Neo Banks: Disrupting the Traditional Banking Ecosystem

Owing to rapid digital transformations across the fintech spectrum, neo banks in India are seeing a consistent rise. But is it enough to disrupt the traditional banking model?

The past few years have seen a meteoric rise of the Indian fintech space, fuelled by swift digital transformations across most socio-economic aspects prevalent in the county. In 2019 alone, fintech startups in India raised a staggering $3.7 billion. India has the highest fintech adoption rate in the world, while the annual return on investment on Indian fintech startups is 29 per cent, again, highest in the world. This has led to a flurry in the inception of fintech startups across several service areas—from online wallets and digital lending to neo banks. 

Neo banking startups in the country have already raised over $90 million so far; the global neo bank market is expected to accelerate at 46.5 per cent CAGR, generating over $394.6 billion by the end of 2026. But what are neo banks, you may ask. Basically, they are 100 per cent digital banks, operating entirely online without any physical branch. They offer multiple financial services, from money transfer to savings account. 

How do neo banks work?

Basically, neo banks in India partner with traditional banks, helping them up their ante through tailored digital services offering rich customer experience. A major chunk of neo banks offer their services in the following two areas:

Customer acquisition: Through targeted offerings backed by extensive consumer research, neo banks help in easy customer acquisition, including working professionals, tech-savvy millennials and MSMEs.

Specialized business banking solutions: With an entire array of services, including payments, receivables, budgeting and expense management, neo banks build next-gen business banking solutions enabling digital transformation. 

Opportunities for neo banks in India

The current pace of digital transformation in the country has opened up a wide range of areas for neo banks to enter and thrive in. Moreover, neo banks represent the next phase of innovation and disruption in the traditional banking landscape, what with their unique and experiential offerings. Here’s what can work in the favour of a thriving neo banking ecosystem in the country:

Tailored and rich customer experiences: Banking in India has traditionally been infamous for the subpar customer experience offered. Despite the advent of internet banking and related digital services, the ecosystem’s inherent dependency on legacy systems has been counter-intuitive to bringing about significant improvement in the quality of banking offered to customers. Neo banks can use this as an opportunity to provide enriching and user-friendly experiences through innovative products and services. 

Transparency: Traditional banks have been rather incompetent at integrating transparency in their operations. This may sometimes render customers feeling helpless, while also costing the bank time and resources that could have been better spent elsewhere. However, owing to the 100 per cent digital nature of neo banks, they can provide real-time updates and on-the-go customer support, saving valuable time and efforts on both ends. 

Deep insights: This is a no-brainer. When it comes to providing real-time insights about products and services, traditional banks obviously lacks the technical acumen that neo banks can boast of. They provide solutions with user-friendly interfaces and easy to understand and valuable insights, again contributing to a rich customer experience. 

Challenges: One of the major challenges that neo banks in India face is a lack of scope to enter newer product/service segments. Their global counterparts offer a wider variety of services, thanks to a slew of encouraging government legislations and regulations. However, in India, the Reserve Bank of India is yet to allow 100 per cent digital players offer key services that traditional banks provide, such as deposits, interest or loans. Moreover, traditional banks too, provide a vast array of products and services.

Scale is another limitation for neo banks; a lack of funding and initial resources can be a considerable setback, especially when they are competing with vast established banks. Plus, winning customer trust can also prove to be a major hurdle; while customers are looking for better experiences, they may initially be hesitant to move to a new, untested ecosystem. 

What the future holds for neo banking in India

The advent of open banking can be a major breathe which opens up potential or neo banks as it will usher a lot of brand new avenues for them to enter. Open banking is already breaking ground globally, with the US, the UK and Europe having passed legislations to encourage innovation in the banking ecosystem through open banking. Open banking basically allows large banks to share relevant and consensual customer information with third-party players such as neo banks, which they can peruse to launch newer, more intuitive financial products and services.

Customers are embracing the idea that digital is the future and thus they are opting for technology in all their routine work and activities including banking. The market in India is untapped and enormous, be it cross-border payments, salary accounts or blue collar employees. Today Indian neo banks are tech platforms integrated with traditional banks using APIs.

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