Complete Guide on What are Neobanks- How Neobanks Function, Pros and Cons of Neobanks
Banking is known to be an old system, it's so old that one might even call it ancient. Over time, banks have evolved, becoming a multifaceted element of the economy, furnishing more services than just storage and distribution of funds. With digitisation, banks began to have new avenues to explore. In the past few years, we have witnessed the fintech revolution grip in India, with hundreds of fintech companies popping up. Neobanks (also known as digital banks) comprise a significant part of these fintech firms disrupting the traditional banking ecosystem. These financial institutions are bridging the gap which exists in the conventional banking system by offering tech-first solutions. In the fintech industry, neobanks have made a huge splash. Their uniqueness is that they simplify financial services to the point where they meet today’s digital generation's expectations.
Neobanks are financial enterprises that are akin to regular banks, and they solely operate on digital platforms such as mobile applications (apps) and/or website platforms. For example, some of India's top neobanks don't have a physical presence across the nation, they operate solely through virtual networks. Due to being majorly technology-based, neobanks popularity is being soared because of their better usage of Artificial Intelligence and the plethora of personalized services, which the traditional banking system lacks. However, when it comes to customers getting to know their banking personnel through face-to-face interaction, traditional banks relish the supremacy over their virtual counterparts.
In this blog, Fintra explores how neobanks function, what edge they possess over traditional banks, and their pros and cons. The following are the highlights of the blog:
- What are Neobanks?
- How are Neobanks different from Digital Banks and Payments Banks?
- How do Neobanks differ from Traditional Banks?
- Top 12 Neobanks in India
- How do Neobanks Function?
- Benefits of Neobanks
- The Downsides of Neobanks
What are Neobanks?
Neo word comes from the Greek word Neos, meaning “New”, thus, neobanks are considered as a new version of an old system. You might be pondering how neobanks differ from the traditional banks you are used to dealing with? Well, the answer lies in its definition.
In simple terms, neobanks are digital banks that do not have any branches, they don't have any physical presence at a set location. The entire neobanking is done online. In fact, there's a wide collection of financial service providers, who mainly target tech-savvy customers, which falls under the umbrella of neobanking.
Essentially, neobanks are fintech firms providing digital and mobile-first services such as debit cards, money transfers, payments, lending, and more. They bridge the gap between the services, which traditional banks offer and the evolving expectations of new-age customers. This is possible because they provide personalised experiences, employ data-driven insights, and offer value-added services. As traditional banks continue to struggle by bringing their legacy-based infrastructure into the digital age, on the other hand, neobanks leverage their modern digital platforms to analyze customer data and create data-driven decisions.
Since they don’t have to endure the expenses of running physical locations, neobanks can even afford to slash customer fees by a significant amount. Along with offering user experience enhancements due to their tech-driven nature, the creation of opening an account is hassle-free. Consumers can easily create their accounts through their mobile devices; because the neobanks have a technology-driven KYC process, accounts can be ready in just a couple of minutes.
Wondering how to avail a neobank’s service? It's the same way how one orders food over Zomato or books an Uber cab- by using an app. It's via a mobile application that neobanks provide their services. In India, neobanks don’t possess a bank license because they're not granted by the RBI. Thus, they rely on bank partners, which are regulated to provide bank-licensed services. Currently, the neobanks like Jupiter, Fi, Niyo, and RazorpayX are working in partnerships with traditional banks.
How are Neobanks different from Digital Banks and Payments Banks?
Speaking first about digital banks, they often exist as online subsidiaries of established banking and financial institutions. They can be backed by some larger financial institutions and have few physical branches. On the other hand, neobanks solely operate online, they don't have offline branches.
Now moving on to payments banks, they come under RBI and provide all banking services to customers except issuing credit cards and extending loans. This enables payments banks to be free of credit risk. On the other hand, neobanks offer credit cards and loan services, which increases their exposure to credit-linked risk.
How do Neobanks differ from Traditional Banks?
Traditional banks such as HDFC, ICICI, Kotak, Axis, HSBC and many others have a wide physical presence with bank branches and physical ATM outlets. In addition to this, traditional banks even offer digital banking or net banking services. This provides them with a minor edge over the neobanks with an only online presence.
