Neo-Banking: A flash in the pan or the next big thing in banking?

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Introduction

The first wave of the fintech revolution was led by startups focusing on digital payments and lending. Now it’s “Neo-Banks” that are grabbing the attention of both fintech investors and entrepreneurs, with venture capital investments in neo-banks leading the charts of all fintech investments, and a number of neo-banks emerging both globally and in India. That being said, there is a fair amount of skepticism within the analyst and banker communities, as well as the common public, that ‘neo-banking’ may just be a fad which will taper down with time. Here, we address these skeptics with 5 reasons why neo-banking is likely to become the next big thing in the world of banking.

1) More than just UI/UX

It is easy to believe that neo-banking is all about an impressive UI/UX wrapper, layered over the plain vanilla product offerings of a partner bank. While it is true that customer experience and design-led thinking is at the core of a neo-bank, well established neo-banks dedicate a lot of focus towards product and business model innovation. They further strive to offer a large basket of value added offerings and tools, many of which are often non-financial in nature and would otherwise never be offered by a traditional bank.

For example, the Niyo mobile app has a lot of value added tools such as a global ATM locator and a real time currency convertor.

2) Neo-banks put the customer at the centre of everything

Thanks to the combination of today’s digital banking and payment technology, customers know that they don’t have to settle for anything less than a truly customer-centric banking experience, which is exactly what direct banks can offer. Consumer surveys in multiple markets, including India, show consumers saying that simplicity, trust, control, and digital self-service are the most important attributes in their banking relationships. These traits make up the hallmark of any neo-bank worth its salt.

3) A scalable, flexible, platform-based business model

Neo-banks, by design, have built their technology stack and business models in a way that is scalable, flexible and not segregated into silos. This frees neo-banks from many of the constraints faced by large traditional banks, enabling them to adapt rapidly in response to changing business landscapes and evolving customer expectations.

4) Collaborate instead of compete

Banks and fintechs have had a tricky relationship over the years from competing for the same consumers. However, in recent times, both banks and platform based fintechs, particularly neo-banks have realized the mutual benefits of collaborating by leveraging each other’s strengths. Neo-banks present the financial services ecosystem–made up of traditional banks, non-bank lenders (NBFCs) and insurers–with an exciting proposition for inorganic growth through partnerships. It allows the incumbent players to reap the benefits of product innovation, digital transformation and incremental revenue without the need for large investments or acquisitions. At the same time, neo-banks can gain access to capital and larger captive customer bases. A report by Morgan Stanley found that only about 7% of banks were involved in the development of in-house technology solutions. The majority of banks, instead, saw more value in either partnering or investing in fintech companies.

5) Not a zero sum game

While it is true that neo-banks are aiming to snatch market share away from traditional banks in certain customer segments and business verticals, they are also expanding the size of the pie itself, by bringing in newer customer segments and enabling new use cases.

The DCB Niyo Global Card, for instance, primarily aims at replacing forex in the forms of hard currency or travellers cheque that Indians have traditionally used for spending during their foreing trips, by digitizing the cross-border payments ecosystem.

While people are certainly turning to neo-banks to help them save, avoid fees and enjoy quick and simple banking, perhaps there’s enough room for both traditional and challenger banks to thrive in the future by collaborating with one another and complementing each other’s strengths.

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