

5. Open:

 

Open is a bank that provides deposit accounts, money transfers, debit cards for online/offline transactions, expenditure management, and invoicing management to enterprises and entrepreneurs.

 

Conclusion:

 

Neobanking was created to address the financial sector's significant digital transformations, and it has performed well thus far. Customers now profit from neobank features; they no longer have to go through the hassles of executing simple financial transactions as required by traditional banks when they may use a new bank's service and complete their transactions on their own terms.