What is a Neo Bank?
Neo bank is a type of virtual bank. A bank with no locations. A bank that operates solely online rather than in a physical location. Through mobile applications, Neo banking delivers a comprehensive digital banking experience.
Neo banks, with the primary purpose of creating a seamless client experience, provide solutions in ways that traditional banks cannot. Neo banks are less expensive, quicker, and have the ability to combine the complete financial portfolio into a single platform.
What is a traditional bank?
A traditional bank has its headquarters as well as regional headquarters, as well as branches throughout the nations in which it operates. Many conventional banks have their own branded ATMs. Smaller conventional banks may group together to run a large amount in order to share costs.
Difference between Neo Banks and Traditional Banks
- Neo-banks are shaking up the traditional banking system by harnessing technology and artificial intelligence (AI) to provide consumers with a variety of personalised services.
- Traditional banks, on the other hand, have an omni-channel strategy, meaning they have both physical (via branches and ATMs) and digital banking presences to offer a wide range of products and services.
- Neo-banks provide a diverse variety of services to consumers in the retail and small-to-medium business (SME) sectors, ranging from customer acquisition to standard banking services such as remittances, money transfers, utility payments, and personal finance.
- Typically, neo-banks adopt a design thinking approach to a specific banking area and modify their goods and services to make banking easier and more comfortable for end users.
How are Neo Banks evolving?
- The term ‘Neo-bank’ first came to popularity in 2017 as a new challenger to traditional banks in terms of client engagement, connection and reach, and, most significantly, user experience.
- That is why neobanks are sometimes referred to as “challenger banks.”
- The growing global prevalence of the internet and smartphones is driving the market potential for neo-banks.
- The global neo-banking industry is estimated to be worth $333.4 billion by 2026, with a compound annual growth rate (CAGR) of 47.1%.
- In India, there are about a dozen neo-banks, including Razorpay X, EpiFi, Open, NiYo, and Jupiter.
Challenges faced by Neo Banks
- The first step is to establish trust. Neo-banks, unlike traditional banks, do not have a physical presence, therefore consumers cannot literally ‘bank on’ them in the event of problems or obstacles.
- Second, the Reserve Bank of India has yet to recognise neo-banks (RBI). As a result, they must collaborate with regulated banks and financial institutions to provide financial goods and services.
- Neo-banks cannot take deposits or offer lending products on their own books due to a lack of enabling rules.
- As a result, some fintechs have a non-banking financial corporation (NBFC) as its parent to participate in lending operations, whereas the majority of others collaborate with banks and financial institutions.
Can Traditional Banks be replaced by Neo Banks?
No, not exactly. Neo-banks provide a limited number of goods and services in comparison to traditional banks, which provide a wide range of services.
Furthermore, as neo-banks are heavily focused on technology, they may be unable to meet the banking demands of non-tech aware clients or those from rural areas of the nation who prefer face-to-face engagement with their financial administrators.
By 2020, India’s smartphone adoption rate was estimated to be at 54%.