Banking has moved forward in leaps and bounds in the past few years. The way businesses and individuals consume financial services has changed significantly ever since neobanking became prominent in 2016.
It’s no secret that traditional banks are on the front of increased competition from many arcs of the digital world says
Neobanks are expanding rapidly, using state-of-the-art tech to win over customers, who demand simpler, faster, and more efficient financial services. In recent years, neobanks have become the next big thing in fintech.
Fintech startups in India raised a whopping $3.7 billion in 2019 alone, and for good reason. India has the highest adoption rate for fintech services in the world! Not only that, India’s annual return on investment on fintech startups is also the highest in the world at 29%, compared to the world average of around 20%. So clearly, fintech players are one of the safer bets in the Indian startup ecosystem, at the moment. Entrepreneurs and venture capitalists, both have come to realise this rather early, and this has resulted in a flurry of fintech startups popping up, offering a slew of different services from online wallets to digital lending… to now, neo-banking.
Many new ‘neo-banking’ startups have come up in the country and have already raised north of $90 million! 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! So yes, it is a growing and important domain of the online banking industry.
But what even is a neo-bank? How do they work? Let’s break it down.
Innovation in Banking Technology
Clearly, digital technology is the core of the business proposition for the Neobanks.The ease of operation as compared to the full-service banks is what strikes the chord with new customers and prospective businesses.
The ability to generate new business value and engage customers in a whole new way through the use of digital technology has led to the paradigm shift. Digital economy is the future, as we all know and acknowledge. With traditional banks posing a whole lot of challenges for entrepreneurs, Neobanks aim to bridge the gap when it comes to operations and execution, thereby redefining the ease of conducting business in a whole new way.
Advent of Fintech
One of the driving forces of this change was the surging internet and mobile phone usage among the users. This led to increased awareness and adaptation of fintech services. It started with online payments, to financial lending and end-to-end cash flow management.
The past decade alone saw the advent of fintech that took the country by storm. Today, there are over 2000 fintech players in the market; with digital payments becoming the trend with users. This is one of the reason why customers are making a shift from physical banks and cash towards online banking and wallets. Making online payments through Google Pay, PayTM, PhonePe and other payment apps, have become a popular hit, now more than ever.
Looking at this, we can see the potential neobanks have in India. Neobanks have the opportunity to provide the fluidity that traditional banks do not. An amalgamation of several factors has influenced customers to make this shift.
Simplifying the process
Neobanks provide majority of the banking services through a simple, efficient mobile application all at the click of a button!
For opening a bank account, the process usually involves going to the bank with original documents like proof of address, identification documents, employment contracts, etc., meet with the bank associate who then sends it for a review process. This can range from anywhere between a day to a week or two.
Neobanks, on the other hand, have been able to build new digital processes that cut down on wait times and friction. They often leverage technology such as AI and facial recognition to streamline and automate the account opening process, all without compromising on stringent compliance and regulatory requirements.
Fintech companies offering Neobanking for their customers provide a whole range of digital financial services such as payments, transfer of funds, loans to businesses and individuals, the facility of savings bank accounts, besides also helping in budgeting, prompt reminders as an when payments are due, calculation of tax etc. In other words,
Changing Banking Experience
The Indian Fintech landscape saw an upheaval, especially in the past five years. Events such as demonetization pushed India from a cash-dependent country towards digital payments. Apps such as PayTM, Mobikwik and subsequently, Google Pay and PhonePe have now become the norm.
This further gave neobanks the opportunity to delve deeper into the behaviours, attitudes, life stages, lifestyle factors as well as tech-savviness of users to get a nuanced understanding to build actionable strategies.
User experiences that help customers to get what they want at the time they want it are the main drivers for delightful experiences. Some of these experiences can be quick and efficient transaction processing to easy accessibility with relevant information, prompt customer support and personalised services.
According to a survey by EY, nearly two-thirds of customers perceive little or no differentiation of products and services across the banking sector, a situation that nontraditional players identified through the promise of the better customer experience.
This created the pathway for neobanks to look at challenges with a focused customer-centric lens. The value for customers here is that neobanks take that extra mile to understand the specific pain points and create intuitive solutions to address them.
PWC revealed in a study that 61% of customers still feel that physical branches are important, however, with more than one branch for every 5,000 residents, savings on these overhead costs are typically passed onto customers in the form of lower fees or interest charges.
Here’s where neobanks differ completely. Opening neobank accounts are typically free to open and use. Moreover, neobanks are not bound by a physical location and are 100% online — which drastically cuts down the hidden customer fees levied by the traditional banking systems.
Finin aims to provide services that would help users to achieve their financial goals despite the extenuating circumstances that the world is currently experiencing. One of the major impacts that people have faced during lockdowns is the complete change in their spending behaviours. Here are some of the features Finin is offering during the time of crisis.
Automated customer service – one of the major complaints that people have faced during a lockdown is limited to no response to customer service. It becomes extremely difficult for traditional banks that rely on human help to function with the same capacity and productivity as before, making it difficult for customers to reach out to the banks. Powered by AI and Machine learning, Finin aims to empower the customer to seek out quick and reliable options which will be personalised based on their spending and saving patterns.
Regulatory framework for neobanks in India
Neobanks in India emerged as a comprehensive aid for banking and financial services, as well as for small and medium-sized businesses. But, RBI’s regulatory policies neither agree nor disagree with the factuality of fully digitised online banks – meaning, in India, neobanks aren’t 100% digital.
Back in 2018, RBI kicked all forms of cryptocurrency to the curb, with an explanation that crypto transactions would be a threat to security. Also, other tech innovations like online currency and associated banking services appear to have come to a halt. This has put a damper on the tenacity of new business models since regulatory guidelines are muddled.
However, in August 2019, RBI ushered in a new regulation for the testing of new fintech innovations in a restricted ecosystem, which is motivating for emerging fintech companies.
Although digital and neobanks are gathering momentum, most are yet to show sustained profitability. Nevertheless, they have great potential to be disruptors in banking and financial services, and the key towards becoming profitable entities would be to convince traditional banks to invest in new-age technology and re-engineer processes to provide seamless and swift customer experiences.