In this week's FinMail we understand the new revolution happening in Banking and FinTech industry - Neo Banks. We also understand how they are disrupting the industry by their unique offerings.
We keep hearing the word 'Banks' throughout the day in the news, in normal talks, or on the internet. But there's this term that has been buzzing around the internet and in the startups of the FinTech industry that is related to banks and are meant as 'the disruptors' of the banking industry - Neo Banks.
Neobanks are the buzzing topic on the internet recently and we have even started seeing TV promotions of NiyoX and if you are an avid follower of the FinTech Industry, you can't have not heard about Neo Banks.
With the world turning digital due to the pandemic, Neobanks have started popping up and we have also come across the news that this Neobank raised this much funding and that Neobank raised that much money. In fact, KakaoBank, recently became South Korea's first listed internet-only bank. The IPO of Kakao Bank was oversubscribed by more than 1700 times. Total bids value was much larger than Korea's GDP itself. So we can see how this trend has been in the news and thus in this week's FinMail we simplify Neobanks. Let's start right away.
What gave rise to Neo Banks?
For every conventional system that exists in the world, there also exists an invention or a habitual change that disrupts the existing system. Basically, new ways & methods of doing a thing remove the hurdles and make the system more efficient overall. For example, the development of new methods of paying bills & doing a phone recharge online removed the problem of visiting a store & lining up in the queue. And the same pattern is followed everywhere, be it booking tickets for movies/travel or a way to enjoy our favourite movies & shows from the comfort of our home via our devices.
Coming back to banks, the existing banking system is not efficient. It is unable to cater to the needs of modern-day businesses and individuals. Though they are trying to provide their services virtually but let's face it, they are not up to the mark, in fact, they are far lower than the mark.
Hence a solution was needed which addressed the problems of the current banking system and if not all at least the major ones. And like every conventional system needs a disruptor, Neobank is the one for the current Banking System, they were introduced to overcome the challenges of traditional banks and here we are, needing them the most in the times when digital is more safe than physical.
What are Neobanks?
The concept of Neo Bank is pretty much simple and plain. A bank operating completely online, offering its service via mobile app/website and the one that doesn't have physical branches as we see in traditional banks. So basically Neo Bank is a bank that exists only on the internet (virtually). The main feature that these Neo Banks offer is the ease of banking. The transactions are faster, UI is optimum and the costs are minimal. And this is what separates Neobank from the traditional ones. We'll look more into Neobank and what are its advantages but let's discuss some other things first.
A question that might have come across your mind is that if these banks operate completely online then the existing ones also have their own website and apps and they too provide some or almost all services via their platform then why would anyone choose a Neobank over Traditional Bank?
The main business of traditional banks is to provide conventional banking services. They do provide online services as well but their main focus remains on providing their services via their location-specific branches. And that is where the gap arises. A gap of seamless banking experience. Traditional Banks while provide you a digital platform to do banking, not everything is available there but Neo Banks are specifically designed to provide every service virtually from account opening to the transactions later on.
We are experiencing a FinTech revolution going on in India as well as in the World while our banks are falling behind to offer full-fledged online solutions and someone has to fill up this space. With the world expected to be more 'online', using the internet more frequently and being more technologically equipped, Neobanks fit just right in.
How do Neobanks operate?
As said Neobanks operate virtually and hence everything is digital. Neobanks can operate in two ways. Either by getting their own banking license or by partnering up with traditional banks. Currently in India, RBI's banking guidelines don't allow a bank to operate without any physical presence due to the lack of a virtual banking framework and thus Neobanks in India have to tie up with the existing banks and offer their service as an add-on. Basically, it acts like an aggregator or a digital partner for the traditional banks.
Neobanks differ themselves from the banks by adding some features over and above what the banks offer. Like an expense manager, digital debit/credit card, financial portfolio manager, Investment options, Insurance, etc. Technology is their strength and thus they invest majorly in UI design & platform speed. Over and above all, Neo Bank has a cost advantage. Instead of investing in the expansion of their branch network, they invest in technology & AI to make their platform more efficient. They save on capital as well as the operating cost of a branch which the traditional banks can't escape. This enables neobanks to provide customer service at competitive prices.
