Neobanking in India: New trend in banking

Soniya Khanna

06 Jul, 2023

Financial inclusion has caused the evolution of many sectors, and it also includes the banking sector. The rise of digital banking has provided the customers with better options that have aided the customers with convenience. A variety of new applications and new trends have emerged among which is neobanking. Neobanking in India is overhauling FinTech significantly on national and global levels.

Neobanks have caused changes in the banking landscape in the country, and now the FinTechs Trends are introspecting the way they do business keeping in mind the loyalty of customers and growth of revenue. This article seeks to cover the vital aspects of Neobanking in India.

Meaning of Neobanking

In simple words, neobanks are 100% digital direct banks that can be availed by the customers through mobile apps and personal computers etc. It is a virtual bank without any branches and which runs only online. It is entirely virtual than being physical. It provides customers with the experience of digital banking without actually having to visit the bank. The term got its prominence in the year 2017 to describe FinTech providers challenging traditional banks. It originated in the United Kingdom and with the intent to reduce costs, provide seamless customer experience and expand banking services to the unbanked.

Neobanks provide solutions to the customers in a way that cannot be seen with traditional banks. It is much cheaper, faster and can integrate the financial portfolio in one single platform.

Financial services offered by Neobanking in India and its impact on customers

The following financial services are offered by Neobanks:

• Opening accounts;
• Payment and money transfer;
• Loans; and
• Other services like budgeting etc.

There has been a considerable drift in the financial industry with the explosion of mobile technology and financial inclusion. Indian customers have largely embraced digital means and are moving away from physical money. The customers have been comfortable executing digital transactions.

Technology and banking integration has positively impacted customers by making it more customer-friendly.  Neobanks have provided a fluidity that was not given by the traditional banks. It is more easy and convenient to handle a mobile application that manages their money and helps them with various decisions making.

Neobanking in India: Scope of opportunities

Between the year 2017 and 2018, mobile banking users in India increased by huge margins. Although India witnessed a massive growth in volume and value for mobile banking users, the percentage of the underbanked population presents enormous potential.

Neobanking in India has an excellent scope for growth as Micro, Small and Medium Enterprises (MSMEs) in the country can avail their services on a large scale. MSMEs account for 95% of the country’s total industrial units, but they have been underserved by the operational ambit of the traditional banks, thereby depriving them of formal banking and credit needs.

Currently, there are four main neobanks in India that have received considerable funding from investors. Apart from it, there are global banks that see India as an engine of growth. Asia pacific region may witness notable growth in neobanks in future. Emerging economies like India are projected to show better healthy economic growth in future based on the increasing Smartphone penetration, higher technological adoption, and expanding size of automated, convenient and cost-efficient solutions provided by neobanks.

Advantages of Neobanking

There are a wide number of advantages to a customer using Neobanking in India as neobanks are entirely digital.

Some of the foremost advantages are as follows:

• Hassle-free account creation

Creating an account in a traditional bank is a complicated process and is highly rigid. However, creating an account with neobank removes such challenges. The customers can create an account with neobanks without going anywhere, thus making it more convenient and comfortable.

• Provision of international payments

One may require upgrading his or her debit or credit card in order to make international transactions, but neobanks allow transacting nationally and internationally with current exchange rates. Many neobanks allow international payments through various banking and payments partner.

• Low-cost structure

Neobanks operates digitally; therefore, a wide range of services can be availed by the customers with a few clicks. There is no need for physical infrastructure, maintenance of physical branches and ATMs that allows saving of additional charges. Most of the basic services of neobanks are free of cost. There are no monthly fees and no withdrawal costs.

• Service efficiency

The transactions of neobanks are real-time and immediate. It provides its customers with an overview of each transaction. It helps them manage finances, savings and expenses, and it can be customized as per customer’s requirement. It provides near real time services for account opening, transactions, checking balances, etc.

• Simple and engaging mobile experience

As stated earlier, it provides and facilitates a customer-friendly, simple and engaging mobile experience.

• Value-Added Services

Neo banks use account information, customer’s data, patterns, etc. with Artificial Intelligence and recommend other financial services to customers according to their needs. The application of neobanks backs up its recommendation with statistics and insights displayed on the interface.

It leverages customer profits, recommends services based on demographics and allows the customers to take investment decisions. Neobank platform provides one platform for linking multiple accounts, apps and services.

• Advanced Security Features

Security is an essential part while making digital transactions. Neobanks implements 2FA (two-factor authorization), biometric verification, encryption technology and various other security measures to protect customer’s data. It provides high-security features like locking and freezing any time through the app. The applications are built with a view to ensuring compliance with anti-money laundering laws, safeguarding the privacy of customers and to deter malware attacks.

Regulatory consideration for Neobanking in India

Virtual banking licenses are still nit granted in India. However, there are foreign national banks that offer digital-only products through their Indian subsidiaries. The Reserve Bank of India^[1] has been strict in ensuring the physical presence of banks and has enforced the need for digital banking service providers to have their physical presence.

The need for bank branches is to serve customers and address their disputes and grievances in person. Currently, neobanks are addressing the regulatory challenges by outsourcing their banking responsibilities to those with licenses, thereby forming strategic partnerships with traditional banks and facilitating amplified services on behalf of existing ones. This model has been employed by most of the big players of Neobanking in India.

Neobanks partner with traditional banks and provide business and consumer banking services. It is part of their strategy and a method of overcoming regulatory obstacles. For a customer, financial and banking services are provided by the neobank, but from a regulatory point of view, monetary transactions are handled by their partner banks.

Challenges and shortcomings of Neobanking

Every facet in life has its own set of advantages as well as certain challenges or shortcomings that cannot be ignored.

Neobanks are no different. The challenges are enumerated below:

• Narrow range of product offerings; therefore, things like car loans, home mortgages or business services cannot be expected.
• One of its significant shortcomings is that they can’t provide an in-branch service which is preferred by some people whilst dealing with large loans like mortgages.
• Operational inexperience in regards to traditional banks.
• Regulatory and Compliance are subjected to the same set of supervisory requirements which applies to conventional banks.

Prospect of Neobanking in India

Accessibility, cost-effective multiple banking, and financial functions are some of the driving factors for Neobanking in India. It may work as an extension of measures in order to solve the challenges of financial inclusion. With initial narrow targets, neobanks can expand its territory by adding more functionality and services in future.

Though neobanks are gathering momentum, most of them are yet to inflict sustained profitability. Nevertheless, they present enormous potential to disrupt banking and financial services. A key to becoming profitable entities could be to convince the traditional banks to invest in modern technologies and develop processes to provide a seamless customer experience.

Conclusion

Also, read: All About Digital Lending and Its Business Models