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BW Businessworld

Growth In Neo Banking

However, the Indian government and RBI are yet to decide the way forward for cryptocurrency. A large bank can associate with a neo bank and use its digital and technology platforms so as to provide efficient service to the customers.

Photo Credit : Reuters


Neo bank is the next big thing in the banking space. Neo banks provide digital banking through mobile applications. The purpose of Neo bank is to provide seamless customer experience which cannot be offered by traditional banks. Being digital these banks are lean in structure and provide faster services and solution. With the advent of mobile banking and financial inclusion neo banks could play a significant role in the banking ecosystem.

The success of neo banks globally would encourage many fin tech companies to convert themselves as neo banks. The neo bank market globally is approximately $ 20 billion and and would grow to approximately $ 400 billion by 2026 as per some reports. Globally there were approximately 105 new banks as on June 30, 2020 with some prominent neo banks being Banko Inter, Chime, My bank, Moven, Nuba Kong, Luda,Banco Sabadell etc. Neo Banks like Monzo and Revolut are extremely popular with their customers and are appreciated for their service.

As a business model there have been varied experiences across the globe. Close scrutiny of neo banks functioning revealed that many have not been able to break even as customers were not offered multiple services. Neo banks need to invest and rely on technology and marketing the product, services are key drivers determining its success. The cost of operation being low is an advantage which can be capitalized by providing services efficiently. Customer acquisition and servicing are the key factors in making the bank sustainable. Some of the successful neo banks have focused on customers for whom they have provided real time accounting which is a value add to its primary banking activity.

However, some of the neo banks have struggled as they have not been able to convince customers of their business model. Trust of depositors, customers is an important criteria for neo bank’s success.

Neo banks can also be called virtual banks, who focus on behavioral patterns of customers and provide them a decision making model. Since Neo banks are virtual banks with no physical infrastructure the cost of services would be lower than traditional banks. They tend to use artificial intelligence and data analytics to evolve a robust business model.

There are concerns about the security of data pertaining to Neo banks which all banks face in digital transactions. Neo banks globally braced up with good security measures like encryption, strong authorisation mechanism, role based access control, bio-metric, strong KYC etc

In India Neo banks space is slowly making its mark with brands like InstaPay, Niyo, Razorpay, Open, SBI Yono etc. At present India has 15 Neo banks. These banks provide services like payment gateway, processing transactions  banking solution, cash delivery, make online payments, payment to vendors etc.

Fintech companies are  also preparing themselves to act as neo banks, but sometimes are constrained by capital and market acceptability. With multiple startups the arena for fintech companies is crowded. Many have folded because of initial capital burn and inability to raise next round of funding.

In India neo banks have not been put under any regulatory framework so far by RBI. Successful neo banks like YONO and 811 have emerged from existing banks and SBI and Kotak Mahindra bank have initiated this process successfully. Neo banks are treated as fintech companies with digital platform thus are not recognised and regulated.

RBI  introduced a new regulatory sandbox for testing new financial technologies in August 2019. The regulatory framework needs to be introduced for neo banks to create an environment of trust and customer safety. There is also a need to take a call on cryptocurrency as neo banks globally consider it an integral part of their activities. Digital cash is an important component of neo banks and its business model. The concern of regulators is obvious considering the fact that many entities have collected deposits in the form of schemes especially in the para banking era. The regulators would like to introduce strong corporate governance oversight for this sector considering the fact that they are dealing with public money. RBI would like to put in regulations so as to eradicate any misuse and protect the customers.

However, the Indian government and RBI  are yet to decide the way forward for cryptocurrency. A large bank can associate with a Neo bank and use its digital and technology platforms so as to provide efficient service to the customers.

There is huge potential for Neo banks considering India’s population, demographics and financial inclusion aspirations. However, Neo banks have  limitations like ability to lend, physical presence in geographies, customer security and lack of regulation.

In the present circumstances neo banks will play second fiddle to traditional banks but can provide value addition in terms of services to licensed banks. With their app only focus, innovative app features and tools neo bank can provide impetus to the digital revolution in the Indian banking sector.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Neo Banking crypto-currencies

S Ravi

The author is a practising chartered accountant and an independent director on many large public companies whose views and ideas have been instrumental in framing policy

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