Introduction: Neo Bank

Neo Bank, what is it? Is it different from an ordinary banking system? If yes, then how so? And last but not least, what does a Neo bank do? If you’re also curious to know answers to these questions like hundreds and thousands of others, then you’re at the exact place where you should be. Let’s start with the definition. Neo Banking or Neo Banks are financial institutions with only an online presence and function digitally. Simply put, unlike ordinary banks, they don’t have any physical branches to run their day-to-day operations.

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Whereas, the traditional banking system often requires a lot of time and effort on the part of customers. On the other hand, when it comes to Neo banking, the entire process goes as seamlessly as possible and the reason behind this is simple - Their Technological Advancement! The tech-driven financial experience that Neo Banks offer allows them to save a lot of expenditures as they don’t need to spend on building and managing any physical infrastructure. Customers of Neo Banks can easily open accounts by themselves and use every financial service hassle-free, and here, all the credit to modern technological know-how. 

Neo Banking

So, how does a Neo Bank operate? As of today, the Reserve Bank of India does not allow any fully-digital banking entity yet. Therefore, the Neo Banks of the country get in partnerships with the banks which have physical branches, to offer their financial products and services. Here, the benefits go to both parties, as the banks which lack technical infrastructure, get it and in exchange, Neo Banks get access to the customer base of that bank, which otherwise would be pretty hard in the initial stage, considering commercial banking is all about trusts, which can take years of effort to build up.

In today’s India, a major portion of the country’s population prefers dealing with the Neo Banks as they are not only sufficient in meeting the evolving financial requirements but also offer several benefits such as better customer experience, quick and Convenient Account Opening, higher interest rates for saving accounts, etc. Their prime focus remains on making the banking experience of their users better and ensuring serving their needs in as less time as possible.

Neo Banks Vs Traditional Banks

With the growing usage of smartphones and the Internet penetration rate getting higher, the Neo Banks of the country are making the best out of the situation to get everything in their favor. Taking advantage of this, they have started offering financial products and services which earlier were not available in the majority of banks. These can include saving accounts, credit cards, and loans. Here, someone might raise the point “All these services have always been offered by traditional banks. So, what’s different?” Well, Neo Banking has completely revolutionized the way one can avail of them. 

For example, Saving Accounts, which would take customers hours to open, can now be easily created within minutes, all thanks to Neo Banking. We can also consider the disbursal process of loans. How often we hear people complaining about the long and complicated process of getting loans but that’s not the case with Neo Banks, which even has a number of types of loans for every sort of customer’s needs. 

Advantages of Neo Banking 

• Less Operational Expense

Unlike Traditional banks, Neo Banks don’t require a costly network of physical branches to connect with their customer base and run their banking activities. And the saving of these operational expenses also gets reflected in the benefits that the customers of Neo Banks get, such as lower interest rates for loans and higher ones for saving accounts, and pretty low fees on financial transactions. 

• Fast Processes

Just think of a situation where you want to transfer some money from your bank account but don’t want to go anywhere for that. Do you think the traditional banking system of the country would be helpful to you in any way? No, right. But Neo Banks have changed the game altogether as they not only offer their customers options to easily carry out banking tasks, including deposit and withdrawal anytime, anywhere but also function around the clock. With the advancement of AI technology, Neo Banks are successfully customizing the customer experience and solving their concerns in real-time.

• Safe and Secure

Today, how often we hear the news about banks getting robbed or customer data getting breached. But things are different with Neo Banks as they have eliminated these worries to a great extent with the use of updated technology and putting strategic measures in place to ensure the safety and privacy of their customers’ information.  

Types of Neo Banks

• Front-End Focused Neo Banks

Front-End Focused Neo Banks don’t possess an operating banking license from the Reserve Bank of India. Therefore, to offer its customers financial services which require a banking license, they get into partnerships with much larger and established financial institutions. And, when it comes to Core Banking Systems (CBS), they take the help of third-party technology. Another major thing about them is they only control the front end of the value chain, or we can say the customer interface.

• Digital Banking Units

Another type of Neo Banks is Digital Banking Units, also referred to as independent digital banks. They are specialized branches of the already established commercial banks and often deal in online banking products and services. To understand it better, you can take the Yono Lite app of the State Bank of India into consideration, which is also a DBU. Unlike Front-End Focused Neo Banks, running a Digital Banking Unit requires a virtual banking license from the Reserve Bank of India and for this, the applicant bank must have sufficient capital to ensure their investors’ deposits. 

• Full-Stack (licensed) Digital banks

Unlike the above-mentioned Neo Banks, Full-Stack Digital banks have all the required approvals from the regulatory authorities and offer a wide range of financial services. They can issue loans, take deposits, and maintain their standalone brand and balance sheets. As they don’t have any physical branches, their expenses are also pretty less. It’s true that Full-Stack (License) Digital Banks are not yet legalized by the Indian Government. But one can also not ignore the suggestions and recommendations that are given by many authorities in recent times in their favor.

Conclusion

It won’t be wrong to say that the Neo Banks can be the future of the Indian banking system but at the same time, it’s easier said than done as there are still many issues with them, such as impersonal customer assistance and the absence of well-defined legal regulations and norms. To deal with the latter part, the Indian government has been taking a proactive approach. The government authorities like RBI, SEBI, and IRDAI, are keeping a close watch on Major Neo Banks, such as RajorpayX, FamPay, and InstantPay, and making sure that customers’ interests don’t get hurt at any cost.