- Neobank's customer base is less when compared to that of the traditional banks. Neobanks still have a long way to go before they overtake the scale of business of the conventional banks.
- When compared to neobanks, traditional banks have deep pockets and significant funds. Neobanks lack these elements because most of them are still in the nascent stage in India.
- It's the innovative app features that give neobanks the extra advantage over traditional banks. However, neobanks have cutting-edge technology, which traditional banks lack. Sometimes we all have experienced and heard about a few banks’ apps having many glitches and are not customer-friendly.
- A major chunk of the customers to which neobanks cater includes the millennials, Gen Z, and young employees who desire to have new-age fintech services that traditional banks currently do not service. However, some huge corporations, the older generation, and legacy companies prefer to continue with conventional banks due to services such as personal banking, relationship managers, etc.
Top 12 Neobanks in India
The entire fintech ecosystem is striving to achieve success towards ease of usage and customer satisfaction. With regards to this, in India, neobanking has seen significant profits over the past few years. Moreover, some experts do believe the future of neobanks in India is pretty bright. Following is the list of the top neobanks in India:
Fi Money
Founders- Sujith Narayanan and Sumit Gwalani
Founded in- 2019
Fi Money, created by GPay co-founders Sujith Narayanan and Sumit Gwalani, targets those audiences who are salaried millennials. With the tagline "Banking Just Got Smarter", Fi Money is a neobank that has secure digital banking services for working professionals of today. Partnered with Federal Bank, Fi offers a smart zero balance savings account, enabling customers to manage their money better. Besides providing easy savings options and a good annual interest on a smart savings account, Fi Money even offers an assistant that can solve any user queries. With the help of Fi Money, some more benefits the users can avail are secure banking services and exciting rewards.
Fi even has an AI-based feature known as FIT rules that enables users to automate their savings by setting specific checks based on popular events such as cricket matches. After setting specific checks, the amount that has been already decided by the user then gets transferred to a custom savings account. Users can create multiple savings accounts for various goals, too. Fi account holders will also obtain a VISA debit card issued that corresponds to their account.
Jupiter
Founders- Jitendra Gupta
Founded in- 2019
Jupiter, which is also partnered with Federal Bank, targets the same demographic as Fi Money, thus, making it a direct competitor. Founded by fintech veteran Jitendra Gupta, Jupiter is a neobank created to serve today's digital customers with a banking service that maintains pace with them. By using Jupiter, one can create bank accounts in a flash, and similar to Fi, it can put their savings on auto-pilot mode in pots that offers a decent interest rate. Users can even obtain real-time insights and a comprehensive breakdown of their spending.
Jupiter claims it provides zero balance account facilities and instant support for its users. Moreover, this neobank also enables users to gain rewards on each transaction done with their debit card and UPI purchases. Since Fi and Jupiter are partnered with Federal Bank, it is predicted that a user may open an account with only one of the neobanks. However, it can switch from one neobank to another. When opening an account with Jupiter, customers will get a VISA debit card as well.
FamPay
Founders- Sambhav Jain and Kush Taneja
Founded in- 2019
FamPay is India’s first neobank which is primarily invented and developed to meet the financial needs of teenagers. FamPay enables teens to have their bank accounts and obtain the freedom to spend money, albeit under the supervision of their guardians. It offers a numberless and secured card which is co-branded with IDFC First Bank.
Through FamPay, teens can make simple payments across various platforms like OTT platforms, eCommerce, food apps, etc. This neobank strives to empower teens from a very young age to become financially independent along with being responsible human beings. It even provides them with the opportunities to make decisions, save money, and manage their spending. At present, it is estimated that the neobanking app has more than 2 million teenage users, and it's still increasing.
Mahila Money
Founder- Sairee Chahal, Siddhika Aggarwal, & Vaibhav Kathju
Founded in- 2021
Sairee Chahal, the creator of the female-only social media website “Sheroes”, created Mahila Money neobank intending to serve only female entrepreneurs from urban and suburban settings. Its purpose is to provide aspiring women entrepreneurs with the opportunities to begin their businesses without any micro-financial support. Mahila Money strives to make women become financially secured by providing loans and prepaid cards by partnering with NBFC named Capital Trade Links Ltd. Through its app, customers can do the following:
- Share experiences and obtain financial advice from the peers and experts
- Learn how to be financially independent
- Become a valuable part of a women-only community
- Open bank accounts online within a matter of minutes
- Get instant loan
- Discover the right financial protection plans
- Set goals and begin saving for them
Currently, it is believed that there are more than 20,000 women who have subscribed to Mahila Money’s financial services. Moreover, nearly 1.5 lakh women are discussing their financial experiences, challenges, and needs through the neobank’s community channels.
