Neo Banks: Can they take the place of traditional banks?

We've witnessed a significant shift in the banking business in recent years. Digital payments are widely accepted in the country and customers are shifting towards internet banking and payments.

Do you feel that as the financial environment shifts toward client experience and contentment, a gap between what traditional banks deliver and what customers want has emerged?

If yes, Neo banks are attempting to fill that distance.

Neobanks are a broad category of financial service providers that appeal to today's tech-savvy clients. They can be compared to fintech companies that provide mobile and digital financial solutions such as financial transactions, money lending and other services.

What are neo banks?

Neo banks are financial firms that provide clients with a less expensive option than regular banks. You might think of them as financial institutions with no physical branches that provide services that traditional banks don't and do so effectively. They use artificial intelligence and technology to provide tailored services to clients while lowering operational expenses.

These companies don't have their own bank licences in India, thus they rely on bank partners to provide licenced services as the Reserve Bank of India (RBI) does not provide them authorization to be fully digital. The RBI has stated that banks' physical presence should be prioritized, and that digital banking network operators should have some real presence as well.

How is the working of a neo bank different from a traditional bank?

Neobanks, in contrast to regular banks, operate on a completely new business model. Neobanks, like regular banks, make money on the margins of money intake and borrowing. Furthermore, because there is no physical facility and everything is accessed digitally, the client costs are significantly reduced. Neobanks are customer-centric, which signifies they offer personalized services to their consumers that are powered by technology.

A neobank's decision-making process is driven by computation decisions. Because their systems are also quite updated, collecting and analyzing data and understanding how their consumers act in the neobanking ecosystem becomes easier for them. Rather than adhering to one or two data points, they develop cohorts of clients depending on their behaviour based on these findings.

Benefits of neo banks

• Sometimes, it might get difficult to open an account with a traditional bank but with a neobank, this time-consuming process is removed. Neobanks do not have a physical location, as a result, you won't need to travel anywhere to set up an account. You can accomplish it in just a few simple steps, from the comfort of your own home.
• Neobanks can keep their expenses low because of less rules and the absence of credit risk. The majority of products are low-cost, with no monthly expenses.
• Traditional banks do not often provide us with a debit card that can be used everywhere in the world or that allows us to transact globally. We may need to seek an upgrade, submit a request, and then obtain an overseas debit card. If you have a neobank account, you can use your card to make purchases or transact when travelling overseas.
• Neobank's applications are simple, straightforward, and easy to use. They're extremely responsive and well-designed to meet a customer's wants. The convenience of its app is what makes it so popular with its users.

Drawbacks of neo banks

• Because the RBI is still yet to recognize neobanks as such, clients may be without legal redress or a specified mechanism in the event of a problem.
• Customers can't get in-person help from neo banks because they don't have a physical branch.
• In comparison to regular banks, neobanks often provide fewer services.

The main focus of the neo banks is to meet the demands of a certain market niche, as well as implement the appropriate technology, corporate strategy, and work culture. None of these, however, are as important as establishing confidence. When compared to regular banks, neobanks are much behind in this field.

While neo banks lack the money and client base to unseat traditional banks, they do possess a unique weapon i.e. innovation. They may provide new products and form partnerships to better serve their consumers far faster than traditional banks. Neobanks establish a connection between traditional banks' services and clients' changing expectations in the modern age.