Neobanks fill the gap between the services provided by traditional banks and the changing demands of clients in the digital era. They are altering the face of fintech and may eventually surpass conventional banks. Many people may confuse neobanks with digital banks. Both provide banking services through smartphones and other devices, which is a similarity between both. The similarities end there, though. Read further to know more about neobanks and how they work.
NEO Banks All You Need to Know
Neobanks can be defined as digital banks with no physical branches. They are truly branchless digital banks. Their presence is entirely online. Their target is the modern and tech-savvy customers who prefer to manage their money via digital methods with smartphones and other similar devices. NeoBanks can be referred to as FinTech companies that offer a wide range of financial services, including lending, money transfers, mobile-first financial solutions, and many others. Neo Banks’ principal goal is to provide a degree of seamless customer service that no traditional bank has ever been able to achieve. The speed and affordability of Neo Banks are also well known. Neo banks also lower their banking expenses, which enables them to lower their fees and offer their services to those who are underbanked. The traditional banks have transitioned from brick and mortar to adapting the digital versions of their services, keeping the concepts of digitalization and financial inclusion at their core. Neobanks go one step farther by using a digital-only strategy. Neobanks are fully working digital-only banks with sophisticated features.
NEO Banks at Global Level
Neobanks are digital banks that do not have physical branches in Australia, Europe, and North America. Because they lacked banking licences in the past, these banks relied on partnerships with conventional banks to conduct business. However, the relevant regulatory bodies now grant licences for their banking activities. Consequently, licenced banks—also known as Challenger banks—are fundamentally actual banks that run an internet business model. These banks have extremely minimal operating expenses because they run fully digitally, allowing them to offer cutting-edge services at competitive prices. With the emergence of Atom bank & Monzo in Europe, the inevitable development of the neobanks began. With its benevolent regulatory practices, Europe has set the gold standard, since the PSD2 regulations have made it easier for fintech businesses to operate there. On the international front, neobanks that originated in Europe include Revolut, N26, Starling Bank, Monzo, Atom Bank, and Tandem, to mention a few. In this neo-banking-driven period, Asia is not far behind Europe and the United States. Recent studies predict that this market would expand by 24 per cent in APAC and by 50 per cent in Southeast Asia. The two biggest markets are China and India, with Open & WeBank leading.
Neobanking in India
In India, neobanks are fintech companies that collaborate with conventional banks to provide their clients with cutting-edge banking and financial solutions. Neobanks in India differ theoretically and practically from those in the west. Neobanks are mostly fintech firms or organisations that create innovative banking solutions to alleviate clients’ problems. According to the RBI, the compliance requirements prevent these internet banking providers or fintech companies from receiving banking licences. By collaborating with regular banks, these banks can offer banking features including virtual accounts and the issuance of cards. Neobanking is expanding at a phenomenal rate on a global scale. Numerous operational models have emerged as a result of the industry’s thoughts and practices changing so quickly. Since RBL & YES banks opened their APIs to external developers in 2013 so they could create cutting-edge financial services, neobanks have existed in India. And right now, there are a lot of neobanking players making waves in the nation. In 2021, neo banking platforms will have raised about $173.5 million.
How does Neobanking Work?
Neobanks function in a variety of ways. Neobanks and digital banks are phrases that can be used interchangeably depending on where you are in the world. The “Banking as a Service” approach is used by neobanks. The current neobank landscape can be divided into three main categories:
- The first category includes unlicensed FinTech companies that have teamed up with conventional banks. In this case, the partner bank’s services and products are integrated by the fintech company.
- The second type occurs when a conventional bank introduces neobanks as part of a digital-only initiative.
- Neobanks with licences for online banking are the third and final type. However, only nations that allow standalone digital entities have this form of neobank.
Few neobanks now exist with their digital banking licence. The majority of the neobanks in use today fall into either the first or second category. The majority of neobanks have a bank as a partner because of this. Neobanks use banks as a platform to provide essential banking services. These banks typically have ageing infrastructure and old systems. To make banking services flexible, accessible, and scalable, Neobanks added a layer of their digital services and products over these outdated systems. Neobanks are client-focused since they offer services that are highly individualised and customised. Neobanks are entirely digital, thus technology plays a crucial role. Most of the time, neobanks use a decision-making model. They are also influenced by data-driven judgments. To understand how the client will behave, they collect data and evaluate the trends.
What are the Advantages of NeoBanks?
I’d like to think that by this point you are aware of what neobanks are and how they vary from conventional banks. But why do they get so much attention? What makes it a trendy term? The excellent benefits that it provides to its clients are the solution. Let’s examine each of these advantages thoroughly.
- Low price: The cost-effectiveness of neobanking in comparison to traditional banks is one of its main advantages. Because they have physical branches, traditional banks must pay for labour and operational expenses. Neobanks, in contrast, are exempt from having to cover the costs of maintaining physical branches. As a result, businesses can charge minimal or no costs. Additionally, because there are no credit concerns and fewer regulations, neobanks are significantly more affordable.
