‘Neo-bank’ is the buzz word today in fintech and grabbing the attention of both fintech investors and entrepreneurs.
While payment and lending fintechs have traditionally dominated the landscape for fintechs in India, the advent of ‘neo-banks’ has been the latest big development in the fintech landscape. These ‘neo-banks’ are unbundling digital or mobile-only financial products and services that are easy to access, more affordable, and suited for unique customer needs.
The whole idea of neo-banking is to be able to create a completely digital banking layer on a mobile phone. The premise of neo-banking is that if you go mobile, you can dramatically reduce the cost, and you can also improve the customer experience by using technology. This concept is to some extent inspired by the success of global fintechs like Monzo, Revolut and N26 in Europe that are disrupting the traditional banking landscape in their countries by using a mobile first banking approach, offering awesome customer experience and great value added features.
The high adoption rates and successful business models of neo-banks has piqued the interest of investors, venture capitalists and corporates, who contributed USD 586.7 million of the total funding of USD 3.49 billion received by fintechs globally in March 2018.
Neo banks in India raised $116 million in 2019, a seven-times jump year-on-year, according to data from Venture Intelligence. The year witnessed the maturing of business models of neo-banks across a wide range of business operating areas, including digital salary accounts for the unbanked and under-banked sectors, SME payment accounts, SME credit cards and cross-border travel cards.
Globally, digital challenger banks or neo-banks are transforming the way banking is viewed by the consumers and the market. They are simplifying the financial world by creating a customer-centric digital approach to services and unbundling traditional banking products and services, and also bringing a lot of innovation in the products, business models and customer journey. Neo-banks are reinventing the practices and processes associated with traditional banking. As the financial landscape is shifting towards customer experience and satisfaction, a gap has developed from what the traditional banks offer to what customers expect. And, neo-banks are making an attempt to fill that gap.
The substantial growth potential for neo-banks is driven by their low-cost model for end consumers with no or very low monthly fees on banking services such as minimum balance maintenance, deposits and withdrawals. Adoption by millennials, micro, small and medium enterprises (MSMEs), pockets of customer segment such as gig economy workers having sporadic incomes and earnings, embracement of innovative technologies and rising consumerism are some of the catalysts for the success for neo-banks.
Neo-banking can work as an extension of measures undertaken to solve the challenges of financial inclusion and bundling banking services with other financial services—for example, services like opening of bank accounts for immigrants, facilitated through new onboarding procedures not based on traditional documentation of identification. With niche/focused target customer segments and product proposition initially, neo-banks could expand by adding more functionalities and services over time.
I am confident that year 2020 will bring a lot of cheer for the Indian fintech industry in general and the neo-banks in particular. There is a strong sense of optimism around regulatory policies and the reopening of the eKYC facility for fintechs, further liberalisation of the regulatory license regime with interoperability guidelines for prepaid players (PPI), and small finance bank license available on tap. Traditional banks will continue to embrace technology and digital disruption like never before, and their partnership with neo-banks will grow stronger and deeper.
Authored by Vinay Bagri, Co-founder & CEO, Niyo