Neo-Banking: A flash in the pan or the next big thing in banking?

Introduction

Thanks to the global technological advancement of the banking industry, the future of banking looks promising across all sectors, from personal banking to corporate banking. Not more than a decade ago, people used to stand in lines to transfer and withdraw money at banks. Today, it takes only a few seconds to do online transactions from the bank’s mobile app. Th technology and the internet have truly revolutionised banking for future generations to come.  But what is neo banking?

The first wave of the fintech revolution was led by startups focusing on digital payments and lending. Now it’s “Neo-Banks” that are grabbing the attention of both fintech investors and entrepreneurs, with venture capital investments in neo-banks leading the charts of all fintech investments and a number of neo-banks emerging both globally and in India. That being said, there is a fair amount of scepticism within the analyst and banker communities and the common public that ‘neo-banking’ may just be a fad that will taper down with time. But in reality, neo-banks are here to stay, and they are surely a prominent part of the future of banking. Here, we address these sceptics with 5 reasons why neo-banking is likely to become the next big thing in the world of banking.

1. More than just UI/UX

   It is easy to believe that neo-banking is all about an impressive UI/UX wrapper layered over the plain vanilla product offerings of a partner bank. While it is true that customer experience and design-led thinking are at the core of a neo-bank, well-established neo-banks dedicate a lot of focus towards product and business model innovation. Neo-banking further strives to offer a large basket of value-added offerings and tools, many of which are often non-financial in nature and would otherwise never be offered by a traditional bank.

   For example, the Niyo mobile app has a lot of value-added tools, such as a global ATM locator and a real-time currency converter.

2. Neo-banks put the customer at the centre of everything

   Thanks to the combination of today’s digital banking and payment technology, customers know that they don’t have to settle for anything less than a truly customer-centric banking experience, which is exactly what neo-banks can offer. Consumer surveys in multiple markets, including India, show consumers saying that simplicity, trust, control, and digital self-service are the most important attributes in their banking relationships. These traits make up the hallmark of any neo-bank worth its salt, and that is what Neo-banking aspires to provide. Most Neo-banking companies offer countless customer-oriented services that aim to facilitate secure, faster and more convenient banking for customers across the border.

3. A scalable, flexible, platform-based business model

   Rapidly growing businesses often need a banking solution that grows with them. That is why they are always looking for banking solutions that can facilitate the services to cater to their needs. Traditional banking is designed to scale at a slower pace and can hinder the growth of businesses. Neo-banking offers the right scalable banking solutions to growing companies so they don’t have to compromise their growth.

   Neo-banks, by design, are made for banking for the future. They have built their technology stack and business models in a way that is scalable, flexible and not segregated into silos. This frees neo-banks from many of the constraints large traditional banks face, enabling them to adapt rapidly in response to changing business landscapes and evolving customer expectations.

4. Collaborate instead of competing

   Banks and fintechs have had a tricky relationship over the years from competing for the same consumers. However, when we imagine banking for the future, it has to be a synergy between the robust traditional banks with the rapidly advancing fin-tech brands and neo-banking. In recent times, both banks and platform-based fintechs, particularly neo-banks have realized the mutual benefits of collaborating by leveraging each other’s strengths. Neo-banks present the financial services ecosystem–made up of traditional banks, non-bank lenders (NBFCs) and insurers–with an exciting proposition for inorganic growth through partnerships.

   It allows the incumbent players to reap the benefits of product innovation, digital transformation and incremental revenue without the need for large investments or acquisitions. At the same time, neo-banks can gain access to capital and larger captive customer bases. A report by Morgan Stanley found that only about 7% of banks were involved in the development of in-house technology solutions. The majority of banks, instead, saw more value in either partnering or investing in fintech companies in the form of neo-banks.

5. Not a zero-sum game

   While it is true that neo-banks are aiming to snatch market share away from traditional banks in certain customer segments and business verticals, they are also expanding the size of the pie itself by bringing in newer customer segments and enabling new use cases. This means the neo-banks are not only revolutionising the existing banking services, but they are also paving the foundation for the future of banking.

   For instance, the DCB Niyo Global Card is a prime example of neo-banking. It primarily aims to replace forex in the forms of hard currency or traveller’s cheque that Indians have traditionally used to spend during their foreign trips by digitizing the cross-border payments ecosystem.

   While people are certainly turning to neo-banks to help them save, avoid fees and enjoy quick and simple banking, perhaps there’s enough room for both traditional and challenger banks to evolve banking for the future by collaborating with one another and complementing each other’s strengths. Neo-banking will surely change how people do banking in the future.

FAQ

How do neo-banks work?

Unlike traditional banks, neo-banks work entirely online. They do not have physical locations. Though neo-banks can facilitate easier and hassle-free baking solutions, they currently rely on traditionally recognised banks to operate. These banks offer a wide range of digital banking solutions. Once you open a digital account, you can perform various financial transactions with your traditional bank and many other value-added services. 

What is the difference between a neobank and a digital bank?

Though the terms neobank and digital bank are often used interchangeably, the two have specific differences. Digital banks are often the online subsidiaries of an existing, well-established bank that offer online services. On the other hand, neobanks have no physical presence and solely exist online. That means, unlike the digital bank, neobanks do not have physical operations in banking locations; they are entirely online.