Neo Banks Are Disrupting The Fintech World
This is the new buzzword in town. And we are here to tell you all about it.
Recently, NeoBank Jupiter raised $45 million in a new funding round, which was co-led by Brazil’s fintech major Nubank, Global Founders Capital and existing investors Sequoia Capital, and Matrix Partners. Also, KreditBee, which offers RuPay credit card, is looking to become a neo bank in two years. So, neo banks are all the craze these days, but what are they?
Meet Neo Banks
Neo banks are financial technology firms that offer internet-only financial services, and do not have any physical branches. From opening accounts to analysing the creditworthiness of an individual or an enterprise, neo banks facilitate almost everything. Neo banks do not have a bank licence of their own, but they count on bank partners to offer bank licenced services.
Most of the time, the terms — neo banks and digital banks are used interchangeably. But the important thing to note is that digital banks are generally an online-only partner or subsidiary of a traditional bank. Meanwhile, neo banks are an independent fintech company carrying out its business without any physical branch. Tech-savvy people are attracted to the concept of neo banks, as they can manage their money via mobile phones or tablets. The major players in this segment in India are InstantPay, Niyo, Open, and RazorpayX.
Why The Hype?
- Everything Made Simple: With neo banks, the account opening process is hassle-free as there is no paperwork and form filing involved. The account can be opened on a mobile phone in two to three steps.
- It Is Cheaper: Neo banks can save a lot of resources as there are no physical branches to take care of. Because of that, there are no fees imposed on withdrawals or any kind of annual or monthly maintenance charges.
- Smooth Experience: Neo banks offer an enhanced customer experience due to the superior technologies. Unlike the websites and apps of traditional banks, which are always filled with glitches and lags, the applications and websites of neo banks are very responsive.
- Helping The Micro Small Medium Enterprises (MSMEs) Segment: Businesses often have to deal with long, tedious processes involving payments and disbursals. Neo banks simplify the entire process by lowering the manual efforts needed, and by offering unified platforms to monitor the money movement. Other services like taxation, budgeting, and accounting to MSMEs are also rendered at low costs.
- Less Regulation: Since neo banks are not legally considered banks, there might be a confusion as to who will be responsible for potential fraud and errors.
- No Physical Banks: Even though neo banks maintain partnerships with ATM networks, we know that they aren’t any physical branches. However, some people want the ability to visit a branch and bank in person. While many neo banks provide strong customer service tools, some customers might prefer to ask questions in person.
- Fewer Services: Usually, neo banks have pared-down services, as against traditional or online banks. These institutions tend to focus on checking and savings more than loans.
The neo banking market has logged a CAGR of 50.6% between 2016–2020, and this shows how people are attracted towards it. According to Zion Market Research, the neo bank sector is estimated to grow at a CAGR of 46.5% between 2019 and 2026 worldwide. The research also said that the sector is projected to generate around $394 million by 2026. So, these numbers are proof that this sector will continue to grow in the future, and we might see new players coming into the Indian neo bank sector.
Even though digital and neo banks are gathering momentum, most are yet to show sustained profitability. However, they have the potential towards becoming profitable entities. With more millennials, and Gen Zers showing interest in saving money these days, we believe they would choose neo banks over traditional ones as the former provides a seamless, and swift customer experiences. But we have to wait and see how they will convince people that their platforms are safe to use at a time when the finance industry is filled with cybersecurity attacks and thefts.