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Are Neo Banks The New Disruption Route To Traditional Banks?
What is a Neo Bank?
A Neo Bank is a new classification of the digital bank. The neo banks have an uncompromising adherence to firm policies. Neo banks exist without any physical branches. They are reinventing the wheel of new processes and practices linked with traditional banking.
The typical definition of a neo bank is “New Bank”. It is a more specific term for the new-age digital banking services aiming to make it more accessible than traditional banks.
Neo banks’ products range varies from customer to customer and so does it’s licensing and limitation. They own online operations via mobile apps and net banking facilities. These features list neo banks as a primary FinTech solution.
Services:
The services of neo banks include mobile apps, payment cards, current and savings accounts, money transfers, loans, analytics on spending behaviour, etc. Besides, a lot of other financial services are provided in the neo bank when compared to the traditional banking. The mobile-only banks, a.k.a neo banks provide personalized products like a bank account, a debit card and a credit card customized for every customer. And the other products like online banking are provided to the customers via a partnership with other daily-use companies or FinTechs.
And it goes without saying that, neo banks fascinate the tech-savvy young adults. The technology vibes are spreading around to the older generations as well, due to the flourishing existence of smartphones.
A sneak peek of Neo Bank Vs Traditional Bank:
Neo banks are also called the ‘Challenger Banks’ in some cases. They are fundamentally discrete from the traditional banks. They are more convenient, less time-consuming and highly influential dominating the traditional banks.
The difference between Neo banks and Challenger Banks are:
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Neo banks offer a mobile-first banking experience via a partnership with the traditional bank.
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Challenger banks aim at being a completely licensed bank making way for new data-driven banking experiences and pricing models.
By and large, we have spotted the following evident differences.
How does a Neo Bank work?
Typically, neo banks are digital applications that promote the administration of credit cards, current and savings accounts. They demand customers having a traditional bank account and its corresponding license. With that underlying bank account, neo banks gain control by giving the customers a user-friendly digital experience. They achieve it via mobile applications and online services – in a much efficient and quicker way.
In simple words, a ‘Neo Bank’ is 100% digitally present on mobile platforms with evolving technology and new systems. It has given a new face to the cumbersome traditional banks with a digital manifestation.
How much of a threat are neo banks to traditional banks?
Traditional banks, also known as incumbents, have a few advantages over neo banks like customer trust, physical presence, assurance and funding. And on the contrary, the traditional banks have a few obvious reasons for customers to not choose them for their lengthy and tedious process. And with legacy systems and lengthier approval time taking the upper hand in conventional banks, it is evident that the traditional banks are finding it very difficult to build and implement innovative user experiences.
Neo banks, on the other hand, do not have legacy policies to hold on to and the money that traditional banks own. They have the power of digital and technology that are more threatening. With the power of technology, neo banks can launch innovative mobile applications, provide seamless user-experience, build partnerships and respond to feedback immediately, which the customers would love.
This obvious blend and differences are allowing the customers to take risks and engage more with neo banks. Although traditional banks can copy the different flavours of neo banks, the challenge always lies in their old school methods.
Example: 811 by Kotak [1]
811 is a digital bank account product by Kotak Mahindra Bank. The product was launched in March 2017 and is named after the day ‘demonetisation’ was announced in India – November 8, 2016. It is a zero maintenance bank account, along with a virtual card. A customer can also earn a 6 percent interest per annum on their savings. Within two years of the launch, the bank claims to have doubled its customer base to 16 million users.
A few others in India include Open, YONO by SBI, Instant Pay, NiYO, Google Pay where financial inclusion is the focus and the core of their business. All these neo banks are focussing towards maintaining a sustainable relationship with their customers by introducing new products and services that will be of value.
What other impacts are neo banks having?
The interesting fact is neo banks usually start from nothing. They have the option to be more flexible than their incumbent. This also brings in vulnerability and poor targeting. However, it won’t be the case in the long run as the neo banks have the platform to improve their process everyday, unlike their old school peers.
Neobanks, along with their counterparts – FinTechs, are driving the markets. Their primary focus is to offer customers with either one product or one service at a time. They can surpass the traditional banks by providing great customer service, user experiences, products and reasonable margin to launch their offering in the market.
Example: Paytm Payments Bank [2]
The Paytm Payments Bank, CEO and MD, Renu Satti, affirmed, “Till now, 10 million customers have shown interest in banking with us. We have moved from digital inclusion to financial inclusion and we are going to the unbanked and under-banked to fulfil our mission.”
The services in Paytm Payments Bank include
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Bill payments
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National and international purchases
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Credits
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Loans and easy instalments
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National and international money transfers
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Sustaining customer relationships through a lot of offers, discounts and paybacks
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Shopping and lots of other services that obviously explains why neo banks will be a huge success over traditional banks.
Traditional banks have not realized the power of neo banks and FinTech, yet. They are being lethargic about their competitors. They seem satisfied with the services they are offering and the range of products they have. Conventional banks have already seen their customers facing problems with them. And they are aware that their customers are gradually shifting towards neo banks and FinTech companies because of the attractive online banking options and mobile applications. It is not too far for the neo banks to completely take over the banking arena if traditional banks continue to allow their customers to go away.
It is no surprise that neo banks and FinTech are supporting the traditional banks to climb the ladder by signing deals and associating with them.
Another example of a great neo bank operating overseas is Moven [3]
Moven was founded in 2011 by Brett King in the United States, a neo-bank that operates in partnership with CBW Bank on its direct-to-consumer product. It is reliant on NFC Technology. Like all neo banks, Moven focuses on providing a mobile-first experience platform that will connect the bank’s products to the end customer. The app is made available through contact stickers placed on users' mobile devices.
Moven’s app comes with a debit card and a contactless payment sticker. The app provides real-time spending insights that aim at motivating customers to make smarter decisions and save more. The startup has raised over US$24 million in funding so far.
Takeaway
The neo bank revolution is evolving and underway in different parts of the world. A lot of players are securing their position to become the next big alternatives to traditional banks. In order to survive the turbulence, it will be better for the conventional banks to associate with the neo banks. Neo banks are creating a lot of eagerness and excitement with their intuitive mobile apps, features, services and products on offer. And when digital is ruling the world already, neo banks are definitely a disruption route to traditional banks.
Source: Medici Research
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