Neo Banks: The future of banking

By Anu Singh, Assistant Professor, Invertis University, Bareilly

Abstract

Banking is an evolving concept, we started with the barter system which evolved and concluded
in the currency system. With the technological revolution, changes in the banking system were
also required. The combination of finance and technology gave birth to financial technology,
which is a billion-dollar industry. Even Fintech also keep broadening its horizons and now we
see a new kind of banking system introduced known as the neo banking system. In this article,
we will discuss the neo banking system, its function and its future in the Indian subcontinent.

Introduction

In the year 1472, the first bank – Banca Monte Dei Paschi di Siena, was established, which sowed the seed of banking in the world. Since then, the journey of the banking system has gone through a lot of ups and downs. The great depression and the financial crisis of 2008 made the banking system change its policies in order to be able to surviving the upcoming economic lopsidedness. After the Popularization of Information Technology, banking systems also evolved, adapted and introduced the concept of internet banking. The concept of internet banking was not admired initially in India but eventually, people started to accept internet banking as there were many pros attached to it. With the changing dimensions of technology, banks have been constantly evolving and the concept of neo banking has been introduced as the most advanced offspring of the banking system.

Fintech and neo banks

The word Fintech is a combination of two words – finance and technology, hence ‘Fintech’. With no universally agreed-upon definition, Fintech is generally described as an industry that uses technology to make financial systems and the delivery of the same more efficient. It has “technologically enabled financial innovation that could result in new business models, applications, processes or products with an associated material effect on financial markets and institutions and the provision of financial services”.[1] Fin Techs are “start-ups and other companies that use technologies to conduct the fundamental functions provided by financial services, impacting how consumers store, save, borrow, invest, move, pay, and protect money”.[2] India does not have a unified code of laws governing Fintech; these activities in India are primarily regulated by the Reserve Bank of India (RBI) – India’s banking regulator.[3]

Some financial technology (Fintech) start-ups are introducing neo banks for retail clients in India to make banking easy, comfortable, and meaningful.[4] They partner with conventional banks and deliver better solutions with the use of technology such as Artificial Intelligence and machine learning.[5] Initially, only business clients were targeted by the neo-banks that were introduced in India, including Open by Open Financial Technology and RazorpayX.[6]

What is a neo bank?

A neo bank is a bank that performs all its functions online and does not have any corporeal branch. Neo banking is changing the traditional banking system by changing its Modus Operandi.

A neo bank does not encompass any license to work as a bank or to operate its banking business in India. Thus, they depend on a banking company and financial institutions to function flawlessly.

Differences between Traditional banking system and neo banks

Grounds of DifferenceTraditional BanksNeo Banks
Duration of functioningThe first traditional bank was established in India in the year 1770 (Bank of Hindustan). The legacy of traditional banks is more than two millenniums old.Neo banks started their function about 5 years ago.
The platform of providing servicesTraditional Banks provide their services on both the platform online as well as offline mode.Neo Banks provide their services in online mode.
BranchesTraditional banks have several branches all across the country.Neo banks do not have any physical branches, as they provide all their services online.
Money TransferMoney transfer in physical branches of the traditional banking system is quite cumbersome and lengthy.Money Transfer in neo banks is effortless and expeditious.
Cost of servicesIn a traditional Banking system, the cost of services is relatively high as these banks have to maintain the physical branches (their infrastructure) as well as required documents of the customers in physical forms also.The cost of services in the neo banking system is very low and they are more transparent about the charges they receive from their customers and also they don’t have to maintain any physical branch.
Speed of serviceThe services provided by the traditional banks are cumbersome. People have to stand in a long queue to get anything done in the traditional banking system.The services provided by the neo banks are unperturbed. Their services can be availed from the comfort of home.

Payment Gateways and neo banks

Payment gateways are like bridges – they connect a user’s bank account to platforms to which money transfers are to be made and it allows one to make online transactions utilizing various payment modes like net banking, credit or debit cards, UPI and digital wallets like Paytm, PhonePe or Google Pay.[7] It mediates in opening the door between the customer’s accounts to the required platform. They are different from neo banks as payment gateways are working with the traditional banks to provide services to the customers and they are regulated by the NPCI (National Payment Corporation of India) but on the other hand the original concept of neo banks is that they should work independently.

Digital Bank and Neo Banks

Digital banking usually refers to a bigger player in the banking industry traditionally providing financial services. Neo banks are 100% digital and do not relate to any traditional banking names, big or small.[8] Neo Banks are a more innovative form of the digital banking system; they can be termed as a new stream of the digital banking system. The main difference between digital banks and neo banks is that where digital banks work as a branch or stream of the traditional banking system the neo banks are independent of the traditional banks.

