Thursday, May 19, 2022

Are Neobanks the Future of the Banking Industry?

Neobanks are financial institutions that exist only in the digital world. In more detailed words, it is nothing but a FinTech company offering digital banking services ranging from faster account opening, mobile deposits, digital debit and credit cards, transferring payments, and many more such services without having to visit the physical branch of your bank. However, these special entities have to partner with traditional banks as they do not have the regulatory licenses to undertake such activities.

So, the partnership with banks provides them with a platform to develop and scale digital banking services such as infrastructure on top of the banks. Neobanks mainly adhere to providing a hassle-free banking experience to consumers and SMEs. The banking industry in India has not matured yet. It is still evolving and so it needs to be up-to-date with the recent technological trend to keep up with the existing consumer demand and provide the customers a seamless digital experience.

Neobanks vs Traditional banks

Neobanks mostly offer minimal functionalities as compared to traditional banks. This approach of neobanks to focus only on the lesser allows customers to enjoy the basic functionalities of a bank without any excess ruffle at lesser fees. Also because of this approach neobanks provide better interest rates than traditional banks.

Neobanks are based on the mobile-first approach and these entities focus on providing digital banking services to consumers anywhere in the world. Therefore, many times these words are even used interchangeably despite being different.

The biggest flaw of traditional banks these days is that they lack some basic consumer requirements in terms of better user experience, value-added services, etc. So neobanks fill this gap and take better care. Some of these merits include:

1. Offering such services so that millennials save money or manage their financial goals easily

2. Providing  better user experience so that the user does not have to ring the customer care each and every time they face any problem 

3. Using high-end problem solving Artificial Intelligence tools so that routine issues such as deactivating user’s cards or unlocking their card, etc can be done in just a few clicks.

4. As neobanks do not have to maintain physical branches and often offer a smaller set of services, so their fee is relatively lower

So, these were some problems that neobanks solve or the merits that they have over traditional banks. As mentioned in the article earlier, neobanks exist only in the digital world, so most of the time they provide the customers with digital onboarding. So customers can open their account in less than 2 to 3 minutes through a completely virtual onboarding process.

Neobanks vs Traditional banks
 NeobanksTraditional banks
User Experience.  BetterBasic
Onboarding Experience  BetterBasic
Different value-added services in a single interfaceOffers integrated payroll for a small business, bookkeeping, payment gateway, etc.  Limited
AccessibilityEasy as everything is virtualRelatively harder as most things are on paper
Fee structureRelatively lowerHigher
LicensingNo or partial licensesFull banking licenses

Therefore, to conclude, in the battle of banks vs neobanks, the latter wins.

How do Neobanks benefits the SMEs or small businesses?

When you start a business, you are required to use multiple interfaces in order to operate your business transactions. So for this purpose, you need a separate invoice raising tool, a separate payment gateway for payment collection, a separate accounting system, etc. This eventually becomes a headache for your business as managing and operating them becomes confusing and most importantly it increases their costs.

So, neobanks found this customer pain point and they started leveraging technology. Finally, they came up with an alternative tool that would link all the required and distinct interfaces such as payment collection, bookkeeping, raising invoices, etc in a single process. This makes the business banking process totally easy, convenient and relatively cheaper.

So, these are some basic ways in which neobanks are eventually differentiating themselves from traditional banks. These are the same benefits that you as a business owner want to look forward to when choosing between traditional banking and new-age banking.

Therefore, neobanking has been a life-changing experience for small businesses as it has completely changed the way traditional banking operates. Small businesses can now focus more on their businesses and cost-cutting instead of worrying about their finances. All thanks to neobanks as they have already automated that businesses’ banking transaction. They even help them to manage multiple business accounts through a single app.

Neobanks vs Traditional banks- Which one a business owner will prefer?
 NeobanksTraditional banks
Interfaces for different activities  SameDifferent
Technology offeredFaster- All through one appSlower- All through different interfaces
Automation for business banking system  OffersDoes not offers
Can you save time by not visiting the physical branches?  YesMostly no

Neobanks in India

India still lags behind in the matter of neobanks advancement. In India, there are 10 neobanks , and all across the world, there are over 250 live neobanks. The neobanks in India raised USD 90 million in 2019.

Indian neobanks are taking a less aggressive approach and are positioning their offering close to traditional banks. This is because RBI has not yet permitted such banks that only exist digitally. This is why most of them are only working in partnership with banks. On the contrary, neobanks all across the world are growing fast and are expected to generate 394.6 billion USD by 2026.

How does a neobank work?

Neobanks work on the “Banking as a Service” model. Currently,  the neobank landscape can operate in three ways:

1. A non-licensed fintech partners with a traditional bank. The fintech uses a layering around the products and services of the partner bank. The layering offers the branding of the fintech, along with their additional services.

2. Traditional banks have even launched their digital-only services and offerings as neobanks.

3. Licensed neobanks that can operate as digital banks. It is possible only in the countries that allow such stand-alone digital entities to operate.

As mentioned before neobanks do not have their license, not in India at least. Sp, they have a bank as their partner. Neobank provides an ease to the customers of banks and in return, the bank provides them with a platform enabling core banking services. Most of the time, these banks use legacy systems and therefore have outdated digital infrastructures and services. So, neobanks wrap the legacy systems with their digital products and services and work on top of them. This wrapper makes banking services much easier, flexible, and scalable. Customers can access this wrapper conveniently using the app provided by the neobanks.

Suggested: Course on Payment Gateway Strategies

Challenges faced by Neo-banking

The primary problem that neobanks face is that they still rely on traditional banks as they do not possess the license to provide financial services. Therefore it becomes very important for the consumer to know exactly with which banks they are partnered.

The digital banking industry is growing dramatically and there are already a number of competitors, which makes it difficult for a neobank to retain customers as there are multiple banks who are all set to grab the market share by providing similar services or niche-based services along with some amazing signup benefits, and hence one has to keep up with the trends so that the consumer always gets the best user experience.


The era of digitalization is here to stay. Especially in a post-pandemic world, traditional banks are expected to invest more in technologies that ensure ease of business. AI, IoT, and solutions for customer-facing operations such as CRM software will be used more than before. Even the financial service sector will look forward to virtual call centres, online account opening procedures, loan automation, and automated/chat-based customer support. That is where neobanks come in. Along with their tech expertise, they have an opportunity to function as a digital front-end to the core banking solutions.




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