Advantages of Neobank
Neobanks overcome exactly what the problems were of the traditional banking and these are their advantages as well but that's not it. Let's discuss their advantages.
An Umbrella Bank:
Neobanks enable everything that is related to money to be easily managed via one platform. When you have different accounts at different banks you need to maintain different records for the same and even when you need to review any particular transaction you will need to do more as you can't really manage them in one place. But here's where neobanks drop in. When you link all of your accounts in one neobank, you can view all the transactions in one place and even review them. It also enables you to bring all your financial portfolio like your investments, your loans, etc. in one place so you can take a look at it all at once.
Account Opening like a pro:
When you open an account with neobank, every account opening process is on your device and seamless. No paperwork and no lengthy process. Fill in some important details and you are all set. As simple as that. You might have seen the ad of NiyoX where they promise account opening in under 100 seconds. That's just wow! And you thought you need to wait for like 2 days.
Hassle-free International Payments:
The debit or credit card that you get with your current bank is not internationally enabled by default. If you need to pay for something internationally, you can't do that without an Internationally enabled card. You might need to apply for another card and pay extra charges or it might not be available to you. But when you use a Neobank for International Transaction, it is simple and fast.
Great for Businesses:
If Neobanks have a customer segment to target, that would be business or specifically MSMEs who have the transactional volume but don't have more employees and robust accounting like corporates. Neobanks offer a wide range of services to such businesses. Services like record management, invoice creator, accounting services, multiple credit cards, ease of credit limit, etc. just ease up their business activity and help them manage their money-related activities better and efficiently. Neobank and business is like a match made in heaven!
And the other advantages which don't need any more explanation are a simple user interface, faster transactions, better interest rates, fewer charges, and better service. Neobanks seem that they have taken up the current banking system and have removed all the inefficiencies and fixed them up for us to provide us a better banking experience.
Limitations of Neobanks
As they say, it's not better to be too good. So let's discuss the limitations of neobanks.
One of the major limitations of Neobank is that they are not tightly regulated by the RBI. As RBI has not allowed any Neobank to operate on their own and rather partnering up with current banks, it doesn't really require separate regulation. And as Neobanks in India doesn't operate on their own what you are really doing is that you are actually opening an account from the same traditional banks but with neobank as your partner. It is like back to square one but with a better experience. You might get a UI change but ultimately it is the traditional bank on the backend.
Yet to offer full-fledged services:
The second Limitation of a Neobank is that RBI doesn't allow them to accept deposits right now. So you can't really close all your bank accounts and deposit cash directly to this account. You'll need a traditional bank account, in any case, to transfer money to your Neobank account.
Only for tech-savvy people:
And the last Limitation that we can point out is that Neobanks is not for the technologically challenged people. Managing a Neobank account requires technological knowledge up to an extent and thus it is not for all people. Also because there is no branch of a Neobank, you can't really visit a physical space in case of any technical assistance, you'll have to manage all of that virtually.
That is what Neobanks are and how they have developed currently. We can definitely see more features and more services being offered by Neobanks once they set their foot in the Banking Industry. As per a report by Zion Market Research, the neobank sector was worth $18.6 Billion worldwide in 2018. This sector is expected to grow at an average rate of 46.5% (CAGR) between 2019 - 2026 which will mean that the sector would be worth $394 Billion by 2026.
If we talk about specifically in India, there are over 42.5 million SMEs throughout India, constituting nearly 95% of the total industrial units in the country. But, only 47% of these businesses have been able to access tools for payments, disbursals, and other vital processes.
Furthermore, about 23% of SMEs use ERP software and CRMs. This means, there’s a huge market opportunity for neobanks, especially since they have a lot to offer.
The gig economy of India has over 15 million contract workers and freelancers. And just like SMEs, only about 67% of the gig economy has access to innovative tech that helps with money management. Neobanks can help the gig economy by enabling independent workers with customer management and banking services. (Data: RazorPay)
We can conclude that we have a lot to see in the Neobank industry as it progresses and grows more but one thing is for sure, they have the ability to capture the huge market that awaits to go digital. What will happen in this space, only time will tell and till then we can just wait and watch.
That's it for this week's newsletter. Stay home, stay safe, enjoy the Olympics and we will see you in the next one.
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