Neo Banks: All You Need To Know

The past few years have seen the fintech revolution grip in India, with hundreds of fintech companies popping up. Neo banks constitute a significant part of these fintech companies disrupting the traditional banking ecosystem. These financial institutions are bridging the gap that exists in the conventional banking system by offering tech-first solutions.

In this blog, we will explore how these neo banks work, what edge they have over traditional banks, and their pros and cons. 

What are Neo Banks

• Neo Banks Meaning - These are financial institutions with only an online presence and function digitally.
• They offer all traditional bank services via a digital setup or mobile apps without having any physical branches.
• These are a kind of digital bank that caters to the financial needs of the tech-savvy generation, like immediate money transfers, lending, payments, etc. 

However, it is essential to note that these neo banks may not necessarily have their banking license but rely on their banking partners who offer financial services and products.

These are 100% digital banks. And since the RBI does not allow 100% digital banking operations, they cannot apply for a banking license. The expertise of these neo banks lies in tying technology and artificial intelligence together to offer personalized financial services to customers. It is offered at a minimal cost. 

How are Neo Banks Different from Traditional Banks? 

Traditional banks like HDFC, ICICI, Kotak, Axis, etc., have a wide physical presence with physical ATM outlets and bank branches. In addition to this, these traditional banks also offer digital banking or net banking services. This gives them a minor edge over the neo banks with only an online presence. 

• The customer base of neo banks is less compared to that of traditional banks. Neo banks have a long way to go before they take over the scale of business of conventional banks. 
• Traditional banks have deep pockets and significant funds compared to neo banks, which neo banks lack since most of them are still in the nascent stage in India.
• Innovative app features give neo banks an advantage over traditional banks. However, neo banks have cutting-edge technology- something that traditional banks lack. We have heard about a few banks’ apps having too many glitches and not being customer-friendly.
• A massive chunk of the customer's neo banks cater to includes millennials, Gen Z, and young employees who want new-age fintech services that traditional banks currently do not service. However, the older generation, bigger corporations, and legacy companies are likely to continue with conventional banks, thanks to services like personal banking, relationship managers, etc.

How are Neo Banks Different from Digital Banks?

Digital banks often exist as online subsidiaries of established banking and financial institutions. They may be backed by larger financial institutions and have a few physical branches. 

On the other hand, neo banks exclusively operate online and have no offline branches.

How are Neo Banks Different from Payments Banks?

Payments banks come under the ambit of RBI and provide all banking services to customers except issuing credit cards and extending loans. This makes payments banks virtually free of credit risk. 

Neo banks, on the other hand, offer both credit cards and loan services which increases their exposure to credit-linked risk.

How Do Neo Banks Function?

The operating model of a neo bank is very different from a traditional or a digital bank. Since these banks have no physical locations, branches, or employees at these branches, they save a lot of money on operational and overhead costs. 

• The primary function of a neo bank is to offer customers tech-led banking services.
• The banking partner provides access to funds for lending and even offers to hold the customer’s funds.
• At the same time, the neo bank operates the app, distributes the product, and ensures customer satisfaction, end-to-end customer acquisition and client servicing.
• These non-licensed fintech companies generally collaborate with traditional banks and provide new-age banking services on modern, easy-to-navigate apps.
• Neo banks rely heavily on data. They collect customer data and analyze it to understand customer behaviour better and offer them enhanced services.
• Based on the existing actions of the customers, neo banks aim to improve the customer journey.
• These banks offer no-fee customer accounts that are beneficial for first-time earners and lending services to young learners who want to build a credit score.

What are the Benefits of Neo Banks in India?

1. Low cost: No physical branches, minimal regulation, and credit risk keep the cost of running a new bank low, resulting in higher revenues. Unlike traditional banks, there are no monthly maintenance fees. 
2. Speedy service: The tech allows customers to navigate through the neo bank apps smoothly, efficiently, and in a fast manner. Money transfers and lending transactions can be done in a few minutes on a neo bank. 
3. Easy account creation: Unlike traditional banks, customers can create an account on a neo bank in a few simple steps.  

What should customers consider before depositing money in Neo Banks?

1. Neo banks are not banks- they are more like fintech companies with banking partners. 
2. Neo banks are fintech companies that fall indirectly under RBI’s jurisdiction. RBI doesn’t recognise neo banks as ‘banks’, so the customers might get into legal trouble in case of an issue. 
3. Neo banks offer limited products like savings accounts, small loans, debit cards, etc. and not all services of banks. 
4. Customers will have to do all the banking on their mobile phones and may not have access to a personal banker. 

What are the downsides of Neo banks?

1. No branches: Since there are no physical bank branches, customers do not have contact with a direct person. This also makes the relationship pretty impersonal, lacking a human touch. 
2. Limited services: Neo banks do not offer all the benefits of a traditional bank since they lack a banking license. 
3. Security: Neo banks operate 100% digitally. This makes them susceptible to security breaches, cyberattacks, and similar online threats.