What is Neo Banking?

Introduction

India has experienced a boom in its financial technology industry over the past several years, with the emergence of hundreds of new fintech businesses. Neo banks are a new breed of non-bank fintech firms that resolve smooth online experiences with negligible to no-fee services. 
These banks make up a sizable portion of these fintech firms upending the established banking industry. By providing tech-first solutions and digital-first—and frequently, digital-only—banking platforms, these financial firms are filling the void in the established neo-banking sector.
In this blog, we shall be discussing everything you need to know about neo-banking. 
 

What is a NEO Bank?

What is a neo-bank?

The simplest definition of a neo-bank is that it is the latest phenomenon of digitization in the modern financial technology business. Neo banking offers banking services online or through a mobile app. 
Neo banks, sometimes known as "challenger banks," often focus on a small number of financial activities, such as spending and saving, and they insure deposits in conjunction with a bank that is covered by the Federal Deposit Insurance Corporation. 
The majority of neo-banks focus on their mobile applications, although many also provide a real debit card and allow customers to access their accounts online. 
 

How do Neo Banks make money?

Research and estimates that the global neo-banking market will reach $333.4 billion by 2026, growing at a rate of 47.1% per year. Neo banks operate under a different business trajectory than established banks. Interest charges accruing from deposits, account creation, and AATMs are the basic sources of income for them.
Neo banks receive a sizable portion of their income through the interchange, which are fees paid by retailers when customers use their debit cards to make purchases. Neo banks are permitted interchange percentages that are up to seven times greater than those offered to banks with over $10 billion in assets value because they are smaller organizations. 
For instance, in the American neo-bank Chime, a 1.5% fee is added by Visa each time a user uses a debit card to make a purchase, which gets reimbursed to Chime with a portion of the fees. 
Another way they make money is through interchange fees whenever customers use one of their credit cards to make a purchase. The Brazil-based neo bank, Nubank, levies fees for each transaction that a user makes through them. The interest levied on users' overdraft credit balances also benefits them.
 

How are neo-banks different from traditional banks?

Traditional banks always have physical ATM facilities and bank branches. But neo banking is completely software-dependant. Neo banks have innovative modern technology, which traditional banks do not.
The modern generation makes up a sizable portion of neo-banks banks' clientele. However, because of services like personal banking, popularity, relationship managers, etc., the older generation, larger enterprises, and legacy companies form the largest client base in the case of traditional banks. 
Neo banks' customer bases are smaller than those of regular banks, whose customer base is more entrenched and habitual-dependent. Compared to most neo-banks worldwide, traditional banks have substantial funds and financial securities.
 

How are neo-banks different from Digital Banks?

Digital banks should not be confused with neo banks, a common error many newbies commit. Both are distinct types of financial entities, despite certain similarities. 

●    Neo banks are completely online fintech organizations without physical branch networks, as opposed to digital banks, which are typically a derivative of traditional banks with physical branch networks. 
●    Neo banks offer services in places where the digital banking system is insufficiently present; and at stress-free, no cost.
●    Digital banks offer their consumers a wider range of services, including loans, than neo-baking.
●    Also, all digital banks have a bank charter, but not all neo banks have a bank charter.
 

How are Neo Banks different from Payments Banks?

All banking services, except issuing credit cards and making loans, are of co-payment banks with payment under the purview of the RBI. In contrast, the service range available from neo banks is limited, but they can make loans and issue credit cards.
The strong government backing eliminates credit risk for payment banks. But in the case of neo-banking, credit-related risks can be commonplace. 
Neo banks that hold a license can operate independently from conventional banks in nations that permit it. However, payment banks cannot operate privately independent of RBI's control. 
 

How to do Neo Banks function?

Neo banks have no physical branches, locations, or employees at their offices. The tangibility aspect of neo-banking is, thus, noticeably absent in contrast to traditional banking facilities. 
The first and foremost function of neo banks, just like all other banks, is to provide credit and deposit opportunities; to put it simply. 

