The last couple of years have been interesting ones, as we saw the announcement of a number of Neo-Banks across the globe. While names like N26, Nu Bank and Monzo have become cemented in Fintech history with their eye-watering valuations and blazing growth, Neo-Banks have been becoming increasingly popular in India as well. But what exactly is a neo-bank? Is it just a fancy word for a digital bank or is there more to this story? Come lets find out.
So, what is a Neo-Bank?
A Neo-Bank (also known as an online bank, internet-only bank, virtual bank or digital bank) is a type of direct bank that operates exclusively online without traditional physical branch networks.
Wikipedia 1
The term Neo-Bank is a relatively recent addition, entering usage about five years ago with the introduction of new challenger banks viz. Monzo and Atom Bank in the UK. In fact before 2010, there were only about 9 startups that could be identified as Neo-Banks. That number rose to 43 by 2015, and in the last five years it has more than doubled to 103!!!2
The term is now most often used to refer to Fintechs that operate digital challenger banks that compete with traditional banks through a digital only model. Very simply put, a Neo-Bank is a fintech company that operates a direct bank that only offers online or digital service. What this implies is that a Neo-Bank only onboards and services customers digitally and often has limited or no physical branches.
Ok, that was simple enough to understand, or was it ?
Well, it only looks simple. In reality, things can get quite complicated, depending on whether the regulatory jurisdiction allows digital or virtual banks to hold an independent banking license or not. Thanks to different countries providing different levels of regulatory access to a pure digital banking license, three distinct models have emerged:
- Existing Bank’s digital initiatives – These are traditional banks that have launched completely digital propositions either as standalone “bank-in-a-banks” or as sub-brands. These Neo-Banks ride on the license of their parent
- Over-The-Top (OTT) Banks – These are Fintech players that stitch together Neo-Banking experiences by partnering with a traditional bank. This can be thought of as “white labeling” a bank’s license to operate a new franchise which provides the bank’s products and services on a new platform. This route is often taken in countries that do not provide for a pure play digital or virtual bank
- Licensed Banks – These are pure play digital or virtual banks that run on their own license and are not required to have their own branches. They distribute their own products. Today, South Korea, Singapore, Hong Kong, Philippines and Europe are some of jurisdictions that allow for digital or virtual banking licenses
Hmm … that sounds complicated. So, what does a Neo-Bank offer that I can’t get from my regular bank?
Short answer – A lot!!! And it boils down to three things:
- Better customer experience
- Better customer convenience
- Cheaper price
Who wouldn’t want a better product at a cheaper cost, no? It’s this aspect of Neo-Banks that has customers flocking to them, especially in the millennial and GenZ segments. Let’s take a minute to understand how Neo-Banks are able to do this.
Better customer experience
Traditional banks today have one thing that Neo-Banks don’t – which is technical debt. Traditional banks have emerged into the era of the internet riding on ancient mainframes or creaky monolithic systems to support their technology needs. Such archaic systems are often not designed for the digital age and additional layers need to be added to them to make them mobile and API friendly. Even in cases where banks have gone for upgrades, due to the burden of integration with multiple systems, the customer experience on digital services is often lacking.
Neo-Banks on the other hand are starting from scratch and can use modern solutions to provide superior experiences to their customers. To do this, they either build their own custom solutions (e.g. Revolut, Monzo, Nu Bank) or use modern solutions from both traditional players (e.g. Oracle, Temenos, Fiserv) or from new age players (e.g. Mambu, Thought Machine). Better technology that’s engineered to perform well in the digital age coupled with superior UI and UX and digital process design, help Neo-Banks significantly beat traditional banks in customer experience.
Better customer convenience
The second thing that traditional banks have, which Neo-Banks don’t, is archaic customer service infrastructure. Traditional banks have been branch centric with only some of the core functions of the branch moving outside to digital channels. While things are much better now, there are still activities that require you to visit that dreaded branch and queue up and wait your turn.
Neo-Banks on the other hand are always on 24X7 and provide almost everything from the mobile app in your phone. In addition to this Neo-Banks are also able to quickly partner with other Fintechs and financial service companies to bring more products to their customers under a single roof. Need a custom insurance cover that covers COVID for that short week long trip to Maldives? Well a Neo-Bank could probably provide this to you in a single click through one of their partners !!!
Want the same thing with your traditional bank? You would likely be waiting for months till the bank launches the product !!!
Cheaper price
The last thing that traditional banks have, which Neo-Banks don’t, is large overheads. In the case of the traditional bank, maintaining those brick-n-mortar branches and offices definitely adds to the overall cost of service. That fancy downtown office with the bank logo on the roof – well that’s adding to the cost of service to you as a customer !!!
Neo-banks on the other hand do not have many of these overheads and can pass on some of the cost savings to their customers in the form of cheaper prices. This could take the form of say cheaper rates on international transactions, better rates on loans or even premium spending cards for free.
That’s great!!! Do we have Neo-Banks in India now?
Yes !!! Neo-Banking is exploding right now in India, in spite of the Reserve Bank of India not providing a digital banking license yet. Neo-Banking in India largely took off with Development Bank of Singapore’s digibank that pioneered completely seamless digital onboarding through India’s National ID infrastructure – Aadhaar.
In recent years, several traditional banks have also launched their digital bank offerings including Kotak Mahindra Bank with Kotak 811 and State Bank of India with Yono. Most recently ICICI Bank launched its Neo-Banking offering targeted at millennials called ICICI Mine.4
On the Fintech front, lack of a digital only bank license has so far prevented standalone Neo-Banks from launching. But it hasn’t prevented Fintechs from using the OTT model to launch Neo-Banks. Some recent launches include Niyo, Yelo, Open, EpiFi, Paytm, Jupiter etc. to name a few. Banks like Niyo have scaled to well over 1.5 -2 million retail customers 5 and banks like Open to over 100,000 businesses in the SME segment.6
Where can I learn more?
To learn more about Neo-Banks, listen to our episode7 on Neo-Banks where Hemant and I discuss a brief overview on the topic. After that join us in conversation with Vinay Bagri, Co-founder & CEO of Niyo8 to get a glimpse into a real life Neo-Bank in India.
Notes
- Wikipedia contributors. (2020, November 24). Neobank. In Wikipedia, The Free Encyclopedia
- Medici (2020, June 25), Neo Banking 2.0: Global Deep Dive 2020
- Built For Mars (2020), The UX of Banking
- Times of India (2020, November 24), With Instant savings account, interactive app, credit card and more, ICICI Bank ‘Mine’ is a complete banking package for millennials
- Outlook (2020, March 5),Niyo Bharat aims at 50 lakh customer base in two years
- Techcrunch (2019, June 25), India’s Open ‘neo-bank’ raises $30 million to help businesses automate their finances
- Episode 1 – Introduction to Neo-Banks
- Episode 2 – In conversation with Vinay Bagri, Co-founder & CEO – Niyo