RazorpayX
Founders - Harshil Mathur
Founded in - 2014
Partnered with RBL Bank, RazorPayX is a platform that supercharges an individual's business banking requirements. It mainly targets small and medium firms by providing them with features to help ease their business operations.
RazorPayX is believed to be a simple and powerful business banking alternative. It enables businesses to do everything like opening current accounts, track invoices, schedule payments, pay tax, apply for instant loans with no collateral, and view financial reports. From one dashboard all these acts can be done. With RazorPayX, businesses can manage their finances seamlessly and have visibility and power over the company’s finances.
Niyo
Founders - Vinay Bagri and Virender Bisht
Founded in – 2015
Niyo boasts of making banking safer, smarter, and simpler for everyone. Launched by the banking industry and payments experts Vinay Bagri and Virender Bisht, Niyo brings a collection of useful banking products such as the following:
- Niyo X - It's an efficient app offering customers the facilities of savings and enables them to manage wealth without hassles.
- Niyo Money - Niyo Money is empowered by robo-advisory, and it helps customers grow and manage wealth.
- Niyo Global - With Niyo Global customers don't need to worry about round-the-clock support and they can earn up to 5% interest against their savings.
- Niyo Bharat - Niyo Bharat is marketed as an open banking platform and an app which ensures salary cards for employees.
OCareNeo
Founders - Dr Neeraj Sheth
Founded in – 2015
Driven by the tagline "Your Digital Health Passport", OCareNeo, founded by Dr Neeraj Sheth, was invented to enable this generation to focus on their medical needs. It helps its customers to dive into their digital health journey with which they can obtain instant access to their health, their family's health, and financial information. OCareNeo also offers a unique facility known as the Digital QR code, the code preserves the owner's health history, its insurance details, and it gives Digital Card and Digital Piggy Bank to pay for medical expenses and save for the health. Furthermore, OCareNeo even helps customers to ensure their health via a list of easy and secure insurance policies.
ZikZuk
Founders - Raj N
Founded in - 2020
Claimed to be an Indian SME neobanking, ZikZuk was founded in 2020 by Raj N. It was built with the intention to foster the growth of Indian SMEs. Besides offering various services and products, ZikZuk offers the founderscard. This credit card empowers business founders and entrepreneurs with the best credit scores by obtaining numerous exciting rewards. Furthermore, ZikZuk enables the company founders to acquire unsecured credit to satisfy their immediate capital requirements. With ZikZuk, entrepreneurs also get an easy way to manage their business finances.
Open
Founders - Ajeesh Achuthan, Anish Achuthan, Deena Jacon, and Mabel Chacko
Founded in - 2017
Trusted by 20,00,000+ Indian businesses, Open is a well-recognized digital business banking solution. It is headquartered in Bengaluru, and it strives to simplify business banking. Open business accounts offer its users VISA business cards which help them in banking, payments management, accounting, and more. It's been said that Open acquired another neobanking startup known as Finin on December 14, 2021.
Finin
Founders - Suman Gandham and Sudheer Maram
Founded in - 2019
Known as a modern neobanking startup that was founded in 2019, Finin strives to bring in a new approach to banking. This first-ever consumer-facing neobank offers easy account opening and management facilities through a comprehensive app. Powered by the latest Artificial Intelligence technology Finin even helps users by providing clever insights to improve their finances. Recently, Finin has been acquired by Open on December 14, 2021, and this results in adding value to Open and its band of SMEs.
Kotak 811
Founders - Uday Kotak
Founded in – 2017
811 by Kotak or Kotak 811 is a neobank-based banking conception which offers personal accounts with debit cards. It was opened after November 8, 2016, the day of demonetization that changed everything. Thus, Kotak Mahindra invented this new concept of easy, online banking services for its customers where the numbers reflect the date of demonetization. By using Kotak811, residents of India can easily open mobile bank accounts which can be instantly opened, they are paperless, easy to use, and can be easily handled.
