Title: NEO Banks in India – 2021. A major technology disruption to traditional banking. The target - Capturing SMEs/MSMEs/Retail clientele – also a high potential job opportunity for graduates.
1NEO Banks in India 2021. A major technology
disruption to traditional banking. The target -
Capturing SMEs/MSMEs/Retail clientele also a
high potential job opportunity for graduates.
- Ramesh Kumar Nanjundaiya
- June 2021
2Definition Fintech Neo Bank
- Every decade has seen ongoing new innovation in
the banking sector for the benefit of its
customers. This decade we are into Fintech. - Fintech - in a simple manner. Financial
technology (Fintech) is a new technology that
tries to improve and automate the delivery and
use of financial services. A combination of
finance and technology helps consumers,
businesses and companies to better manage their
timely financial operations by depending on
specialized software and algorithms on
computers, laptops, smartphones and mobiles.
3Neo Bank and AI
- Extending this definition, it was only in early
2016 that fintech based financial providers came
into the market as NEO Banks which are an online
bank, an internet-only bank, a virtual bank, a
challenge bank or a digital bank that operates
directly and exclusively online without
traditional physical branch networks. - Neo Banks are AI-driven and incorporate the
entire financial portfolio onto a single platform
to keep track of your entire banking operations
of receipts, payments and transactions in
real-time for your benefit.
4Digital Bank and Neo Bank Differences
- A digital bank is generally the online-only
subsidiary of an established and regulated bank. - A NEO Bank operates solely online and does not
have any physical branches independently or in
partnership with traditional banks. This enables
them to navigate and comply with the regulatory
environment. - Neobanks differ from a Digital bank as they are
stand alone and their business model is based on
digital operations on a mobile-app based utility.
With this technology, they are able to fully
provide similar services as that of traditional
banks on real time. - A Neobank is exclusively an online organization.
5Payment Banks
- Before diving into NEO banks we should briefly
look at a new concept called Payment Banks. - The Reserve Bank of India (or the Central Bank of
India) had conceptualised a new avenue called
Payment Banks. Essentially these banks can accept
a restricted deposit, which is currently limited
to ?200,000 per customer and may be increased
further. These banks cannot issue loans and
credit cards. Both current account and savings
accounts can be operated by such banks. Payments
banks can issue ATM cards or debit cards and
provide online or mobile banking. - The following is the list of active payments
banks currently operating in India - Airtel Payments Bank
- India Post Payments Bank
- Fino Payments Bank
- Jio Payments Bank21
- Paytm Payments Bank
- NSDL Payments Bank
- The main objectives of setting up of payments
banks are to ensure the financial inclusion by
providing payments/remittance services to migrant
labour workforce, opening up small savings
accounts of small business holders, low-income
households, workers of the unorganised sector.
6Entry of NEO Banks
- With so much talk about Mobile banking and
customers becoming tech savvy, NEO banks entered
the stage with more technology added to the ever
expanding financials affairs and services and
expanding customer base due to digitization of
services. - With the aim of providing timely cost effective
customer services, Neo Banks have integrated
technology so seamlessly that they provide
effective digital and mobile-first financial
solutions, payments, money transfers, money
lending, account position management and much
more.
7Entry of NEO banks continued
- While NEO Banks do not have a bank license of
their own, they count on bank partners to provide
bank licensed services, a mutually beneficial
relationship. - Very early NEO Banks saw that there was a hidden
growth potential in the SME MSME business and
small grocery business covering the nook and
corner of India which was still highly unbanked
by 100s of traditional banks operating in India.
They could not provide standard technology aided
services like payment gateway, cash management
services, receivables reconciliation, etc.
8NEO Bank and traditional Bank
- It is a win-win situation. NEO Banks actually
partner with traditional banks and help them
acquire new customers in a seamless manner. - NEO Banks or a virtual bank provide many new
financial and value-added services to traditional
banks. NEO Banks bring in good volumes hand
picked customers for loans and other banking
services after necessary due diligence per
banking regulations and thus the traditional
banks have no hesitation in processing request
and provide core regulated products and services.
