Explanation: neo-banks vs traditional bank

What are neo-banks?

Neo-banks are online-only financial technology (fintech) companies that operate only digitally or through mobile apps. Simply put, neo-banks are digital banks with no physical branches.

How are they different from traditional banks?

Neo-banks are disrupting the traditional banking system by leveraging technology and artificial intelligence (AI) to deliver a range of personalized services to customers. On the other hand, traditional banks follow an omnichannel approach, that is, having both a physical banking presence (via branches and ATMs) and digital to offer a multitude of products and services.

From customer acquisition to traditional banking services such as remittances, money transfers, utility payments and personal finance, neo-banks offer a wide range of offerings to customers in the categories of retail and small and medium-sized enterprises (SMEs). Typically, new banks apply a conceptual approach to a particular banking area and tailor their products and services to make banking easier and more convenient for end consumers.

How are they evolving?

The term ‘neo-bank’ started to gain importance globally in 2017, as they became a new challenger to traditional banks in terms of customer engagement, connectivity and reach, and most importantly , user experience. This is why neobanks are also called “challenger banks”. The market potential for neo-banks is being boosted by the increasing penetration of the internet and smartphones across the world.

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According to a report by KBV Research, the global neobanks market size is expected to reach $ 333.4 billion by 2026, growing at a compound annual growth rate (CAGR) of 47.1%. Although neo-banks are a relatively new concept in India, the concept has gained ground in recent years. There are a dozen neo-banks in India including Razorpay X, EpiFi, Open, NiYo, Jupiter among others. In recent times, some of these companies have raised funds from reputable global investors, who are betting on the potential of India’s extremely underbanked market.

Can they replace traditional banks?

Not entirely. Neo-banks offer only a small range of products and services compared to a whole range of services offered by traditional banks. Additionally, since neo-banks are heavily digitally driven, they may not be able to meet the banking needs of uninformed tech-savvy consumers or people in rural areas of the country, who believe in a digital interaction. face to face with their guardians. In 2020, India had a smartphone penetration rate of around 54%.

What are the challenges they face?

Numerous. It is above all about building trust. Unlike traditional banks, neo-banks do not have a physical presence, so customers cannot literally “bank on them” in the event of problems / challenges. Second, the neo-banks have yet to be recognized by the Reserve Bank of India (RBI).

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Thus, they must engage with banks and regulated financial institutions to offer financial products and services. Due to the lack of enabling regulations, neo-banks cannot accept deposits or offer loan products on their own books. This is why some fintechs have a non-bank financial corporation (NBFC) as the parent company to engage in lending activities while most of the others partner with banks and financial institutions.


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