How NeoBanks Are Changing the Fate of India’s Banking System

How NeoBanks Are Changing the Fate of India’s Banking System

Banks are undergoing rapid change. Banks are changing their behavior in terms of customer convenience, transparency, pricing and customer service due to the increased use of disruptive technologies. Businesses and operating models must change as customer behaviors and expectations change.

Thanks to its technological prowess and its agile, lean business models, a non-bank service provider now has access to all aspects of the banking value chain, starting from what consumers expect in terms of banking services. Rather than physical branches, these models provide banking services to individuals and small to medium-sized businesses primarily through the Internet or other electronic channels.

These non-bank providers are called neobanks. They offer more customer-centric and lower-cost services and experiences compared to the current status of traditional banks. Traditional banks are constrained by legacy systems, tightly integrated value chains, complex administrative structures and strict regulations, unlike neobanks. Neobanks in India do not have their banking licenses, but they partner with service providers licensed by banks.

Micro and small businesses, and unbanked or underbanked clients such as freelancers and odd-job workers appreciate the convenience of opening and operating accounts, transparent payments, and payment solutions. transfer and remittance. The neobanks have made financial products and services available to these segments, which are otherwise rare or at high costs.

What is NeoBank?

Customers can obtain financial services at a lower cost through neobanks. With their help, customers can enjoy the convenience of traditional banks without the hassle of physical branches. Providing personalized services to customers while reducing operating costs is achieved by taking advantage of technology and artificial intelligence.

Banks license their services, but they do not have their own banking license. Due to RBI policy, banks are not yet allowed to be completely digital (although some foreign banks offer digital-only products through their local units.) The RBI remains firmly committed to prioritizing physical presence. banks and speaks on digital banks. physical presence.

Digital banks vs neobanks

While they appear to be based on a mobile-centric approach and focus on digital business models, a digital bank and a neobank are not the same. A digital bank is often the only online branch of an established and regulated player in the banking industry. In contrast, a neobank is an independent or partner entity without a physical branch, and it can therefore comply with regulations and navigate the regulatory environment.

Neobanks vs traditional banks

Neobanks cannot compete with traditional banks in terms of funding and, above all, customer confidence. In addition, legacy systems weigh them down and they are struggling to adapt to a new generation with technological demands.

However, neobanks have a unique weapon in their arsenal – innovation – that they cannot apply to traditional banks. Traditional banks are slow to launch new features and develop partnerships to serve their customers.

In general, traditional banks are less inclined to serve small businesses and individuals who use neobanks. With innovative products and excellent customer service, they differentiate themselves thanks to the mobile first model.

Neobanks have advantages over traditional banks for MSMEs

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  1. Customer service: Neobanks do not offer innovative banking services to their customers, and traditional banks offer similar services; however, they provide a highly enhanced and personalized experience for customers. Compared to conventional banks, neobanks offer significantly leaner business models and superior technologies, including seamless account opening, 24/7 customer service through chatbots, near real-time cross-border payments, and services. automated accounting, budgeting and cash flow systems powered by artificial intelligence. (AI) and machine learning (ML).
  2. Mechanical Services: Neobanks offer pre and post financial institution services on mobile platforms, including GST compliant invoicing, tax payment record keeping and reconciliation, as well as primary banking services.
  3. Transparency: Neobanks strive to be transparent and inform their customers in real time of any fees or charges they owe.
  4. Easy to use APIs: The APIs provided by the neobanks allow the integration of the bank into the accounting and payment systems.
  5. In-depth insight: Most neobanks offer dashboard solutions for managing payments, debts, and receivables, as well as bank statements that provide great insight to users. Providing businesses with substantial expenses and an appropriate number of employees with such information reduces expenses and increases revenue and productivity.

Neobanks in India: Regulatory Considerations

neo-bank 101 - niyo

However, foreign domestic banks using their Indian subsidiaries to offer digital-only products can still obtain licenses for virtual banking in India. RBI continues to stress the importance of the physical presence of banks and recently reiterated its requirement of certain physical businesses for digital banking providers.

Bank branches are used to provide customer service and to resolve disputes and grievances in person. Payment banks are unlikely to become “virtual” or branchless banks, according to the 2014 RBI guidelines for licensing payment banks.

Indian neobanks are currently facing the regulatory dilemma by outsourcing their banking activities to licensed banks and creating strategic partnerships with traditional banks. Some of the biggest names in neobanking are already using this model.

Neobanks partner with traditional banks and offer banking services to businesses and individuals as part of their business strategy to overcome regulatory hurdles. From an end user perspective, Neobank provides financial and banking services, but from a monetary perspective, their partner banks handle monetary transactions.

The best neobanks in India

list of the 3 best neobanks in India (2021) - aayush bhaskar

Launched: November 2018

Automates manual and repetitive financial tasks and provides insight into money flow primarily for business owners and online traders. Provides general ledger support for current accounts, simplifies payments, and offers credit solutions.

Launched: 2015

Provides zero balance accounts with free accidental death insurance and payday advances to its clients. Users can also track, manage, and claim employee benefits using forex cards and tax saving cards.

Launched: 2017

In addition to offering deposit accounts, money transfers, debit cards for online and offline shopping, and expense management, Open is a neo-bank for businesses and startups.

Launched: 2019

The company offers online banking services such as savings accounts, prepaid cards, bill payments and money transfers to individuals. The company also provides insight into money management and interest-bearing savings accounts.

Neobanks face challenges

The neobank market size is expected to reach $ 333.4 billion by 2026, growing at 47.1% CAGR. Neobanks, however, have their pros and cons, just like any other financial institution. They are successful in meeting the needs of a market segment and implementing the right business strategy, work culture and technology.

While they are all important, none of them are as important as building trust. Compared to traditional banks, neobanks are at a disadvantage in this case. Neobanking in India is thus supported by freemium models which give customers the opportunity to try the service before signing up.

Benefits of neobanks

  • Low costs: Because neobanks have fewer regulations and are not exposed to credit risk, their prices are low. Most products are inexpensive and maintenance is not charged.
  • Convenience: Many banks offer banking services to their customers through an app (if not all).
  • Speed: neobanks offer rapid account opening and processing of requests to their customers. Loan companies can use innovative strategies to assess your credit instead of the usual time-consuming application processes.

The disadvantages of neobanks

  • Regulatory Barriers: Due to the RBI’s inability to recognize neobanks as such, clients are unlikely to have any legal recourse or defined process if they have a problem with a neobank.
  • Impersonal: as neobanks do not have physical branches, customers do not have access to personalized service.
  • Limited services: Neobanks generally don’t offer as many services as traditional banks.

Case study

SMEs in India can take advantage of the services and solutions of a neobank, helping them to manage their finances quickly and comprehensively. Small businesses can use Neobank to send and receive payments, automate accounting and reconciliation, generate and verify invoice tax compliance, and connect to third-party banking and business applications. The app also allows businesses to manage multiple accounts from one place.


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