In this era of business models being customer centric and digitized, the Banking sector, too, faces this new challenge. Such dynamic trends have given rise to ‘digital-only banks’ often called Neo Banks. The market now has new entrants challenging the monopolies of conventional banks by capitalizing on emerging opportunities of going digital.
What are Neo Banks?
Neo Banks are fintech institutions operating on IT based services (cloud-based operating systems) to perform banking functions on the digital front, ergo, eliminating human interference. Simply put, Neo Banks are the banks without physical brick-and- mortar presence, operating entirely digitally. Such banks offer banking services in an easier, quicker and efficient way. They run on targeted customer segments that are not the concerns of legacy banks, such as SMEs, tech-savvy millennials, and low-wage classes.
According to Grand View research, this novel facet of the Banking industry is currently valued at $34.77 billion in 2020 and is anticipated to expand at a compound annual growth rate (CAGR) of 47.7% between 2021 and2028. Neo banks have nearly tripled their customer base between 2018 and 2019, from 7.7 million customers to almost 20 million customers.
Neo Banks can acquire funding from various avenues like from crowdfunding, equity funding etc. Let’s take a look at how Monzo, one of the largest UK based Neo banks, has raised funds. In 2018, it raised £85 million through US venture capital investors like General Capital and Accel Partners. Neo Banks in India have also managed to raise hefty funds. Razorpay raised capital from Sequoia Capital, Ribbit Capital, Matrix Partners and others.
Are Neo Banks better than traditional banks?
Neo Banks boasts of lower capital investment and operational costs (which can be upto 70% lower than that of conventional banks) as they obviate the need for maintaining physical workspace and can automate functions as well, thus providing its customers with lower service fee and higher interest rates. Such a business model also allows them to be agile in the face of changes and implement new features with ease. For instance, Monzo allows its card users to use their cards overseas without markups, along with low international transaction fees.
Their business models are more customer centric, as they entice their customers by offering them quicker services than traditional banks like opening a bank account in just a few minutes, receiving payments immediately through various gateways, etc.
This customer-oriented banking facility offers an interface that is highly user-friendly and easy to understand and run. Neo banks also use other innovative tools like artificial intelligence, robo-advisors or biometrics, and leverage the latest technology to take customer experience to a new level. Revolut, for example, has begun offering cryptocurrency support, while Monzo and Starling are the only UK banks providing an account switch service in their app.
Neo bank programs have introduced security measures like two-factor authorisation, biometric authentication, RBAC (Role-Based Access Control), encryption technologies etc. to secure consumer data. Evidently, Neo banks are better placed than conventional ones in terms of customer service.
Proliferating internet and smartphone users have expedited the growth of Neo Banking globally. The European region dominated the Neo banking market in 2020 and accounted for over 30% share of global revenue. Some prominent players operating in this market are Atom Bank PLC; Monzo Bank Limited; Movencorp Inc.; MyBank; N26; Revolut Ltd.; Simple Finance Technology Corporation; Ubank Limited; WeBank, Inc. India currently has 10 Neo Banks operating and a few more in the pipeline.
Lately, traditional banks have also partnered with Neo Banks to secure their precarious position in the market. ICICI Bank, India’s largest private bank has taken a lead in the Neo Banks segment and has partnered with three Neo Banks- Open, Instant Pay and Yelo.
Challenges Moving Forward
‘Digital-only Banks’ are also being faced with numerous challenges. Foremost one being, absence of lucid regulations. Reserve Bank of India (RBI) has not permitted 100% digital bank model in India yet. This will keep the landscape dubious for them. They don't know whether they will be allowed to lend on their books and raise deposits on their credibility as an individual bank.
Another major hurdle is to bag customers’ confidence as customers might be reluctant to drift away from centuries-old banks. Even those willing to give it a try aren’t using Neo Banks for their main account. While the urban population can be tapped in, the same cannot be said for the rural populace.
Meagre revenues are also a major concern for such banks. Since they charge minimal transaction fees, interchange fees; along with inability to raise charges; having limited customer base; so securing a stream of revenue may not be a cakewalk for them.
These new fintech institutions are constantly altering the Banking landscape making it more ‘customer- oriented’. Such new entrants are transforming our economy into a cashless one. They have not only ushered in digitisation to this sector but also expedited the provision of banking services online.
This is a crucial time for banks and financial institutions to benefit from technological breakthroughs and transform the old-fashioned operational structure of banking with the new-gen Neo banks.
The Covid-19 pandemic has indeed called for flexible banking. Does it mean this business model will succeed and be quintessential for various others or will the tables turn?