Neo-Banking 101

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Introduction

“Neo-Banking” has become a buzzword in the fintech and consumer banking worlds. Also referred to as “Challenger Banking” or “Open Banking”, neo-banking is a craze in both developed markets, such as the US and Europe, and emerging markets such as China, India, Brazil and South-East Asia. In essence, it is a new way of banking, beyond the confines of brick and mortar establishments – one with a compelling digital presence.

What exactly is a Neo-bank?

A “neo-bank” is a new type of banking entity that does not have any physical branches, but offers all of its banking services through digital/mobile channels, like a smartphone or web interface. A neo-bank may hold a full-fledged banking license, a specialized digital banking license offering a limited set of products or services, or may operate without a bank license by partnering with traditional banks, depending on the regulatory regime of the particular market.

Neo-bank literally means “new bank”, pulling roots from the Greek word νεος (neos) meaning “new”. It is an umbrella term for the new generation of fintechs offering cutting-edge, fully digital banking platforms, aiming to make banking simpler, easier and more exciting for customers. In fact, neo-banks are revolutionizing the entire consumer banking experience, by reinventing everything from the customer experience, product features, and internal practices and processes associated with traditional banking.

Neo-Banking: Banking Beyond Walls

Neo-Banking: History and Origins

The term neo-banking was first coined in 2017 to describe tech-based financial service providers that were challenging traditional banks. The concept of neo-banking itself, however, emerged years ago, between 2013-15. Some of the first players started up in the UK and Germany, including Monzo, Revolut, N26 and Atom Bank. In India, we at Niyo Solutions were the first fintech to pursue neo-banking back in 2016.

Source: Medici Research

Digital banks vs. Neo-banks

While the terms “digital bank” and “neo-bank” are sometimes used interchangeably, a digital banks is often the online-only subsidiary or strategic business unit (SBU) of an established and regulated player in the banking sector. Some examples of digital banks include “Kotak 811”, “DBS DIgibank” and “YONO” in India, “First DIrect” by HSBC in the UK, “Tangerine” by Scotia Bank in Canada and “Mashreq Neo” by Mashreq Bank in UAE. A neo-bank, on the other hand, exists solely online — without any physical branches and either independently or in partnership with traditional banks.

The Current Global Landscape of Neo-banking

Over the past 5 years, the global neo-banking market has witnessed exponential growth in terms of both customer base and size of the overall market. It is expected that the market will continue to grow by at least 25-30% in the next 5 years. With all its unique advantages, both to the fintechs that engage in neo-banking and the customers it serves, neo-banking shows incredible promise in the near future. Based on current projections, neo-banking is expected to become mainstream within the next few years, with more and more consumers and small businesses overcoming their apprehensions and adopting this new wave of revolution in the world of banking and finance. Whether or not it overtakes traditional banking is something only time will tell.

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