Bridging the shortcomings of traditional banking through integrated value chains and regulatory requirements, neo banks today offers a holistic twist to banking services. User-friendly and completely digital, these banks work on referral-based acquisition and competitive pricing.
With no banking license of their own, neo banks partners with traditional banks to offer their service suite. While this might be a pain point, neo banks target niche micro-segments like the Gen-Z because of their higher transaction volumes. Coupled with Data Analytics, neo banks bring forth innovative solutions to help individuals keep better track of their finances.
For instance, our client Finin, India’s first neo bank, has brought on a feature where users can have a unified view of their bank accounts via their platform. It helps a user to keep better track and plan their financial journey.
Unbundled Banking
Neo banks today are focusing on offering one type of product/service with complete functionalities. They operate with customized tech stack modules aimed at niche segments with user convenience as the focal point. Some of the top global neo banks are Revolut, Monzo, WeBank, Chime, etc.
Paradoxically, legacy banking institutions cannot create these experiences as they face redundant processes, interoperability, etc. Fintech professionals realized that an obsolete technology stack was limiting the interoperability of traditional banking. This, in turn, guided the notion of Unbundled Banking, with neo banks steering the helm.
Unbundled banking further narrowed that focus on customer experience, user convenience, and simplified processes. In this approach, anyone can launch banking products minus the need to go through a rigorous process of setting up a bank.
Neo Banking Revenue Model
Neo banks operate on a strong cost-efficient model backed by less complex IT systems. So, their revenue model depends on the kind of products and services offered by them. Cross-selling of products/services to niche customer segments also acts as a secondary revenue stream for neo banks.
They are driven by data-based decisions that depend on a decision-making model. Neo banks gather consumer data and analyze them and predict consumer behavior. These predictions help to offer customized services to their target customers. By deploying AI-driven chatbots, video chats, and data analytics, neo banks are available to customers as a cost-effective banking service right at their fingertips.
Neo banks cross-sell and generate secondary revenue streams with a range of customized offerings suitable to customer’s needs. They also offer payments and accounts back-end platforms for other fintech companies to build their own interface on top of it.
Plug and Play solutions with 3rd party service providers with ease and data insights. With this, they can offer a range of products and services based on customer appetite and financial goals to boost up the secondary revenue lines and opportunities for cross-selling. Boosting lending options to customers and the SME sector will help generate revenue options.
Neo Banks & the less-digitally savvy users
The audience that comprises this segment is often elderly and rural customers; capturing their trust is quite an uphill task for neo banks. They gain such customers with a free account and low fees and budgeting tools and cash projections based on past spending, and ‘savings pots’ for spend categorization. Offerings like High-Yield Savings Accounts and easy money movement through lower fees & charges are some ways.
Neo bank growth can be accelerated through adaptable services and convenience in money transfer like cheaper lending rates and better rural audiences’ products. Creditors can choose borrowers and information from diverse sources and technology-based lending. Like how social media platforms have pulled in rural customers, neo banks also need to create awareness through their user-friendly applications.
Reduced data rates & smartphone prices will also encourage rural customers to use neo banking apps and gain trust.
Neo Banks & Transparency
The issue of banking transparency is closely linked to financial inclusion. Neo banking transparency can be improved through dashboards, reports across products with enhanced interfaces, and easy-to-understand services such as payments, payables and receivables, and bank statements. They must explain real-time notifications, any charges, and penalties incurred by the customer too. They should send instant alerts to customers to know exactly what is going on with their account.
Security & Privacy
Neo banks were the primary users of security-enhancing models. These were MCC block, single-use virtual cards, and tokenized online transactions. They rely on security and safety when designing platforms, like data localization or 2-factor authentications (2FA) for card-based transactions.
Neo banking enables third-party financial service providers (TPPs) to access customer data from banks or financial institutions. They must maintain robust online anti-fraud systems and inform customers of breaches as soon as it happens.
