Neobanks, coined as ‘challenger banks’, have emerged with a promise to redefine the traditional banking sector. Essentially, a neobank is a digital bank that functions without any physical branches. It operates entirely online, leveraging technology and artificial intelligence to offer personalized services to customers, thereby mitigating operational costs.
In India, neobanks like RazorpayX, Jupiter, Niyo, and Open do not possess their own bank license. They partner with licensed banks to provide services, as the Reserve Bank of India (RBI) currently does not permit banks to operate fully digitally. The RBI emphasizes on maintaining some level of physical presence for digital banking service providers.
Operating Models of Neobanks
There are three primary models through which neobanks operate. Non-licensed FinTech firms sometimes join forces with conventional banks, enabling the creation of a mobile or web platform wrapped around their partner bank’s products.
Secondly, traditional banks also undertake their own digital initiatives. Lastly, licensed neobanks function in countries that permit digital banking licenses.
Neobanks Versus Traditional Banks
Traditional banks enjoy certain advantages, including substantial funding and customer trust. However, outdated systems often weigh them down, making it tricky to cater to the evolving needs of today’s tech-savvy generation. Although neobanks lack the funds or customer base to topple traditional banks, they excel in innovation. They manage to launch new features and establish strategic partnerships much faster than legacy banks.
Neobanks focus on retail customers and small to medium businesses, sectors often overlooked by traditional banks. They capitalize on the smartphone-first model to distinguish themselves by providing innovative products and superior customer service.
Challenges Confronting Neobanks
The success of neobanks lies in their ability to meet the demands of a specific market segment and adopt effective technology, business strategies, and work culture. Regulatory bottlenecks form a significant hurdle, as the RBI does not officially recognize neobanks yet.
Other challenges include the lack of physical branches, limiting customers’ access to in-person assistance. Additionally, the services offered by neobanks are generally fewer compared to conventional banks.
Benefits of Neobanks
Neobanks are popular for their low costs, primarily due to fewer regulations and absence of credit risk. They also offer convenience by providing a majority of banking services through an app. Set-up and request processing times are quick, adding to their appeal. Transparency, real-time notifications, and insightful dashboards that provide valuable services insights are other significant benefits.
Distinguishing Between Digital Banks and Neobanks
Although both digital banks and neobanks operate on a mobile-first approach focusing on digital operating models, they are not the same. Digital banks usually serve as the online-only subsidiary of an established bank. In contrast, neobanks function solely online, either independently or in collaboration with traditional banks, without any physical branches.
The Way Forward for Neobanks
Neobanking can address financial inclusion challenges by bundling banking services with other financial offerings. By initially targeting narrow segments, neobanks can gradually expand by adding more functionalities and services over time.
Although digital and neobanks are gaining momentum, most are yet to demonstrate sustained profitability. However, their potential to disrupt the banking and financial services sector is apparent. The key to becoming profitable entities lies in convincing traditional banks to invest in new-age technology and re-engineer processes for seamless and swift customer experiences.
