The Concept of Neobanking Simplified

6th AUGUST, 2021

Even as traditional banking are doing away with redundant and cumbersome functioning, tiring queues and mountains of paperwork moving into the digital space, a new league of non-bank fintechs are making news.

Giving a chase for the digital banks are neobanks which are combating the digital-first strategy towards a digital-only strategy promising a world of seamless banking experience. Neobanks are fintechs that offer applications, software and other technologies to streamline digital banking. Generally they offer or specialize in one or few financial products like checking and savings accounts, lending and loans, micro-finance or may cater to a specific market or segment like SMBs, individuals, corporate employees etc. As they operate only via digital platforms, they tend to be more nimble, transparent and cost effective than their traditional counterparts.

To put it quite simply, a Neo bank is an online-only bank. Though Neobanks are essentially online-only banking platforms that do not have branches, they are not to be confused with online banks (as they often are). Online or digital banks are often the online subsidiary of a traditional banks operating as a regulated player in the banking sector providing a broader spectrum of banking services to a versatile range of customer segments. A neobank, on the other hand, exists solely online — without any physical branches and independently or in partnership with traditional banks.

What does the future of Neobanking look like?

Focused on low-cost banking, supported by intuitive technologies and real-time, responsive interactions, Neobank is a welcome alternative to customers weary of traditional banking methods. Platformed on a complete digital infrastructure, Neobanks holds the potential for a far superior customer service and much lower banking charges than its traditional competitors. Even as the larger population is being inducted into digital banking (strongly propelled by the recent pandemic), online-only banks but naturally, are attracting a massive following. Further, the low cost models with less or no fees, greater transparency of operations and flexible product offerings of neobanks are attracting millennials, micro, small and medium enterprises (MSMEs), and those having sporadic incomes and earnings or seeking specific offerings.

With the comprehensive intelligence into consumer behaviour, neobanks also have the potential to offer hyper-enhanced and personalized customer experience tailoring product(s) and service for specific customer needs. Deeper technology penetration in these business models also allows for a more timely and transparent support - at an affordable cost.

The global neobank market was worth USD 18.6 billion in 2018 and is expected to accelerate at a compounded annual growth rate (CAGR) of around 46.5% between 2019 and 2026, generating around USD 394.6 billion by 2026 While neobanks have certainly become a buzz word and a fascinating concept among the young, it is still not accepted by masses with concerns on safety and reliability concerns. Also, regulatory and compliance factors are inhibiting the growth and success of neobanks in the financial space. It is interesting to note, in India, the RBI remains firm on prioritizing a bank's physical presence and banking licenses are not given to digital only banks. To deal with this regulatory predicament, it has necessitated Neobanks to operate with the support of existing traditional banking partners who hold banking licenses.

Also, it is also a wait & watch to see how the customers warm up to interacting and investing in a financial institution that is completely online, pulling away from years of conditioning of in- person banking especially on larger accounts.

Understandable, there is rise in partnerships between neobanks and traditional banks. The hybrid model combining the technical proficiency and customization offerings of a neobank with the security and reliability of a traditional bank has evolved to be a strategic partnership model for the future of banking. This has heralded a win-win for both the banking businesses and the customers by combining the best of both worlds.

Neobanks emerged in response to the digital era holding great promise to a very personalized, cost effective and customer centric approach to traditional banking. While the road ahead for neobanks is still bumpy, it is certainly on the fast lane to revolutionizing banking as we know it. Moreover, in an industry that has long needed a renewed approach to service, neobanks warrant considerable progress.