●    Neo banking typically works with established banks to offer new-age banking services through sleek, user-friendly apps.
●    Neo banks manage customer service, end-to-end customer acquisition, and client servicing while running the app and distributing the product.
●    The banking partner offers to keep the customer's funds while also providing access to funds for lending.
●    Neo banks are very data-driven. To better understand client behavior and provide them with improved services, they gather and analyze customer data, seeking to enhance the customer journey based on the current consumer actions.

Neo banking generally offers the following features, among many others, to the customers: 

●    electronic money transfers, 
●    online bill payments
●    direct deposit remotely 
●    mobile check deposits;
Some of these fintech companies in neo-banking also provide tools to aid in saving money and creating budgets. As such, no banks fulfill the role of personalized financial advisers and money management as well. 
 

What are the benefits of Neo Banks?

●    Fast: The technology enables users to quickly, easily, and efficiently navigate via the Neo Bank apps. On a neo bank, loan, and money transfer transactions can be completed quickly.
●    Cheap: The operating costs of a new bank are kept low due to the lack of physical branches, less regulation, and credit risk, which leads to increased revenues. There are zero monthly maintenance fees.
●    User-friendly: Unlike traditional banks, neo-banks let users open an account in just a few easy steps. They are allowed to come up with their digital initiatives, such as providing a mobile/web interface around their products.
 

Pros and Cons of Neo Banks

Pros

●    Neo banks provide lending services to young students who wish to establish credit as well as no-fee customer accounts.
●    Neo banks enable customers to handle the majority of their banking needs online or via a computer app, around the clock, without needing to go to a branch.
●    Certain neo-banks don't look at banking history, so if you've previously had accounts cancelled, your account is more likely to be authorized.
●    Since neo bank providers don't have any physical branches, they do not need to spend on the maintenance of offices, and some of them pass the savings forward to their consumers. 
●    For simple banking queries, customer care over the phone or via social media can be most useful.

Cons

●    It gets difficult to get in touch with someone who has the authority to assist in resolving problems.
●    Neo banks do not offer all the financial and credit benefits a traditional bank does since many lack official banking licenses.
●    Neo banks operate completely digitally. This makes money and personal data of customers susceptible to security breaches and cyberattacks.
 

What should customers consider before depositing money in Neo Banks?

It is simple to understand why most clients today are drawn to neo-banks, given the rising need for digital financial services as well as fast-paced procedures and comfort. It is convenient to dispose of routine chores like peer-to-peer payments and check deposits online without having to pay a tonne of fees. Neo banking's agility, which typically results in fewer regulatory obstacles to overcome, also frequently results in simpler account setup and quicker processing times.

Neo banks don't suit everyone, however. For instance, mortgages aren't a facility you will likely find in neo-banking. Following are some riders to consider before choosing any neo-bank firm:

●    Neo banks are private and often unlicensed, being indirectly governed by the RBI. Customers risk facing legal repercussions because the RBI does not consider neo-banks as "banks." 
●    Neo banks are more akin to technology firms with banking partners than traditional banks. 
●    Customers may not have recourse to a personal banker and will have to conduct all neo-banking on their mobile devices themselves.
●    Neo banks don't provide all the services provided by banks and only offer a few items, such as savings accounts, minor loans, and debit cards. 
●    Neo banks have more risk exposure. 
 

Conclusion

Neo banks were created in response to the challenges presented by the old financial services industry and the advent of the digital age, and thus far, it has performed as expected. Despite a few hiccups, the trend is unlikely to end any time soon. That is good news for a sector that has needed a renewed emphasis on accessibility and diversification. 
Customers now gain from neo-bank features since they can easily access the service of an emerging bank, saving them from the hassles of executing fundamental financial activities caused by traditional banks.
A new bank might be an excellent option if you want banking ease and prefer to handle the majority of your financial duties online. The greatest candidates for a new bank account are those whose finances are largely automated and who don't frequently need to make cash deposits, send wire transfers, or use additional account features.