- NEO Banks are facilitator of services. They help
traditional banks to grow their books on timely
basis with quality assets. This is the biggest
USP of NEO Banks. - NEO Banks took advantage of mobile technology, to
provide timely secured encrypted cash transfer
and related financial services across the board
for mobile and smartphone users by way of user
friendly apps at a very small fee. Thus providing
extreme convenience.
9Reserve Bank of India (RBI) guidelines on
regulations for NEO Banks
- Today the RBI cannot grant virtual banking
licences. How to overcome this. - RBI has come out with its master circular called
titled "Mobile Banking Transactions in India
Operative Guidelines for Banks", has mandated the
requirement for digital banking service providers
to have some physical presence. -
- This essentially means, neo-banks or virtual
banks can provide banking related services only
through outsourcing their technology oriented
banking responsibilities to licensed banking
institutions and non-banking financial companies.
- Such fintech companies operating in India have
entered into an outsourcing arrangement where the
non-banks verify data for credit requests or
undertake the preliminary work for opening
current accounts. This arrangement under the RBI
Guidelines on "Managing Risks and Code of Conduct
in Outsourcing of Financial Services by banks" as
well as the 2010 RBI Guidelines on "Financial
Inclusion by Extension of Banking Services. -
-
10RBI regulations continued
- NEO Banks also comply with data protection laws
since they facilitate a number of services
between the consumer and the banking institutions
by providing an online platform. - The Indian data privacy regime comes under the
IT Act and the Information Technology (Reasonable
Security Practices and Procedures and Sensitive
Personal Data or Information) Rules, 2011 (SPDI
Rules). These rules are quite extensive and
provides good protection to the end users, i.e.
the customers. - As per the SPDI Rules, an entity that collects
or processes sensitive personal data (including
bank account information and payment instrument
details) pertaining to an individual must (i)
establish a privacy policy (ii) provide
mandatory notice/disclosure to the data subject
before collecting the information and a host of
other guidelines.
11NEO Banks are good due to ...
- They make access to credit easier,
- Other services provided to customers include
facilitating opening and operating savings or
current account with a licensed bank, - Access to loan offers or applying for loans,
- Issuance of co-branded cards, payment gateway
facilities, - Personal finance, or expense management,
providing value added services such as invoice
generation, accounting, - GST compliance, payroll management,
- Enterprise resource planning, etc.
- Such services have made NEO Banks very popular
among not only the youth but also the mid level
career professional, businessmen, traders, etc
who today prefer banking through applications
rather than physically going to a branch which
can be inconvenient and time-consuming and quite
restrictive due to covid 19 pandemic and extended
lockdowns and health issues.
12Earnings
- One method of making monies for the timely
technology oriented service provided via
smartphone, etc is via marginal earnings between
money inflows and lending and service or
convenience fee. - NEO Banks are able to provide highly reduced
customer fee for services provided as they are
completely online. This gives rise to high volume
clientele acquisition thus enabling steady flow
of earnings. - NEO Banks tend to be highly customer-centric as
they provide personalized services to their tech
savvy customers. -
- NEO Banks specialize on data driven
decision-making process. This means that they are
able to collect and analyze data and understand
how their customers behave in the technical
ecosystem. - They are able to get and machine process a lot of
data analytics and consumer behaviour and action
patterns and thus can modify their suite of
services.
13Advantages of NEO Banking
- NEO Banks are completely digital, they open up a
wide window of advantages to a customer such as - Hassle-free account opening and account creation
via a mobile in a very short time. - Reporting of transactions on real time basis.
Availability of account balance anytime. - A customised expense sheet on your app.
