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. (1)

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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.

• Ramesh Kumar Nanjundaiya
• June 2021

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Definition 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.

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Neo 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.

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Digital 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.
  

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Payment 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.

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Entry 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.

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Entry 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. 

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NEO 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.

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Reserve 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.
•  

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RBI 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.

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NEO 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.

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Earnings

• 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.

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Advantages 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.

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Popular 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.

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Popular 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.

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Ongoing 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. 

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Fund 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.

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Enabling 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.

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Tech 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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• THANK YOU