A recent concept, now in practice, neo-banking has brought a revolution in the banking industry. From traditional banking methods to digital banks and wallets to neo, the concept of finance has transformed significantly. Technology in every industry and sector has gained tremendous momentum in recent years, and the same rhythm can be felt in the financial world too.
Neo-banks are institutions, which provide financial services similar to those of traditional banks, the only difference is that these services are strictly only online. They entirely exist digitally. Fintech has made it possible for us to get banking services online, without there being any physical branches. With easier processes, user-friendly interfaces, and lower fees, the banking system has witnessed quite a remarkable makeover in recent years.
Neo-banking Vs. Traditional Banking
There are quite a few distinctions that can be drawn vis-a-vis the different setups and services. Neo-banks may or may not possess the license to function as independent financial institutions. Many countries have granted permission for independent licenses, but many countries like India, are yet to follow the trend. They provide services similar to those of traditional banks, but because of their regulatory limitations, the services offered by neo-banks are not as holistic compared with the traditional ones. Their services are much quicker and their fees are much lower, which gives them scope for a much wider acceptance and audience.
Neo-Banking Vs. Digital Banking
Digital banking is a component of traditional banking, like an extension, or a service provided by regular banks. Neo-banks on the other hand, are majorly fintech companies or start-ups, which function independently. Neo-banks leverage technology to provide customized and quick services to their customers using artificial intelligence and data insights.
How Do Neo-banks Function?
If neo-banks are granted independent financial licenses, they exist as their entity. However, if they cannot possess licenses, like in the case of neo-banks in India, they usually form tie-ups with traditional banks, where they provide the technology, and their partner bank provides the products and services. Traditional banks too could have their neo-banks.
Benefits of Neo-Banks
User-friendly and Easy Processes
With a heavy focus on making interfaces as user-friendly as possible, one of the biggest advantages neo-banks offers is simple processes and procedures. Their services are much more convenient for users, as there are lesser restrictions in terms of time and effort, for instance, a user can have their KYC (Know Your Customer) done sitting in the comfort of their homes.
Augmented Customer Services
One of the core objectives of neo-banks is enhanced customer services. The entire concept of omitting physical branches and reducing human interaction aims to amplify the customer service segment. With the target of disrupting conventional banking methods, neo-banks create easier and quicker processes to provide intensified customer-centric services.
The turnaround time for transactions, registrations, and services like new account opening is negligible, making it much more convenient for users to systematically manage and operate their finances.
Because neo-banks only exist online, they save a lot on the cost of infrastructure. With lesser human involvement and no physical structure, these banks can offer more services at lower costs.
Disadvantages of Neo-Banks
Financial information and activities are sensitive and even slight negligence can lead to immense damage. With digitalization making the entire world accessible to everyone, neo-banks are compelled to abide by the different regulations and rules in every country they operate in.
Even though technology has advanced substantially in developed nations, many corners of the world are yet to experience the wave of digitalization. With countless potential consumers still anticipating experiencing this revolution, neo-banking faces limitations when it comes to inefficient basic infrastructures.
As digitalization in many aspects is still a recent phenomenon for the majority, there are strict regulations and limitations which hinder the smooth functioning and expansion of neo-banks. This ultimately limits the scope of services they can freely offer.
Future of Neo-banking
Globally, the neo-banking industry has reported a CAGR of 51% since 2017. With the number of users shifting to digital modes of banking, this number will only grow. In 2021, the valuation of neo-banks globally was reported to be a little less than $48 billion. Judging by the exponential number of start-ups emerging in this sector of fintech, the valuation is estimated to grow by more than 50% before 2030.
The Indian market mainly has been in the limelight as the number of smartphone and internet users in the country is one of the highest in the world, making the ecosystem there extremely habitable for the future of fintech.
Neo-banks are already starting to be perceived as alternatives to traditional banks. With countries making regulatory changes to increase allowance and acceptance for neo-banking, the picture looks bright when it comes to the future of neo-banks. More and more start-ups focused on neo-banking are emerging every day. As the market is filling up with new neo-banks, the intensity of competition has grown remarkably, resulting in more innovation and better services.
The future of traditional banking is not in jeopardy as they cannot be replaced completely by neo-banks for many reasons like the mass majority is still not very familiar with new technologies changing the face of banking, neo-banks cannot substitute human involvement for services that require them, etc.
Neo-banks have provably disrupted traditional banking methods. Both new and old techniques are targeting partnerships to not only help bridge gaps but also enhance their services. With the extent of possibilities that are rapidly materializing by corroborating finance and technology, it is only a question of time when neo-banking will be as popular as traditional banks.