Since the Reserve Bank of India (RBI) tightly regulates banking licences, neo-banks are providing services built on the offerings of a traditional bank. “For traditional banks, it is difficult to change their legacy technology for which they have already spent a lot. Neo-banks, on the other hand, are small and nimble. They can use the latest technology and offer solutions to customers’ banking problems," said Anish Achuthan, CEO and co-founder, Open Financial Technologies Pvt. Ltd. Achuthan cites an example in the payments space to highlight why customers would prefer neo-banks over traditional ones. “All banks offer transactions through UPI (unified payment interface). Customers, however, prefer non-banking apps such as Google Pay and PhonePe, which offer the service in partnership with traditional banks," he said.
Globally, neo-banks offer 100% digital banking services. According to PwC, the global neo-bank market is expected to grow at a compounded annual growth rate of around 46.5% between 2019 and 2026, generating $394.6 billion by 2026. The growth is driven by their low-cost model with no or low monthly fees on banking services.
So should you go for them for the solutions they provide? Here are details of the current offerings by neo-banks and other details to help you decide.
What do they offer?
Traditional banks also offer digital savings bank accounts like Kotak Mahindra Bank’s Kotak 811. But neo-bank accounts are not the same as digital bank accounts, though both have a mobile-first approach and emphasize on digital operating models. “Digital banks are often the online-only subsidiary of an established and regulated entity. Neo-banks, on the other hand, exist solely online—without any physical branches—in partnership with traditional banks. This enables them to navigate and comply with the regulatory environment," said Vivek Belgavi, partner, financial services, technology and fintech leader, PwC India.
As of now, only Niyo has started full-fledged operations. A startup called Finin will be launching its services in June, while some others, such as Yelo, are conducting pilot testing. Some, including Jupiter by Citrus Pay co-founder Jitendra Gupta and epiFi by former Google Pay executives Sujith Narayanan and Sumit Gwalani, have raised funds and are expected to launch operations soon.
According to Belgavi, neo-banks, typically, identify a problem area in banking and offer solutions. In many developed countries, for example, they are popular because they offer better control on a person’s finances or forex solutions. In India, neo-banks are offering solutions for expense management, investments, forex needs and so on.
Niyo, for example, started its services by offering zero mark-up fee (usually, this fee is 2-5% of the amount) for customers using their debit cards abroad, to promote it as an alternative to forex card. It also provided better control of the card through an app. A user could activate and deactivate the card, check the prevailing exchange rates, set limits, and so on. Now, it also offers a savings account in partnership with IDFC First Bank that does not have any charge on ATM withdrawals, solutions around investing and so on.
Finin uses AI and ML to analyze the spends of customers and offers to help them have more control on their finances. It generates reports with insights on their spending and saving behaviour. It also suggests data-driven investment plans. For example, just like online mutual fund platforms, customers can set up goals. The AI-driven platform will suggest a mix of investments and allocation each month. “A neo-bank like ours uses technology extensively to manage finances, predict activity in accounts and send regular push notifications to alert customers if their spends are going above the allocated budgets," said Suman Gandham, founder and CEO, Finin.
Finin is also addressing the problem of high costs associated with inward remittances. It will be launching solutions that would enable cheaper and faster international transfers. Yelo targets the mass market and offers solutions pertaining to goal-based savings, gold and healthcare.
Then there are other frills. Finin offers 2% cashback on every purchase, complimentary airport lounge access, mobile protection plan and a metal debit card. Niyo’s saving account offers up to 7% interest rate (depending on the amount deposited), the prevailing rate at partner bank IDFC First Bank, and an international platinum debit card. Some others, including Jupiter, are working on easy loans that come with easy repayments and rewards on spends.
What sets them apart
There are many apps such as PhonePe, Google Pay and Paytm that offer solutions for payments and investments. “Some solutions that neo-banks address could be similar to the current offerings of other fintechs. But they are also addressing problems in banking that others fintechs don’t. Also, with better insights on the funds of customer, they are in a position of offer better solutions," said Achuthan. For example, if the customer has ₹10,000 lying in the account for some weeks, the AI can suggest that the money be kept in a liquid fund or a sweep-in fixed deposit that can earn better returns. This can be done in a few clicks. In the case of other apps offering solutions, the customer needs to be proactive to do this.
There are features that neo-banks can offer that other fintechs can’t. “A simple way to look at neo-banks is to think of them as traditional banks with better features. They can lower the cost of banking, give customisable solutions, help in better management of money, offer better customer service and so on," said Nilesh Agarwal, co-founder and CEO, Yelo.
He gives an example of a feature that Yelo offers. “As we are managing the finances of individuals in the mass-market segment, we are also telling them about the government schemes, like, say, Ayushman Bharat," said Agarwal. According to the executives of these platforms, as traditional banks face challenges with technology and compliance, they are partnering with neo-banks for increasing their business. “The fintech brings them additional revenues," said Achuthan.
Should you try them?
All the transactions done on their platforms involve the partner banks. The debit card or the savings account that these neo-banks offer belong to the partner banks, which are governed by RBI. The on-boarding process is the same that banks follow. Many banks have now started introducing video KYC (know your customer), making account opening entirely digital.
Many of these platforms are targeting college students to become their first bank. They are also looking at millennials to offer lifestyle solutions. “There are many use-cases for neo-banks. If there is a budget-conscious consumer, he can opt for one that has budgeting and savings tools built into accounts. If there are flatmates that share expenses, they can have an account with a neo-bank to track and share the expenses. Individual business owners can opt for neo-banks to reconcile their payments with their accounting software," said Achuthan.
To differentiate their offering, each neo-bank provides a solution that regular banks don’t. Before you opt for one, therefore, assess whether the solution it is offering—be it expense management, investments, forex or remittances—will be useful for you or not.