- Convenience: Since they are fully digital, NeoBanks are renowned for providing its customers with the best in convenience. Customers can utilise all banking services at their convenience using their smartphone thanks to the whole digital arrangement. You can easily reach a Neobank representative through digital channels if you have any banking-related problems. In NeoBanks, problems are solved much more quickly and with far less effort from the user. NeoBanks gives individuals the ability to effectively manage their accounts in addition to the advantages listed above.
- Customer Centricity: NeoBanks places a lot of emphasis on the look and feel of their platform. Banking institutions that aren’t NeoBanks can seem incredibly antiquated. NeoBanks seeks to create a user-friendly, intuitive solution that can outperform the current banking infrastructure. The Neobank apps are really clear, crisp, and tidy. Additionally, they are well-designed to meet the customer’s intricate requirements. One of the main USPs of neobanks is their user-friendliness.
- Smart Reporting: NeoBanks provide extensive and clever reporting. It’s because every time you check it, an updated account balance is provided. You can do this to view all of your payments and transactions in detail on a single app. You can also view a summary of all of your expenses and financial objectives with Neobanks. Additionally, you can alter reports to suit your needs. NeoBanks’ skilful reporting gives customers a clear picture of their finances. Additionally, this enables individuals to make more informed choices.
- Caters to the economy’s drivers: Neobanks may currently have a smaller market share than traditional banks, but they are expanding faster. The Neobank market size was USD 18.6 billion in 2018; between 2019 and 2026, it is anticipated to increase at a CAGR of around 46.5 per cent, bringing in over USD 394.6 billion. According to the statistics, neo banking is banking the formerly underbanked population, which largely comprises Gen Z & Y and the society’s financially exclusive population, with a greater scope of financial development.
- Quick processing: NeoBanks are renowned for processing transactions more quickly than regular banks. For instance, if a user wants to apply for a loan at a conventional bank, he must go through several rigid, time-consuming procedures. Neobanks, in contrast, avoid all these laborious procedures and use cutting-edge techniques to hasten the entire process. For instance, SoFi enables pre-qualification for loans and interest rates in just a few minutes.
- Easy international payments: Users must contend with challenges with traditional banking while making foreign payments. It’s because consumers must request an upgrade to an international debit card to make payments internationally. You can use your card to make overseas purchases without asking for an upgrade, though, if your account is with a neobank.
- Value-added services: Payments and money transfers are a considerably smaller part of banking nowadays. With its value-added services, Neobanks demonstrates this. Neobanks use artificial intelligence (AI) to recommend other financial services to customers based on client data, account information, patterns, and much more. In addition to recommending other financial services, Neobanks also provides data and analysis to support its claims. Additionally, neo banks give demographically-based service recommendations to help consumers make financial decisions.
- High-level security features: Additionally, some of the most cutting-edge security mechanisms are reportedly used by neobanks. To keep banking secure for users, they use biometric verification, 2FA (2-factor authorization), RBAC (Role-Based Access Control), top-notch encryption technology, and many more cutting-edge security features. Additionally, these programmes abide by consumer privacy rules, anti-money laundering laws, etc.
Types of Neobanks
There are two sorts of neobanks: full-stack neobanks and front-end neobanks.
- A full-stack neobank function as a separate bank with the necessary banking licences to provide its services. The front-end and back-end operations in this case are under the control of the neobank. N26, Monzo, Atom Bank, etc. are a few examples of this type of neobanking model.
- A front-end-focused neobank, on the other hand, depends on a conventional bank to deliver its services to clients. They only have control over the user interface and lack a banking licence. Revolut is one example of such a model.
Who Uses Neobanks?
Neobanks don’t follow a one-size-fits-all strategy as traditional banks do. Instead, they adopt a flexible strategy and make an effort to customise solutions for various clientele. While some neobanks in India create products for retail clients, the majority of them focus on small enterprises. Let’s examine the neobanking solutions and their target market:
SMEs and Startups: Since traditional banks lack tailored solutions for their particular business issues, neobanks generally support startups, small, and medium-sized businesses. Because of this, there is a huge disconnect between their wants and available resources. The economy of India is heavily dependent on small and medium-sized businesses. MSMEs, which total more than 63.8 million businesses, contribute 20 to 25 trillion dollars, or more than 28% of India’s GDP. However, when creating financial services and functionalities, this aspect is frequently overlooked. Small and medium-sized firms demand high lender coverage, increased financial access, and effective operating platforms. Due to their informal organisational structure and high servicing costs, traditional banks classify SMEs as risky. MSMEs need a strong banking system to fill the gaps in this ecosystem. Every business activity of an MSME is a business opportunity, according to research. Each task demands specialised solutions that are distinct from corporate solutions, including operations management, client management, supply chain management, and financial management. The Indian startup ecosystem, which has the third-largest ecosystem in the world and more than 55,000 startups, needs neobanks that can meet their needs.
