Transactions in traditional banks could involve a lot of time. In the recent past when individuals have become accustomed to ultra-fast 5G internet connections, the prospect of spending long hours in a bank just for a transaction to be processed can be quite exasperating. So, fintech companies are now offering customer-centric services through electronic channels. These service providers are referred to as neo-banks.
What is Neo-banking?
Neo-banking, also known as digital banking or challenger banking, is a new breed of financial institution that operates exclusively online or through mobile apps, without any physical branches. These banks leverage technology and digital platforms to provide a range of banking services like payments, money transfers, lending, and more. They even offer debit cards, investment facilities and lending services.
Features of Neo-banks
Neo-banking in India is shaking up the traditional banking sector primarily because of its unique features. Some of the key characteristics of Neo-banks include:
- Digital platform: Neo-banks have a strong online presence. They primarily interact with customers through websites or mobile apps. This allows for 24/7 access to banking services inclusive of features like real-time transaction notifications, account management and personalised financial advice.
- No Physical Branches: Neo-banks do not have physical branches, which significantly reduces the overhead costs.
- Customer-Centric: Neo-banks often prioritize customer experience. They offer user-friendly interfaces and customizable financial tools.
- Innovative Features: Neo-banks frequently introduce innovative features and products, such as budgeting tools, automated savings plans, and investment opportunities. They may also integrate with third-party fintech services for added functionality.
- Mobile Payments: Many neo-banks provide integrated mobile payment options and digital wallets, enabling payments or transfers directly from smartphones.
Neo-banking in India is a fresh subject and is still evolving. Some popular neo-banks in India are Freo, Fi Money, PayZello , InstantPay, FamPay, Jupiter, Mahila Money, Open and Niyo. Here it must be noted that neo-banks in India partner with licensed banks to provide financial services as they do not have a banking license. Nevertheless, this gives them more autonomy than traditional banking institutions.
Benefits of Neo-banking
Neo-banks offer multiple benefits compared to traditional brick-and-mortar banks. Some of the benefits are as follows:
- They have a streamlined account opening process. Customers can open neo-bank accounts often without extensive paperwork or credit checks.
- Neo-banks have a zero-balance account policy. So, customers are not required to maintain a minimum balance in their accounts.
- Neo-banks may offer lower or more transparent fees compared to traditional banks. Some even provide fee-free or no-minimum-balance accounts.
- Some of these banks have higher interest rates on savings accounts than traditional banks.
- Neo-banks use cutting-edge technology to provide a higher level of security of customer data than traditional banks.
Neo-banks typically focus on offering core banking services like savings accounts, checking accounts, and payment processing. They may not provide more complex financial products like mortgages or business loans. Legal restrictions often prevent neo-banks from accepting deposits or extending loan products directly. Additionally, since these banks are not regulated by the RBI, customers may lack proper legal channels or pre-defined processes to address any dispute.
Types of Neo-banks
Neo-banks can be of either of the two types:
- Full-stack Neo-banks: These banks have essential bank regulatory approvals. So they handle all back-end and front-end operations on their own. Full-stack banks are still not legal in India.
- Front-end Focused Neo-banks: These banks do not have any banking license and are dependent on a traditional bank to funnel their services to the customers. They only have control over the customer interface.
How are Neo-Banks Different from Digital Banks?
Neo-banks and digital banks are similar in their mode of operation. Both are accessible through mobile and other devices. But there is a fine difference that separates neo-banks from digital banks. Digital banks are online extensions of conventional banks and financial institutions. It offers digitized traditional banking services but has no physical branches. On the other hand, neo-bank is a financial technology company that provides 100% digital and mobile solutions.
Regulatory Considerations for Neo-banking in India
Neo-banks provide products that come under the regulatory framework of the Reserve Bank of India, the Securities & Exchange Board of India, and the Insurance and Regulatory Development Authority of India. It is true that neo-banks in India now operate in a regulatory vacuum.
But NITI Aayog’s recently released discussion paper titled “Digital Banks A Proposal for Licensing & Regulatory Regime for India, proposes a framework be created for neo-banks to become fully licensed digital banks.
Conclusion
The past few years have seen big changes in the banking sector. As consumer behaviour has undergone a dramatic change, so has the business operation models of the banks. Neo-banking offers many advantages in terms of convenience and accessibility. They are best for people who prefer doing most financial transactions online. Neo-banks are also business-friendly so far as payments and disbursements of loans are concerned.
But it also means increased dependence on technology and internet connectivity. There are still many who do not have reliable internet connections or the necessary skills to navigate through online platforms effectively. Furthermore, in absence of proper regulations, neo-banking carries with it the potential risks of fraudulent activities or misuse of customer data.
Inspecting its popularity, it can be said that neo-banking is positioned for growth. Since both traditional brick-and-mortar banks as well as neo-banks have their benefits and downsides, the right choice between the two must only be made based on personal situations.
Neo Banking FAQs
Q1. What is a Neo-bank?
A Neo-bank is a new-age bank without any physical location, present entirely online.
Q2. What are the limitations of neo-banking?
Limited physical presence and customer support are the major limitations of neo-banking.
Q3. Can Neo Bank accept deposits?
Yes, neo-banks allow customers to make deposits and withdraw money.
Q4. What is the future of neo-banks in India?
Between 2016-2020, the neo-banking market has registered a CAGR of 50.6%. By 2026, the neo-banking market is expected to reach $333.4 billion, with a market growth of 47.1% CAGR over the next three years.
Q5. What are the popular neo-banks in India?
Freo, Fi Money, PayZello, InstantPay, FamPay, Jupiter, Mahila Money, Open and Niyo are some popular neo-banks in India.