We keep hearing about Neo Banks these days. Here is a small write on what they do and their current landscape.

Neo Bank is a new type of digital bank that exists without any branches. They are primarily fintech firms providing digital and mobile-first financial solutions services to modern tech-savvy customers. These include payments and money transfers as well as lending through online platforms and apps. Neo banks are reinventing the practices and processes associated with traditional banking.

This new-age banking emerged about 5 years ago, namely in the UK through FinTech players such as Monzo and Atom Bank.

Neo Banking in India

Neo Banking in India is of 2 types – consumer facing and business facing. The Neobanking journey in India started out with Open in 2016 for small businesses to go digital. Now, even YouTubers and freelancers are registering on its platform as businesses. On the consumer side, Bengaluru-based Niyo started operations in the same year, but targeting blue-collar workers, taking the B2B2C route. Some Neo banks in India are in the beta stage or just about to launch operations.

Difference between Digital Bank vs Neo Banks

Digital banking usually refers to a bigger player in the banking industry providing financial services in a traditional way. Neo banks are 100% digital and do not relate to any traditional banking names, big or small.

Banks which entered Digital Banking:-

1. Yono by SBI
   YONO (You Only Need One) is State Bank of India’s digital banking platform which was launched in November 2017.  Apart from banking services, the platform also provides lifestyle services like cab booking and online shopping.
   The country’s largest lender is looking to acquire a customer base of up to 250 million using this platform in the next two years
2. ICICIStack by ICICI Bank
   ICICI Bank launched ICICIStack digital service ahead of the coronavirus outbreak in the country. ICICIStack is another digital platform allowing users to open saving accounts, instant PPF, and a list of about 500 services covering all the banking requirements. The ICICIStack is available on the internet banking platform or mobile phone app.
3. 811 by Kotak
   The product was launched in March 2017 and is named after the day demonetisation was announced in India – November 8, 2016. It is a zero-maintenance bank account, along with a virtual card and one can also earn a 6 per cent interest per annum on their savings. Within two years of the launch, the bank claims to have doubled its customer base to 16 million users.

Fintechs vs Neo Banks

There are apps like Google Pay, Paytm and Phone Pe in India which provide payment and investment solutions. “Some solutions that Neo-banks address could be similar to the current offerings of other fintechs. But they are also addressing problems in banking that others fintechs don’t. Also, with better insights on the funds of customer, they are in a position of offer better solutions”. For example, if the customer has ₹10,000 lying in the account for some weeks, the AI can suggest that the money be kept in a liquid fund or a sweep-in fixed deposit that can earn better returns. This can be done in a few clicks. In the case of other apps offering solutions, the customer needs to be proactive to do this.

In other words, Neo Bank is a traditional bank with the better features to offer. They provide customisable services to the customer, better customer service, money management etc.

Advantages of Neobank:-

1. Easy account creation
2. Seamless international payments
3. Customer friendly interface
4. Value added services like bookkeeping, financial management etc

Challenges faced by the Neobank:-

1. Targeting customer segments
2. Arriving at best market-fit product for the customer segment
3. Partnership with traditional bank
4. Technology challenges – core banking systems used by most banks do not meet some of the expectations for modern digital services

Are Neo Banks in India secure?

When somebody opens Neo bank a/c they have a traditional bank a/c in the backend. Neo-banks are mandated to follow the same set of regulatory requirements such as data localisation norms or 2-factor authentication for card-based transactions. Additionally, Neo-banks are among the first to adopt more advanced transaction security enhancing models such as MCC block, single-use virtual cards, and token online transactions.

Regulatory norms for Neobank: –

In India, RBI is still not granting Banking licenses to virtual banks. Currently, Neo Banks are outsourcing their banking responsibilities to those with licencesiecreating strategic partnerships with traditional banks.

Focus Business Segment for Neo Banks in India: –

Neo Banks main focus are especially young generation who are digitally savvy consumers and who don’t want to deal with traditional banks due to lack of flexibility. This generation wants to compare online loans, submit their application with a few clicks, and receive approval in a matter of minutes. And this is exactly what neo-banks offer them: speed, friendly customer support, and relevant services. Neo-banks are all about convenience and respect for the customer’s time. Some of the players are available in both B2B and B2C segments.  In terms of customer base Niyo – one of the leading Neo bank has ~ 1 Million customers and B2B leading player Open has ~ 0.4 Million customers. Below are the details of some B2B and B2C players.

B2B companies Product feature offering

Retail companies Product Feature Offering

Funding Details of Indian Neo Banks: –

During the period of Q1’20, India fintech companies has raised $421 M. New-born Neo Bank – Jupiter which is founded by Citrus pay co-founder raised $ 2 M on Apr-20. Below are the more details of Neo Banks funding: –

Neo Banks and their Banking Partners

Transaction / New Entrants in Indian Neo Banking Industry: –

1. Niyo acquired Goalwise
   Niyo has acquired mutual fund investment startup Goalwise for an undisclosed sum in a cash-and-stock deal on July 2020
2. Singapore fintech company Atlantis enters India
   Atlantis, a Singapore-headquartered fintech company has announced the launch of Neo-Bank for Gen Z and millennial
3. Cashaa plans to enter India
   London-based crypto-friendly banking platform Cashaa plans to enter India, US, and Africa
4. Sokin enters India with Razorpay partnership
   Sokin – London based company has entered into partnership with RazorpayX, to provide its clients with a fully operational business banking service including current accounts which can be seamlessly integrated with Sokin’s simple app, or online-based platform, which allows multiple international transfers with no hidden costs, all for a fixed monthly fee

Covid-19 impact in Neo Banking: –

COVID-19 has given birth to fears pertaining to the contamination of coins and notes with this transmissible virus. Consumers are also worried about the possibility of banking professionals being infected with the contagion and thereby, becoming vectors of this disease in the process. Thus, the need to embrace digital transactions has become more urgent and pertinent than it was four years ago. Neobanking is one solution to facilitate this shift.

There is a long lasting impact of pandemic in digital mode of payment The pandemic has changed how people think about their choice of payment options. According to a recent study from Forrester Research, retailers reported a 69% increase in contactless transactions since January.

According to a yStats report released in June, nearly 50% of global shoppers were using digital payments more than before the pandemic, and the majority plan to continue doing so after the virus is contained. In future, many of fintech companies may also enter Neo Banking.

Neo-Banking Future Prospects: –

Credit to GDP Ratio in India is 50% where as it is north of 100% for developed countries. Credit reach definitely needs to improve in India. More bank licenses is surely one way but a thought on giving a systematic push towards digital channels of fulfilling the credit need of the country may go a long way. Moreover, the recent Covid situation has underscored the imperative of quickly scaling banking and credit services to consumers and small businesses.

According to a report published by Allied Market Research, the global neo bank market is growing at a CAGR of 50.6% during the period 2017-2020. Thus, e can confidently say that they are here to stay and grow the pie of the borrowing customers.