The financial services industry has seen drastic technology-led changes over the past few years.
Payments, digital lending, and asset management channels have been rapidly disrupted through technology for quite some time now. However; the recent trend of “Neo-Banks” is fast attaining the attention of fintech investors and entrepreneurs.
What is Neo-Bank?
The term refers to a digital direct bank that provides banking services to its customers digitally through smartphones and personal computer channels only. The term became famous in 2017 to describe fintech providers challenging traditional banks. One of the major objectives for Neo-banks coming into existence is to provide extended banking services to the unbaked at affordable costs. Such banks were first introduced in the UK but with the rise of technology now they have a global presence.
Globally, neo-banks are totally 100 percent digital banks that offer hassle-free banking services in comparison to traditional banking like accounts, loans, and payments but in India, however, regulations do not allow 100 percent digital banks. Payments banks, one of the closest models of neo-banks, are now offering services higher than a traditional bank’s offerings.
Indian Market Opportunities for Neo-Banks
With learning from major global players, Indian startups are now focusing on backing unbanked segments instead of battling with the other players. In India, leading traditional banks are forming their own channels to boost their range of services with digital banking services such as 811 by Kotak, YONO by SBI, etc.
Exciting opportunities exist for neobanks that offer incredible analytics on accounting, payments, receipts, etc. and higher flexibility in disbursing through structured operations and costs. They can also provide complementary services like book-keeping and financial management tools to merchants and businesses. As RBI does not permit 100 percent digital banks in India the existing neobanks are collaborating with existing traditional banks and utilizing their extensive network to yield rich results for both the investors and for them as well. Some of the examples of such neobanks startups in India are NiYO, Open, Yelo, etc. Open has collaborated with Visa to introduce a business credit card for SMEs for credit, cost management and payment processing for small businesses.
Future Trends for Neo-Banks in India
- Focus on shifting channel- Consumers transition to digital banking will lead to the progress of neobanks as it initiates a behavioral change to move from branch to digital banking.
- Creating awareness/ literacy in customers– As awareness of digital services converts to the adoption of such services there is an exceptional opportunity awaiting in the SMEs’ among many others.
- Building trust or confidence in users- Once the users become confident with technology, they will totally get dependent on digital platforms provided by neobanks for the future.
- Favorable Policies by Regulators- RBI’s moves on sanctioning a regulatory sandbox for financial innovation will push beneficiaries to adapt their business models and motivate more startups to enter. By launching UPI and BHIM by NPCI the Indian Govt. is heading the way in payment innovations at a global level. Such favorable policies are also foreseen in the neo banking space to encourage startups and to move a step ahead in achieving financial inclusion.
- Visits to physical bank branches will slowly end- As the users get confidence and friendly for using digital banking services, eventually neobanks will end up becoming their trusted partners for any banking requirements.
Increased RBI focus on digitization, a collaboration of fintech startups with traditional banks and the opportunity for the people to enter the financial net who remained unbanked for ages through increased penetration of smartphones and digital literacy will promote the next wave of fintech growth in India through the rise of neo banking.
The rise of innovative digital-only banks will benefit the consumers especially the unbanked section who will get an opportunity to be a part of the formal financial system and will contribute their bit in achieving financial inclusion.