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Neobanks – Decoding everything about them!

Recently, the word Neobanks have been thrown around quite often. This may have left you wondering many things such as; Why a neobank? Are they real banks? Where is its place in the future? In this article, we have made an attempt to address everything that we think you should know about neobanks. For those who are new to the term ‘Neobanks’, check out this article.

What do Neobanks offer?

The banking sector is built around such rigid compliances, they lag in providing superior customer-centric services. Thanks to neobanks, you can now bank with the same convenience of booking an uber – yes you heard that right – banks have moved into smartphones.

Neobank apps are slick, simple. They are designed to help you understand better& improve your saving and spending habits. Built for the digitally savvy, these apps eliminate the frustration of paperwork and other rigid compliances of a regular bank.

Why Neobanks?

Neobanks have come across as a breath of fresh air in a world where financial services are haphazard and fragmented. How is a neobank better than a regular bank?

  • It’s Cheaper: Neobanking products are generally inexpensive carrying low to no maintenance fees.
  • Convenient: Everything banking including opening an account can be done at the convenience of your smartphone.
  • Quick process: Updated technology allows deposits and loans to process at a lightning speed.
  • Loans at better rates: Generally, larger banks don’t offer small loans. But neobanks are changing that by concentrating on small loans too at better interest rates.
  • Helpful insights and stats: Neobanks provide timely reports and valuable insights to their customers to help them make better financial decisions.

Are they real banks?

Well, some are while the others aren’t. The neo banking landscape is an amalgamation of non-licensed, over-the-top banks, digital initiatives of traditional banks, and licensed neobanks.

  • Over-the-top banks: These are digital-only platforms without their own banking licence. Fintech startups backed by powerful AI technology, partner with the existing traditional banks to form neobanks.
  • Licensed banks: Some Fintech startups that started out as an OTT, obtained a virtual banking license from the government later.  These are as much as a bank as any traditional bank.
  • Digital Banks: Lately, some traditional banks have come up with their own version of digital platforms. They offer 100% digital services to their customers. Although fully digital, these do not classify as neobanks.

In India, pure digital banking has not yet regulated by the RBI. Hence, neobanks have structured themselves in a way to work in partnership with the regular banks (OTT). And aim to provide services built atop traditional bank’s offerings.

The Path Ahead

A study conducted by Bain and Company across 22 countries, found that digital channels are the preferred means of purchasing banking products. And, the share of purchases via such channels rising by 2% to 16% points since 2017. Neobanks are ever-evolving and growing popular each day. As a result, the ease of use and lower costs makes it look like this is where the world of money is headed.

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Neobanks – A ‘Neo’ Face to Banking

Since the evolution of the human race, Finance, Economics and Banking have significantly developed. From quasi banks and grain loans of Babylonia to the establishment of modern banks – humankind has thrived in the progress of the banking sector.
However, the question here is, has the banking sector progressed since the 19th Century? Of course, technology has transformed the way banks function. But, over the years, legacy systems or Core Banking Solutions (CBS) have undergone cycles of change, to meet a wide range of requirements. Due to the complexity, switching to newer systems isn’t an easy task for the financial giants.

The Dawn of Neobanks:

While the bigger players in the financial sector have been struggling to keep up with the pace of digitization, another set of players called “Neobanks” have emerged in the fintech space. ‘Neobanks’ are 100% digital banks which offer services ranging from accounts, credits and payments without the burden of a physical network. Eg, Revolut, Monzo, Xinja etc.

Some of its key features are:

  • Mobile App controlled without any storefront
  • Free Debit Card with control over an App
  • User-friendly interface consumer-centric
  • AI-Based smart and real-time reporting
  • Low-cost structure

What is so ‘Neo’ about them?

The branchless approach to banking reduces its operating costs significantly. Thus, enabling them to provide better and hassle-free services to their customers.
Some of the top-notch services offered by neobanks globally are:

  • Digital Onboarding/Account Opening: Neobanks offer simple and fast online account opening in just a few clicks on their smartphone.
  • Branchless Banking: All financial requirements of a customer are fulfilled digitally eliminating the need to visit a bank branch.
  • International Payments/Remittances: They offer fee-less usage of their debit card in foreign countries at live exchange rates.
  • Money Tracking/Account Aggregation: These banks provide an interface that helps users to spend, save, and manage their money.
  • Lending/Credit Products: Neobanks can provide credit products at lower charges and interest rates compared to traditional banks due to their lower operating cost.

In addition to these banking services, some Neobanks also provide value-added services – Payment processing, invoicing and accounting support, investment/wealth management support, data analytics, etc. Neobanks have been succeeding in the international market such as the UK, Europe & the US for quite some time.  They are now being recognized in developing countries such as India also.
Now, bouncing back to our question earlier, though the banking sector has progressed the digital wave has created a need for a revolution in the field. With the rise of neobanks, a revolution has already been set ablaze.

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