Neo-banks are fintech firms that offer banking products and services digitally by tying up with banks (since they don’t have a banking license themselves). They are somewhat different from ‘digital banks’ that are a fully digital offering-led subsidiary of an existing licensed bank in India.
The birth of neo-banks has its roots in technological advancements and an ever-growing need to reach out to customers more efficiently in the past decade. The banking industry comprises the consolidation of different legacy stacks-built decades ago, which are gathered and not meant to interact with each other, making it difficult for banks to provide a seamless and outstanding digital experience to the consumer. Hence, customer service issues, hidden fees, lack of convenience also impelled the birth of neo-banks.
Products & Offerings
Their offerings include a wide range of products and services. Superior digital experience, negligible to zero costs of operating, quick account opening, transfer, reconciliations, transaction history retrieval, 24×7 customer services are the key benefits of using neo-banks. Multiple products like lending, insurance, registration, accounting, invoicing, virtual receipts, etc. can be overlayed on neo-bank platforms providing the path to an ample product bouquet and service experience to the customers.
It is quite lucrative for licensed banks too, as they can leverage the capability of new-age nimble and agile tech neo-banks to create wider user base and provide a seamless customer and product experience.
Current user base
It is estimated that currently about 2% of the user base in India has a neo-bank account. Such users also operate traditional banks. The youth comprises a substantial percentage of these users. The evolution of regulatory environment and building of trust in opening and operating a financial account and availing financial products and services will be critical to growth of the neo-bank platforms in ensuing times. Reports suggest that the neo-bank sector is expected to grow at a CAGR of 40%+ globally, till the year 2026.
Growth & usage
With the growing penetration of smartphones, medium to long term impact of neo-banks ranges from clear democratization of financial products and services (loans, insurance, investments and more) to financial inclusion in rural markets where people still travel long distances to conduct banking transactions and avail ATM services.
Capital allocation
India has seen an advent of a few neo-banks aided by substantial capital infusion by Venture Capitalists. While neo-banks have attracted a decent funding, presently, the income lines are limited since product penetration in revenue accretive product lines like lending, insurance is only seeded and will take some time to discern and grow.
The future of neo-banks looks promising. Improved demographics, importance of convenience aided by advanced tech stack in India certainly offer sound recipes to growth and success of neo-banks in India.
Disclaimer
Views expressed above are the author’s own.
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