Consumers: Consumer neobanks concentrate on single clients like teenagers, blue-collar employees, and gig economy workers. Due to the low transaction volume and velocity in this market, traditional banks ignore it. But it’s no longer acceptable to overlook this market due to its enormous size, rising economic engagement, phenomenal expansion of online media, work-from-home employment models, and technological collaboration tools. Neobanks are providing specialized product offers including Zero Balance Saving Accounts, Sachet Loans, and more since they serve this section.
Freelancers: Freelancers are contract professionals hired by people or businesses to complete specified tasks. Freelancers today have broader access to businesses as a result of technological advancements and workplace collaboration tools. Additionally, Covid wants flexible working arrangements, and businesses welcome partnerships with freelancers. The freelancing economy has grown as a result of this, and these individuals require specialised banking solutions.
Neobanks VS Traditional Banks
From the points below, let’s try to understand the key distinctions between neobanks and conventional banks.
- Neobanks are entirely digital, which puts them in contrast with traditional banks, which have branches spread across the nation and the globe. This is the first significant distinction.
- Customer service is personal at traditional banks, which also means that it moves more slowly. For instance, applying for a mortgage at a typical bank might take a long time because there is so much paperwork, in-person meetings, documentary submissions, and other steps.
- However, because neobanks are created to avoid time-consuming duties through time-saving procedures like automatic checks of credit histories, sign-up forms, etc., the identical process in neobanks is quicker and more convenient. Neobanks also don’t require you to give anyone your personal contact information for account opening, loan approval, or draught.
- Neobanks may be licenced at different levels, as was already mentioned. What services they can provide to their clients depends on the type of licence they have or don’t have. For instance, not all neobanks offer deposit insurance. All conventional banks are fully licenced to do banking business.
- In addition, neobanks are considerably less expensive than their conventional counterparts. Customers don’t need to worry about any hidden costs because neobank pricing is quite straightforward. Traditional banks, on the other hand, may impose a range of fees, including monthly charges for certain types of accounts.
Neobanks VS Digital Banks
Because they are so similar, it might be difficult for people to tell the difference between digital banks and neobanks. Digital banks are well known for providing very similar services as NeoBanks, allowing users to withdraw, deposit, borrow, transfer, and carry out a variety of other banking-related tasks. If we discuss the differences, NeoBanks occasionally operate independent and have no connection to conventional banks at all. Digital banks, on the other hand, typically function as a branch of a bigger traditional bank.
Growth of Neobanks
Neobanks have experienced considerable growth in recent years. Neobanks had more than 30 million customers as of 2019. It’s interesting to note that this statistic leaves out important markets like China and India. Neobanks bring out sophisticated features more quickly than traditional banks, which improves their performance and is one of the main causes of this exponential expansion. Neobanking applications are reportedly gaining 10 new features each year, according to a 2018 market research. This figure for conventional banking is only 6. The average number of neobank app updates is 27, based on the total number of app upgrades every year. For conventional banks, however, this figure is less than 10. Neobanks outperform conventional banks when it comes to customer happiness. Nearly 90% of US users, according to a recent study, are happy with Neobanks. This figure is intriguing because just 66% of users were satisfied by the top 50 worldwide banks.
The Disadvantages of Neobanks
- Regulatory obstacles: Since the RBI has not yet recognised neobanks as such, consumers may not officially have access to the legal system or a clear process in case of an issue.
- Impersonal: Customers who use neobanks are unable to receive face-to-face support because they lack a physical branch.
- Limited services: Compared to ordinary banks, neobanks often provide fewer services.
The Best Neobanks in India
Study the table given below to learn about top Neobanks in India.
|No.||Name of Neobank||Year of launch||Remarks|
|1||RazorpayX||November 2018||Specifically, for entrepreneurs and online sellers to automate manual, repetitious financial processes as well as provide transparency into money flow. provides ledger assistance for current accounts, offers credit solutions and simplifies payouts.|
|2||Jupiter||2019||For individual bank users, it offers services like money transfers, cash withdrawals, savings accounts, and NFC-enabled prepaid cards. It provides a dashboard where users may track transactions and see balances.|
|3||Niyo||2015||provides zero-balance accounts with features including free accidental death insurance and salary advances. Additionally, provides tax-saving cards and currency cards to assist users in managing and claiming employment perks.|
|4||Open||2017||Providing services like deposit accounts, money transfers, debit cards for in-person and online transactions, expenditure management, and invoicing management, Open is a neo bank for small businesses and entrepreneurs.|
|5||EpiFi||2019||provides personal digital banking services, including prepaid cards, bill payments, money transfers, savings accounts, and so forth. Additionally, it provides financial knowledge and interest-bearing savings.|
Neobanking is the ideal illustration of how user-friendly banking can be. Customers throughout the world already appreciate this innovative, quick, and practical method of banking. If neobanking can get beyond obstacles like lack of regulation and a lack of actual bank branches, its growth potential will increase. However, since neo-banking is in its infancy, nothing can be claimed with certainty at this time. The picture will become clearer in the direction that neobanking is moving in a few years. It will not be shocking if neo-banking overtakes traditional banking as the industry’s future in the coming years. The article has covered all the major areas regarding the topic of Neobanking. Download the Entri app to increase your financial knowledge and learn more about the stock market.