Neobank- The Evolution of New Age Banking

We live in an age and time, where we turn to digital solutions for practically everything from education and shopping to entertainment and food delivery. A little lethargic to join the digital bandwagon is the banking sector. It’s mired by ridiculously slow net-banking services, apps that do not function, and an overall experience that leaves its customers dissatisfied. This is all set to change. Neobanks are rapidly taking over in a bid to provide customers with a seamless, frictionless, digital banking experience.

What are Neobanks?

These are virtual banks, meaning, they do not have a physical presence. They use new-age technologies to provide financial services that are quicker, hassle-free, and more efficient. Neobanks offer solutions that conventional banks have so far failed to.

In India, neobanks and conventional banks are not mutually exclusive from each other. To explain this, let me first take you through the types of neobanks out there-

  1. Neobanks that don’t have a banking license themselves and hence, partner up with a licensed bank to function. These can be simply understood as FinTech firms providing auxiliary financial/banking-related services and not banking (taking deposits and giving away loans) services per se.
  2. Neobanks that obtain banking licenses themselves to operate independently. These neobanks stand in direct competition with the age-old legacy banks and hence, often called ‘challenger banks’

In India, neobanks are not allowed to hold banking licenses yet. While licensed banks hold deposits and give away loans, neobanks control customers’ front-end digital banking user interface and use apps to connect them to those licensed banks. All in all, neobanks and legacy banks work in tandem and support each other’s work.

Neobanks in numbers

Kakao and Toss (K-banks) already serve up to 1/4th of the entire South Korean population. These were valued at $9.9 billion and $7.4 billion respectively in 2021.

In the UK, traditional banks are on a steady decline. Its Revolut is valued at around $33 billion. America’s Chime is estimated to be worth $40 billion. Nubank of Brazil, a country particularly riddled with bad banking infrastructure, was valued at $52 billion at the time of its IPO last year.

This is just the tip of the iceberg.

ABI Research predicts that the top 57 neobanks worldwide will cater to approx. 591 million users worldwide by 2026. As per Zion Market Research, a market research firm based out of New York, the global neo banking industry is expected to generate earnings of around USD 394,648 million by 2026, at a CAGR of around 46.5%.

The problems that neobanks solve-

It is not for no reason that neobanks boast of such staggering valuations. Charged with technology, the possibility of them helping people and businesses is endless.

B2B Neobanks- Neobanks have proved to be especially useful for freelancers and medium and small enterprises which have hitherto been neglected by both the banking and IT sectors. Listed below are a few services which they provide and are gaining traction –

  • Expense management – At present employees first make expenses out of their own pockets and later get reimbursed. Neobanks issue prepaid debit cards using which employees make payments straight out of the company’s resources. Businesses can add or cancel cards anytime, assign multiple cards to their employees, set limits, and track expenses in real-time.
  • Working capital credit lines – It is extremely difficult for businesses, especially SMEs, to get loans sanctioned for their working capital needs. Basis the cash flows generated by SMEs, neobanks can offer to provide better and faster working capital loans without placing assets on collateral. They also provide much-needed flexibility in payment terms.
  • Payroll management – Neobanks leverage technology to provide smooth, and fully automated payroll disbursement and compliance services. From onboarding to full and final settlement, and everything in between -taxes, accounting, PF- neobanks can handle everything.
  • Cash management - Neobanks help businesses keep a track of their finances in real-time with a finance dashboard, manage their current accounts, and automate payables and receivables management, generate cash flow statements and P/L accounts.

 B2C Neobanks- Neobanks are especially suited to the young, tech-savvy population which is increasingly getting used to getting work done in a click. In the B2C space, neobanks work in super niche domains-

  • Neobank for couples, allowing them to collaborate on shared spending. Couples get a digital joint account with 2 debit cards, 2 UPIs, and individual app access. Fibbl is one such neobank.
  • Teen Banks – While in traditional banks, juveniles cannot open an account independently, neobanks do not come with such restrictions. In exchange for opening a fully digital wallet, neobanks give your teens a debit card, at the same time allowing their guardians to keep a watch on their spending. Keeping kids in mind, teen banks usually come with a gamified interface and an excellent reward system in place.
  • Pride Bank of Brazil, Daylight of the US are neobanks that serve exclusively to the LGBTQ+ community, Purple based out of the US caters just to the specially-abled people, Nerve is the world’s first neobank that understands the financial needs of professional musicians.
  • Neobanks provide hyper-personalized money management tools, making people track and analyze their finances like never before.

What drives the growth?

Internet penetration, an ever-increasing demand for smartphones, a huge underbanked and underserved population, needless to mention the advent of leading-age technologies like IoT, AI, cloud computing, Big Data, have all combined to make neo banking a rising industry. If classrooms and business meetings can be held online, what’s taking banking so long?

Keeping up with the times, regulators worldwide, are coming up with newer regulations to support this new breed of banks. NITI Aayog is awarding neobanks with a restricted Digital Business Bank license which can gradually be converted to a Full Stack Digital Banking license. These will be monitored on matrices such as volume of credit disbursed to MSMEs, level of compliance, and customer acquisition cost (CAC).

Conclusion- Traditional Banking is getting digitized. But it is too little, too late. Neobanks are giving the new-age people what they already have elsewhere - superly customized, completely digital, cost-effective, tech-centered, app-based solutions. Banking is at the cusp of change and neobanks are leading that change from the front.