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Neobanks are more agile and inclusive when compared to the traditional banks.
Neobanks are more agile and inclusive when compared to the traditional banks.

Opinion | Neobanks – the next technological wave

  • The acceptance of the neobanking business model by customers across the globe has generated enormous interests amongst investors, venture capitalists and corporates

The growth of neobanks is expected to disrupt the way we bank in the coming decade. Neobanks provide app-based digital banking services with no physical branches on high streets, providing services to their customers.

This new wave of fintech start-ups are being challenged by the traditional banks who are developing their own app-based platforms for their clients. Online services have been growing ever since internet began. Over the years banking and financial services sectors have evolved as a leading digital service provider.

The acceptance of the neobanking business model by customers across the globe has generated enormous interests amongst investors, venture capitalists and corporates. In terms of numbers, out of $3.49 billion received by fintechs globally in March 2018, neobanks alone received $586.7 million of the total funding.

Considering India, neobanks raised $ 116 million in 2019, almost a seven-time jump over 2018. Since 2019, we have witnessed refinement of the neobanking business models across a wide range of business operations. These include digitalising of salary accounts, SME credit and payment accounts, international travel cards and remittances, and mortgages.

Despite plenty of overlap between the neobanks and the traditional banks, neobanks are very different. Neobanks are much more technology-oriented. Many such banks often consider themselves tech companies. A key facet of these newbanks is that both the front and the back ends are 100% digital. Further, unlike the traditional banks they are not bound by the legacy system. They are primarily app-driven. For instance, if you need to move your money around, sign-up and create a new account and do your transactions with a few taps of your fingers.

Neobanks are a different way to bank. Majority of these banks position themselves as a modern and a customer-focused alternative. However, they face challenges from the traditional banks that are increasingly developing their own digital-brands. Some of these digital brands are separate, including operating on new systems rather than cumbersome legacy platforms. This allows them to compete more efficiently with the neobanks, but still a few questions remain:

Can the digital-front of the traditional banks tackle the slow-moving decision-making and approval processes to launch features and products as swiftly as the neobanks?

Can they convince customers they’re different from their parent, i.e. the traditional banks?

Are the neobanks a threat to the incumbents? Traditional banks have many advantages, such as funding and customer trust. However, the legacy system makes it tough for them to develop innovative service experience. In contrast, while the neobanks do not have the customer-base or the money, they can launch client-centric applications that allows customers to achieve their requirements much faster.

More importantly, the mix of strengths amongst the new entrants and the traditional banks has led to innovative knowledge transfer. In many instances, neobanks have pushed the traditional banks to provide enhanced web-based customer services.

Other impacts of neobanks: Neobanks are more agile and inclusive when compared to the traditional banks. This allows these new entrants to reach the vulnerable and the under-served customer segments, such as migrant workers and rural households.

Neobanks, along with other fintechs are driving further segmentations in the market. The initial focus is on providing customers with one product or service. For example, while Habito is for mortgages, Paytm is for commercial transfers and TransferWise is for international payments. These services provided by the neobanks outperform the ones provided by the traditional banks. The complacency of the incumbents has been their biggest limitation. They have been unconcerned about new entrants, satisfied that they can complete with their size or range of products. But, these traditional banks could start to lose ground if new entrants continue to pull customers away from the revenue-generating areas.

The future: Even with regulatory bodies encouraging more players and more competition, profit margins are slim. Thus, there is not room for everyone and challengers have started consolidating. We expect to see more M&A activities as the sector matures.

The area that is expected to see the maximum growth is the SME business for the new banks. This sector is primarily underdeveloped and poorly served. Thus, the potential to develop services is plenty.

Trust is everything. If the idea of app-based banks makes you uneasy, be rest assured that just like other financial institutions, they are held to stringent standards by usual regulatory bodies.

(Anandadeep Mandal is assistant professor, Finance, University of Birmingham, UK and Neelam Rani is associate professor, Finance & Control, Indian Institute of Management Shillong, India. Views are personal and do not reflect Mint's.)


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