Customer permission is required to ensure data privacy or share certain information with banks or providers. For instance, if the customer gave consent, they can share financial data like spending habits and regular payments with other banks.
Providers must comply with GDPR regulation and data protection rules. They must provide transparency on how and for what the data will be used, for how long before they get a customer to sign up.
Trust
Neo banks have strong drivers for securing their customers’ accounts, which are reputation management & consumer perception. Developing trust can also be a challenging factor for loyal traditional banking customers. Fines, data breaches, and attacks can significantly damage consumer trust in non-traditional banks. Therefore, neo banks must protect consumers from mobile Trojans phishing scams and account takeover attempts. They can earn consumer trust through advanced authentication concepts such as dynamic linking, device binding for mobile apps, mobile application shielding, and transaction risk analyses.
Strong privacy and data protection policies like removal of hidden fees and charges can help build consumer confidence in neo banks.
Neo banks are trying to simplify the ways of transacting through digital mediums through:
1. Simplified process with minimum steps to complete with minimum redirect for the transaction/payment
2. Tightly tying up and different players in the ecosystem (Retailers, Digital Service Providers, Issuer and Acquirer banks, etc.)
3. Standardization across devices and internet browsers
4. Compatibility across platform and technologies
5. Educating conventional customers on digital payment and ensuring that money is safe.
Neo Banks Vs. Traditional Banks
Traditional banks are focused on product-centric models, meaning high verticalization of products, no strong communities built around the brand/product, increased customer acquisition cost, and legacy technology infrastructure.
But currently, traditional banks have been increasingly offering unique products and services to customers. One might wonder how neo banks will continue to differentiate themselves from conventional banking as a result.
Neo banks can tackle product competition by keeping the focus on a platform-centric model. For example, high community engagement with the product, product horizontalization with best-in-class apps, open-banking APIs, and capitalize on a mobile-only approach for the low customer acquisition cost. A lower dependency on 3rd party providers and real-time data integration and management might help too. Above all, customer-centric organizational design and customer needs to drive data architecture.
Neo banks create an ecosystem of services around their infrastructure, shifting the banking value from branches to their API layer. They expand their user base by providing services on a 3rd party platform or offering 3rd party services on their platform.
The neo banks’ value propositions & CLV is based on lower costs, personalized insights, predictive intelligence, user-friendly interfaces, easy accessibility, and simplified processes.
The Global Way Forward
On a global scale, neo banks are on an upward growth trajectory in Europe, followed by America. The real neo bank growth is being unlocked in the APAC region, with many countries devising their virtual banking systems.
Hong Kong, Taiwan, and Singapore have already implemented virtual banking licensing, with Thailand and Malaysia following suit.
In India, neo banks are still nascent. Still, they are playing a leading role in helping small businesses to manage finances conveniently and comprehensively. The data below shows that the Indian neo banking market is growing fast:
- Average market maturity of India is 2–3+ years compared to 5–6 years+ in Europe and the US.
- Number of neo banking players in India has gone up in the recent past compared to global markets.
- Fund raised by Indian neo banks have gone up to $168 million
- Indian neo banks are boosting up the competition through value-added services apart from standard offerings.
- Indian Government supports the MSME sector through different schemes that open up Indian SME neo banks opportunities.
Neo banks are expected to explore strategic partnerships with established traditional banks to grow in India. The Reserve Bank of India (RBI) has not permitted a digital license to neo banks yet. RBI has initiated the change by providing a license to small finance and payment banks, to begin with. Banking Industry experts are hopeful that RBI will also work on policies to approve banking license for digital-only or neo banks soon in the post-covid-19 era. This will keep the fate of neo banks blurry.
Conclusion
Fintech will continue to push neo banking as the new normal. The pandemic is just a catalyst to ignite the digital transformation. Neo banks are challenging mainstream traditional banks. They are backed up by digital backing licenses and control most of the value chain from front-end to back-end.
Till then, neo banks in India will have no option but to continue partnering with the traditional banks to offer services.
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