Can Neobanks transform banking in India?

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Neobanks are cost efficient fintechs or non-banking players providing microfinance services with innovative products and quality customer services. It has proved to be exceptionally beneficial for the gig economy employees and blue collar jobs, who usually function without the support of a traditional physical bank and mortar branch network. India’s neobank start -ups have garnered $230 million in the year 2020 according to ET, where infusion of larger penetration of mobile phones have resulted in the popularity of neo banks among the common masses. It is built on a technology based consumerism aspect.

Neobanks can tie up with small banking institutes and offer higher interest rates on savings accounts. NeoBanks have the advantage of being able to tie up with multiple banks following myriad regulation norms, different document structures, separate customized products tailored for different customer experiences, various security protocols and similar other parameters.

 Adhering to a platform without approaching physical branches are objectified to be a trend amidst the post-pandemic situation. To be a customer of neobank it is essential to be aware of banking partners at the back-end and their financial health . Helping blue collar category jobs, luring the gig economy workers into the formal financial system, neobanks have proved to be a real boon in the national financial inclusion initiative. 

The attributes that reasons out Neobanks to be efficient on laying a financial path are the services it provides, such as:

  • Automating manual and repetitive financial tasks
  • Simplifying payouts, 
  • Credit system solutions, 
  • Providing ledger for Current account and Savings accounts,
  • Instant loans that are collateral free
  • Credit cards for individuals and corporates
  • Mutual funds, insurance, tax savings
  • Business analysis with granular-level data

Neobank uses technology services such as Cloud, Data Analytics, Machine learning and many more for their targeted customers that includes millennials, SMEs and low salaried segments who are largely neglected by the traditional banking system based on their income structure. APIs could be one of the unique features in neo banks where banking services of leading banks can be used by fintech companies, web developers and non-financial businesses.

Neobank Holds attributes of low cost models, and provides alternative methods of credit value covering the MSME Sector by not being a part of a complex administrative structure. In the regulatory environment, partnership with private bank entities helps in the transformational ecosystem for employees. As per the regulations, the monetary transactions are held by partnered banks, as fintechs are competent in building effective solutions for everyone’s financial needs. Neobanks could be held as a path to attain financial inclusion, where merging with other banks help in the production of effective financial products, better enhancement of financial credentials, and a driving factor in relation to the emergence of neo-entrepreneurs..

Setup for the next financial evolution

SMEs can benefit with the freedom to choose according to their business and payment duration structure. In remote areas, they serve under banks and communities by guiding the customers and being attentive on providing solutions, including user friendly banking portals. The dual combination between neo banks and other commercial banks create value as neo bank takes up technology and innovation, and licensed/commercial banks take up trust, franchise, risk, underwriting and collections by integrating banks into the SME ecosystem through APIs where instant receipts, real time cash flow monitoring, automated accounting and bookkeeping, payroll management and vendor management are provided. Neobanks can even afford to offer customers an experience of their services before paying for it, through freemium subscriptions and memberships. Banks remain as money custodians whereas neo banks have built on technology infused banking services.

A major setback for the Neobank sector is the lack of a large technology-agnostic consumer base, especially in a developing country like India where the major chunk of the population resides in the rural regions. There are limited services offered by Neobanks compared to traditional banks, though its structure involves similar functions provided by traditional banks. The lack of a physically present infrastructure or on-ground employees also acts as a deterrent for the neo bank culture. It lacks to garner trust and reliability from traditional banking service practitioners. 

As of 2021, RBI does not directly regulate the neobanks but the neo banks do adhere to the stringent clauses of its RBI-monitored bank partners. RBI intends to prioritize the physically present structures, thereby urging the digitally present neobanks to be built on a physical counterpart. This enables the neobanks  to collaborate  and provide  financial services such  as investment, lending or insurance over its platforms. RBI regulatory structure is needed for the working of neobanks in a long run phase to predict whether it holds as a cornerstone for the digitalized era and survives with the traditional banking structure. For this business model to emerge efficiently, regulations from RBI could subject neobanks on a larger scale of criteria.

Article by Ramya. S 

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