- A monthly receipts and expenses summary
- Loan maturity sheet with alerts for payment and
running interest schedule. - Seamless international payments anywhere via
mobile and no need of any plastic cards. - User-friendly interface providing security and
transparency - Easy to use APIs
- Neobank apps are very crisp. They are generally
highly responsive and well-designed to suit the
needs of a customer. The ease of use is what
makes the app such a hit amongst its customers.
Neo banks are featured with dashboard systems
with advanced interfaces, easy to understand, and
practical insights for services such as payables
and receivables, payments, and bank statements.
14Popular NEO Banks innovating in India
- Per market analysis and RBI data and lately due
to the Covid 19 pandemic, digital acceptance has
been accelerated among customers for their
banking requirements. Notwithstanding legacy
technology, being a digital-only bank, they have
presented an alternative banking option to other
traditional financial institution incumbents.
15Popular NEO Banks
-
- NEO banks tend to work as a tech-savvy
decision-making model setup and handle cash more
easily and openly. These banks gather and assess
data, understand the trends, try to quantify the
behaviour of their customers, and then come out
with predictions and results. - Popular NEO Banks
- 811 by Kotak,
- Yono by SBI,
- RazorpayX-2018
- Open,
- NiYo-2015,
- Open, Instant Pay-2013 and Yelo-2019 have
partnered with ICICIBank. - Neo Banks in India particularly since the last 3
year have been successfully helping SMEs, MSME,
large enterprises, and the gig economy with
billing, cashflow management, Working capital,
disbursals, vendor management and much more.
16Ongoing innovation in Fintech is the name of the
game
- Today what is needed by both financial
institutions, consumers, SMEs, is reliable and
secure transactions with a minimal need for
service interactions. Neo Banks who use cutting
edge technologies are able to provide high end
cost effective services. Today Financial
institutions have adopted the following
technological innovations - Blockchain
- Mobile banking
- AI and machine learning
- Microservice architecture
- Open banking
- Eg Microservice architecture is a new way of
approaching the structure of information systems.
Traditional software created large,
interdependent systems of software functions,
which led to systems that were difficult to
update or modify. In other words, changing one
part of the system would usually have unintended
impacts on many other parts. Microservice architec
ture breaks down complex software systems into
smaller independent components, each providing a
defined service. -
17Fund raising
- Per latest date available, NEO banks in India
raised around USD 90 million in 2019. Expected to
double in 3 years. - NEO Banks in India are positioning their offering
close to traditional banks. It is because RBI has
not yet permitted banks that solely exist
digitally. Therefore, most of them are now
working in partnership with banks. - Globally, neobanks are growing fast and are
expected to generate 394.6 billion USD by 2026.
18Enabling Technologies
- The wave of digitization is here to stay.
- AI, IoT, and solutions for customer-facing
operations (e.g., CRM software) will be on the
rise. - The financial service sector will look forward to
virtual call centers, online account opening
procedures, loan automation, and
automated/chat-based customer support. - Neobanks, with their tech-expertise, can
eventually function as a digital front-end to
the core banking solutions.
19Tech Savvy customers leads to new job
opportunities for graduates
- Consumers are now adjusting to the fact that
digital business is here to stay. - Customers will slowly and steadily adopt to NEO
banks digital platform. - NEO Banks will survive on bank partnerships
provided by acquiring new customers for them. - Neo banks will educate bank customers
for on-boarding and helping them to be more
saving savvy and more financially competent. - Huge untapped opportunities in a market like
India is available. Eg a salary account banking
for un-served underserved working class blue
collared workers banking for SMEs cross-border
travel payments or smart digital bank accounts
for students and millennials. - To a large extent, Indian NEO banks are
technology platforms that integrate traditional
banks with open APIs. - The foregoing clearly indicates that there will
be a huge and growing opportunities for qualified
graduates to seek employment in NEO banks. There
will be added bonus if they are able to bring in
new and evolved digital products and services and
new clientele to the table.
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