Neobanking has recently become a buzzword in the fintech community. The term has acquired traction as it has been featured in the news and media. But do we understand what it’s all about? On a global scale, Neobank are sweeping the fintech industry. Every day, a new competitor enters the market with the goal of further simplifying financial services. Let’s look at what it really means.
What is a Neobank?
A neobank is a type of digital bank that does not have any physical locations. Neobanking takes place totally online, rather than at a physical facility.
It’s a broad range of financial service providers pleading with today’s tech-savvy clientele. Fintech organisations that provide digital and mobile-first financial solutions such as payments and money transfers, money loans, and more are known as neobanks.
Neobanks do not have their own bank licence but rely on bank partners to deliver bank-licensed services.
As the financial environment shifts toward client experience and happiness, a chasm has formed between what traditional banks provide and what customers want. And Neobanks are attempting to fill that need.
Most traditional banks are stymied by legacy-based infrastructure. As a result, they falter when it comes to assisting SMEs with financial services such as offering a payment gateway, invoicing software, and numerous views of cash management, among other things.
Because of this gap, as well as the explosion of mobile technologies, it only makes sense for banking services to merge with other financial services.
We’ve seen a significant shift in the finance business in recent years. With over 2000 fintech businesses in the country, digital payments are widely accepted. Customers are shifting away from physical banks and cash in favour of internet banking and wallets.
In a recent paper, we discussed how India is transitioning into an era of increasing fintech. We discussed how Indian consumers deal digitally, and the numbers are rapidly increasing. People are becoming more comfortable making online payments using Google Pay, Paytm, PhonePe, and other services than ever before.
When we consider these figures, we can understand the potential that neobanks have in the country. Neobanks offer the flexibility that regular banks do not. They can easily support themselves and generate a profit.
How does a Neobank works?
Neobanks operate on an entirely different business model than regular banks. However, neobanks, like regular banks, make a marginal profit between money intake and lending.
And, because there is no physical facility and everything is done online, the consumer fees are much reduced. Neobanks are customer-centric, therefore they offer individualised services to their consumers that are powered by technology.
A neobank’s decision-making process is driven by data-driven decisions. Because their platforms are also highly modern, they can collect and analyse data more easily and learn how their clients act in the neobanking ecosystem. Instead of limiting themselves to one or two data points, they develop cohorts of clients depending on their activities.
Neobank vs Traditional bank
Traditional banks have many advantages over neobanks, including funding and, most significantly, the trust of their customers. However, outdated systems are dragging businesses down, making it impossible for them to adapt to the expanding expectations of a technologically savvy age.
While neobanks lack the money and client base to dethrone traditional banks, they do have something unique in their arsenal: innovation. They can offer services and form partnerships to better serve their consumers far faster than traditional banks.
Neobanks serve retail customers as well as small and medium-sized enterprises, which are typically underserved by traditional banks. They differentiate themselves through the mobile-first concept by developing innovative products and providing exceptional customer service.
Investors in venture capital and private equity have been keeping a close eye on the market potential for such banks and are becoming increasingly interested in them. According to a fintech research firm, India’s neobank startups generated more than $230 million in 2020.
In 2020, India had a smartphone penetration rate of 54%, which is expected to rise to 96% by 2040. Despite the fact that 80 percent of the population has access to at least one bank account, financial inclusion levels are still to improve, according to a PwC analysis released in September 2021.
Pros of Neobank
Low costs: Because there are fewer rules and no credit risk, neobanks can keep their costs low. Products are often affordable and do not require monthly maintenance.
Convenience: These banks provide customers with the bulk (if not all) of their banking services via an app.
Speed: Neobanks allow customers to open accounts and process requests rapidly. Those that provide loans may forego the traditional time-consuming application processes in favour of innovative credit-evaluation strategies.
Cons of Neobank
Regulatory barriers: Because the RBI has yet to recognise neobanks as such, clients may not have any legal redress or a specified process in the event of a problem.
Impersonal: Customers do not have access to in-person help because neobanks do not have physical branches.
Limited services: In general, neobanks provide fewer services than traditional banks.
Challenges for neobanks
The global neobanking industry is estimated to be worth $333.4 billion by 2026, expanding at a compound annual growth rate (CAGR) of 47.1 percent. Neobanks, like any financial entities, have advantages and disadvantages. The key to their success is meeting the needs of a certain market niche while also implementing the appropriate technology, corporate strategy, and work culture.
However, none of these are as important as developing trust. When compared to traditional banks, neobanks are at a disadvantage here. As a result, models like freemium subscriptions and memberships are prominent in neobanking in India, as they allow clients to try out the service before paying for it.
Are Neobanks the Bank of the Future?
Neobanks are ahead of traditional banks because they are not reliant on a physical network and provide a totally digital service. It makes them more appealing to the younger generation and SMEs, both of which are important growth areas for them. The modernity and simplicity of their technical systems, as well as their low or no-cost accounts, higher savings rates, and personalised financial solutions, may position them as industry leaders in the coming years.
Top 5 Neobanks in India
1. Fi Money
Created by Google Pay co-founders Sujith Narayanan and Sumit Gwalani, the target audience for this neobank is salaried millennials who may not have the time to plan bank visits in order to take advantage of all the human services offered by traditional banks.
Fi, in collaboration with Federal Bank, offers a stunning 5.1 percent annual interest rate on its smart savings account. Fi also features an AI-powered feature called FIT rules, which allows users to automate their savings by setting up checks based on popular events like as cricket matches. If these checks are triggered (for example, Team X winning a match or Player Y scoring a specific amount), the user-specified amount is deposited to a custom savings account. Users can also set up several savings accounts for different aims. In the event of an early withdrawal from a savings account, Fi charges 1% of the account’s interest rate.
Fi account subscribers also receive a VISA debit card linked to their account.
Jupiter, which is also associated with Federal Bank, targets the same demographic as Fi Money, making it a direct competitor. Jupiter also offers an automated savings method known as Pots, which offers a 2.5 percent interest rate.
Jupiter also has a tool called Insights that allows customers to track their spending habits. Jupiter also sponsored an invite-only campaign dubbed “Mission Invite” in which new members may either be welcomed by an existing member’s invite or receive an exclusive invite from Jupiter’s crew.
Because Fi and Jupiter are both affiliated with Federal Bank, a person can only open an account with one of the neobanks. Users can, however, switch from one neobank to another.
Jupiter customers also receive a VISA debit card.
This neobank platform, which is partnered with IDFC First Bank, presently exclusively offers prepaid cards. The platform is aimed towards teens and attempts to capitalise on the demographic’s desire for financial independence.
VISA issues prepaid cards in an infinite number. The numberless function allows teenagers to use their prepaid cards without jeopardising the security of their guardian’s account.
4. Mahila Money
Mahila Money is a neobank founded by Sairee Chahal, the originator of the female-only social networking platform “Sheroes.” It supports solely female entrepreneurs from suburban and metropolitan areas. The goal of this platform is to give female entrepreneurs who do not have access to microfinance the opportunity to start their own businesses.
RazorPayX, in collaboration with RBL Bank, targets small and medium-sized businesses by delivering features to assist them run their businesses more efficiently. RazorPay’s current account gives users access to features like tax and vendor payment automation, business reporting, and so on.
Users can also get corporate cards and fast loans with no collateral from the platform.
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