What are neobanks

In the past few years, the fintech revolution has gripped India with hundreds of fintech companies opening up. Neobanks are a significant part of this and have begun to disrupt the traditional banking ecosystem. Neobanks have brought in a radical change and provide their customers with ease and comfort in all their banking transactions. The emergence of neobanks has opened exciting avenues for new development and a lot of progress in the banking sector. These neobanks are bridging the gaps that exist in the conventional banking system through technological solutions.

What is a neobank?

A neobank is a new generation of banks that exist only in the digital realm. These financial institutions only have an online presence and operate digitally. They offer all the services that a conventional bank would offer through a digital setup or a mobile app without any physical branches. The younger, tech-savvy generation prefers these digital banks that can offer immediate money transfers, lending and payments.  

Most neobanks have easy and simple interfaces, cheap fees, and quick transaction time periods. They provide various banking options such as checking and saving accounts, loans and credit cards.

Neobanks Vs Traditional banks

A neobank may pose a threat to conventional banking because it is extremely customer-focused. The technology makes banking easier, quicker and more convenient for customers. On the other hand, traditional banks have a wide physical presence with ATMs and branches in various places. Coupled with their services like net banking and digital payments, they have an edge over neobanks.

Neobanks have a lower customer base when compared to traditional banks and hence they will take a long time to achieve the scale of business of a traditional bank. The latter category also has significantly higher amounts of funds than neobanks and a large customer base, ranging from big corporations, large MNCs and a major portion of the older generation with them. The neobanks on the other hand have innovative app features, cutting-edge technologies and new age fintech services that traditional banks lack and hence, they attract the younger generation.

It is important to note that neobanks rely entirely on their banking partners to operate since RBI does not allow 100% digital banking operations and therefore, they cannot apply for a banking license. But in the light of the success of neobanks, traditional banks have been compelled to relook at their products, services and apps and are trying to offer better customer service.

Despite all these problems, neobanks are growing in popularity when compared to conventional banks as they are more responsive, creative, economical and not bogged down by archaic systems.

How do neobanks function?

Neobanks save a lot of money on operational overheads since they do not have any physical branches or employees working in them. The main functions of a neobank are:

•     Offering technology-led services to customers
•     They depend on the banking partner to hold the customer’s funds or to access funds for lending
•     They oversee operating the app, distribution of the product and customer acquisition, servicing and satisfaction.
•     They are heavily dependent on data, analysing it to understand customer behaviour and offering enhanced services based on the understanding that they have gathered.
•     Young people who are just beginning their journey of earning, find the fact that neobanks offer a no-fee customer account very useful. They also benefit from the lending services offered by neobanks.

Benefits of neobanks

     1. Low cost: Since there are no physical operations, the cost of running a neobank is low, resulting in higher revenues. Customers benefit because there are no monthly maintenance fees.

     2. Quick service: The neobank apps work smoothly, quickly and efficiently. All transactions are completed within a few minutes.

     3. Ease of use: Customers can open an account in a neobank very easily in a few steps.

Downside of neobanks

     1. Since there are no physical branches or people that a customer can interact or talk to, neobanks lack the human touch.

     2. They do not possess a banking license and therefore, they cannot offer all the services and benefits that a traditional bank can offer.

     3. Since neobanks operate only digitally, it makes them susceptible to online threats, cyber-attacks and security breaches.

Things to watch for

•     Neobanks are not banks. They are fintech companies with banking partners.
•     RBI does not recognize neobanks as a “bank” and hence if there is an issue, there may be a gray area in case there is a legal matter.
•     Neobanks have limited services unlike conventional banks.
•     All access to neobanks is through mobile phones alone. If you lose your phone, it could be a threat.

Conclusion

Neobanks have shaken up the banking sector and brought in development and innovation forcing traditional banks to think on their feet, adapt and respond. It remains to be seen if neobanks and traditional banks will work together to make the banking and financial services industry bigger and better.

People Also Ask

1.  What are the examples of neobanks?

Some examples of neobanks are Jupiter,  Instapay, Open Money and Kotak 811.

2. Is neobank a new concept in India?

Neobank is a relatively new concept in India. Conceptually, it started in 2013 and the idea spread across quicker in 2018, due to growth in online transactions and e-commerce.

3. What are the features of a neobank?

Major features of a neobank are free transactions where customers can make unlimited fund transfers, bill payments and digital debit and credit cards that they can use for online transactions.