InstantPay
Founders - Shailendra Agarwal, Amol Sonbarse, and Ajay Upadhyay
Founded in – 2013
InstantPay is known to be India's largest neobanking platform, which helps businesses and individuals to streamline their banking with visibility on cash flows, payables and receivables. Along with offering full-stack digital banking services, it extends easy banking options through which users can spend, save, and manage money online. InstantPay aims to make banking an experience instead of an obligation for the customers. It is partnered with top banks to offer full-featured current account and debit cards, combined with banking, payments, collections, expense management, and developer APIs, all in one place.
How do Neobanks Function?
A neobank's operating model differs greatly from a traditional or a digital bank. Since neobanks have no physical branches, locations, or employees at these branches, they tend to save a lot of funds on operational and overhead costs. The primary function of a neobank is to offer individuals tech-led banking services. Their banking partners provide access to funds for lending and it allows to hold the customer’s funds.
At the same time, the neobank distributes the product, operates the app, and ensures customer satisfaction, end-to-end customer acquisition, and client servicing. Generally, these non-licensed fintech companies collaborate with the traditional banks to provide new-age banking services on modern, easy-to-navigate apps. Do note that neobanks rely extremely on data, they frequently collect the customer data to analyze it and to understand customer behaviours better. By doing this they are in a better position to offer users enhanced services. It's based on the existing actions of the customers, which enables neobanks to aim at improving the customer's journey. Neobanks offer no-fee customer accounts which are beneficial for first-time earners, and lending services to young learners who desire to build a credit score.
Benefits of Neobanks
Neobanks have brought about a huge shift in the ways we do banking today. However, they're many questions arising as to why one should consider using neobanks when it has been banking the traditional way for years. In India, the USP of neobanks lies in their exclusive value proposition. Following are some of the benefits of neobanking:
- Neobanks have no physical branches, require minimal regulation, and credit risk keeps the cost of running a new bank low, resulting in higher revenues. Unlike the traditional banks, there're no monthly maintenance fees
- The latest tech technology enables users to navigate through the neobank apps efficiently, smoothly, and in a quick manner. Money transfers and lending transactions are done within a few minutes on a neobank
- Unlike traditional banks, individuals can make an account on a neobank in a few easy steps
- Highly convenient and user-friendly banking services
- They are created for a niche audience
- Neobanks offer digital banking services, such as prepaid cards, savings accounts, bill payments, and money transfers
- They provide financial management services
- Neobanks have high-security features
- They have a transparent structure consisting real-time notification feature
- Neobanks are facilitated to remove all the hassles
- Neobanks provide us with numerous rewards and other benefits
- Such banks ensure instant banking
- Neobanks are future-proof
- They are almost foolproof or at least they attempt to keep the human errors to a minimum
- Neobanks are powered by 24/7 customer service
- Since there are lower overhead costs, neobanks tend to offer higher interest rates
The Downsides of Neobanks
- Since neobanks have no physical bank branches, customers can't have contact with a direct person. Thus, this makes the relationship pretty impersonal, lacking the human touch
- Since they lack a banking license, neobanks don't offer all the benefits of a traditional bank
- Since neobanks operate 100% digitally, it makes them susceptible to security breaches, cyberattacks, and other similar online threats
- Do note that neobanks are not banks; they do not have a bank charter. Thus, these institutions usually partner with a bank to ensure their products. Do bear in mind while opting for a neobank, always make sure a regulatory body has insured it by a partner bank. This ensures some degree of security for the cash that's been deposited into mobile apps or online accounts
Conclusion
Neobanks have emerged in response to the new, digital era. Despite some bumps in their journey, the trend of neobanks is not likely to disperse anytime soon. Moreover, in an industry that has long needed diversification and a renewed focus on accessibility, the invention of neobanks does appear to be a positive thing.
As described above, various new neobanks, also known as digital banks, have come up in recent years, offering the most basic banking services online. However, as our blog has revealed, neobanks do have their limitations, and one shouldn't take them as a substitute to the traditional banking service. Do thorough research, and analyze which neobank suits you and your banking needs before opting for the best one.