Working of neo banks:

Neo banks function all over the world. However, they do not work under the same category. There are different categories of neo banks, some of them are mentioned below.

  • The first type features non-licensed Fintech that has partnered with a traditional bank.[9] In this type, Fintech utilizes a wrapper around the various services and products of its partner bank.[10]
  • The other type of neo bank functions as a digital initiative of the traditional banks where they function only via online mode.
  • The last type of neo banks are those in which they function by having a proper license issued to them. These kinds of neo banks are rare as there are very few countries that issue license to such banks.

Challenges before neo banks

Although neo banks are technologically driven and have user-friendly interfaces, they still face certain challenges in their functioning. Some of these challenges are mentioned below:

  • Neo Banks are not regulated by RBI in India as they are entirely virtual. Some neo-banks choose to act as business correspondents (BCs) of conventional banks, which are typically viewed as entities furthering financial inclusion in remote areas and to act as BCs, companies are expected to have widespread retail outlets.[11]
  • Data privacy and data security will be the biggest challenges before the neo banks as they will have to upgrade their online infrastructure and security features,
  • To function in India, neo banks will have to improve the reach of their customers as elderly people are not immensely compatible with the technology and they also do not trust such banks to invest or open an account with them.

Conclusion

While the complete online existence helps neo banks to cut down on operational costs, the adoption of cutting-edge technology is an easy route to customer acquisitions.[12] Neo banks require traditional banks by their side to handle customers’ money, and for the banks, it becomes easier to acquire new customers.[13] The importance of neo banks has increased in times of a pandemic as customers are not able to access the services of the traditional banking system and neo banks can provide all the necessary services with ease. But for this purpose, the online infrastructure of a country must be strong enough to bear the burden of such technology and most importantly people should understand such technology and be aware of the importance of the data that they carry. In 2014, the RBI introduced payment banks to further financial inclusion through a “secured, technology-driven environment” by providing small savings accounts, and payments or remittance services, to the under banked population.[14] The RBI clarified that it did not envisage payment banks to be virtual banks or branchless banks.[15] But the future belongs to the virtual world and online platforms. It should be kept in mind that other countries are accepting these technologies and are preparing themselves for the upcoming challenges. By denying such technologies, we are also waving goodbye to a future full of opportunities and possibilities.

Disclaimer – All views and opinions expressed in this article are personal and belong solely to the author(s) and do not necessarily represent those of the LAABh Foundation or the individuals and institutions associated with LAABh Foundation.


[1] Reserve Bank of India – RBI Bulletin, available at < https://www.rbi.org.in/Scripts/BS_ViewBulletin.aspx?Id=19899 > (last visited Jun 29, 2021).

[2] Id.

[3] FinTech Comparative Guide – Technology – India, , https://www.mondaq.com/india/technology/885572/fintech-comparative-guide (last visited Jun 25, 2021).

[4] Kapil Rana, Neo bank — the new disruptor on the block, @businessline , https://www.thehindubusinessline.com/opinion/neo-bank-the-new-disruptor-on-the-block/article34093484.ece (last visited Aug 10, 2021).

[5] Id.

[6] Id.

[7] Explained | From Payments Banks To Neo Banks — How India’s Fintech Ecosystem Has Evolved, , Moneycontrol , https://www.moneycontrol.com/news/business/companies/explained-from-payments-banks-to-neo-banks-how-indias-fintech-ecosystem-has-evolved-4700551.html (last visited Jun 23, 2021).

[8] Understanding Neo Banking In India – Probe42-Probe Information Services, , https://probeinformation.com/learn-with-probe/understanding-neo-banking-in-india/ (last visited Jun 28, 2021).

[9] Nikunj Gundaniya, Everything you need to know about Neobank, Avada Cryptocurrency (2021), https://www.digipay.guru/blog/everything-you-need-know-about-neobank/ (last visited Aug 9, 2021).

[10] Id.

[11] Vantage Asia Editor, Challenges and future for India’s neo-banks, Law.asia (2021), https://law.asia/challenges-future-india-neo-banks/ (last visited Aug 10, 2021).

[12] Rise of Neobanks in India, , https://www.outlookindia.com/outlookmoney/ , https://www.outlookindia.com/outlookmoney/fintech/rise-of-neobanks-in-india-6862 (last visited Aug 10, 2021).

[13] Id.

[14] Editor, supra note 11.

[15] Id.

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