Digital Banking, or Neo Banks, disrupts the age-old traditional banking system that ever existed.

Neobanks, sometimes called “digital banks,” are fintech firms that offer apps, software and other technologies to streamline online and mobile banking. These fintechs specialize in particular financial products, like checking and savings accounts. As a result, they are more agile and transparent than their megabanks counterparts, even though many of them partner with such institutions to insure their financial products.

Neobanks has made a splash in the fintech industry. New players have entered the market in large numbers. Their uniqueness is that they simplify financial services to the point where they meet the expectations of today’s digital generation. Today, these fintechs are transforming the banking sector in a similar way as Airbnb revolutionized the hospitality industry or Uber and Lyft overhauled transportation. In the U.S., some big-name neobanks are attracting customers in droves.

In India, Prime Minister Narendra Modi announced to rollout Seventy-Five Digital Banking Units (DBUs) across the country on August 15th, 2022. These units will be paperless and will also work as digital financial literacy centres for the customers. “All Seventy-Five districts have been finalized and allocated to respective banks to set up the infrastructure and train manpower for these specialized units,” said an executive aware of the developments. The districts identified include Leh, Srinagar, Lakshadweep, and others. In addition, the Reserve Bank of India (RBI) has issued guidelines allowing scheduled commercial banks to open digital banking units (DBU). According to the circular, DBUs will be specialized fixed point business units to digitally deliver digital banking products and services and service existing financial products and services.

Neobank bridges the gap between the services that traditional banks offer and the evolving expectations of new-age customers. They provide personalized experiences, employ data-driven insights, and provide value-added services. While conventional banks struggle to bring their legacy-based infrastructure into the digital age, neobanks leverage their modern digital platforms to analyze customer data and make data-driven decisions. Neobanks can slash customer fees by a significant amount since they don’t have to bear the expenses of running physical locations. The hassle-free account creation is among the user experience enhancements that neobanks offer because of their tech-driven nature.

Since Neobanks doesn’t have a physical office in neighbourhoods, consumers can create their accounts from their mobile devices from the comfort of their homes. And, given their technology-driven KYC process, the account can be ready in just a couple of minutes. And, how do you avail of a Neobank’s service? The same way you order food over Swiggy or Zomato or book a Grab, Ola or Uber cab.

By using an app. Neobanks provide services via its mobile application. In India, neobanks don’t have a bank license of their own. Instead, they count on regulated bank partners to provide bank-licensed services. RazorpayX, Fi, Jupiter, and Niyo currently work with traditional banks. Neobank startup OPEN becomes the 100th unicorn in India with the latest funding of 50 million dollars from IIFL and existing investors. The Indian Startup Ecosystem is the third-largest in the world in the number of Unicorns and is now home to 100 unicorns with a total valuation of 332.7 billion dollars.

According to Forbes, here are some of the well-known neobanks in the market today.

Chime: 

Boasting more than 12 million users, Chime is arguably the most widely recognized brand in the Neobank space in the U.S. The platform eliminates many of the standard fees typically associated with brick-and-mortar banks. Chime also provides credit-building opportunities, early access to direct deposit payments and automatic savings features with a competitive annual percentage yield (APY). Chime is a financial technology company, not a bank. Banking services and debit cards are issued by The Bancorp Bank or Stride Bank, N.A.; Members FDIC.

Varo Bank:

Varo Bank was founded as a Neobank. But the company, which has around 2 million users, received a full-service national banking charter in 2020 from the Office of the Comptroller of the Currency (OCC), officially making it a bank. The service offers similar perks to Chime, including no monthly or overdraft fees and no minimum balance requirement. In addition, users don’t need to undergo a credit check to open an account.

Current:

Current is another Neobank that has attracted hundreds of thousands of users in the U.S. It offers benefits such as early access to direct deposit, fee-free overdrafts and cashback on debit card purchases.

International Neo Banks

In the U.K., popular Neo banks include Revolut (which has made its U.S. debut), Starling and Metro Bank. Other international Neo banks include N26 in Germany and NuBank in Brazil.

How Do Neobanks Make Money?

Neobanks typically use a different business model than incumbent banking institutions. They make a good amount of their revenue from interchange—fees paid by third-party vendors when customers make purchases using their debit cards. As smaller organizations, neobanks are allowed interchange percentages up to seven times higher than those available to banks with more than $10 billion in assets.

Should You Consider Switching to a Neobank?

For the growing number of customers demanding digital financial services, it’s easy to see the appeal of neobanks. Conducting everyday tasks like depositing checks or making peer-to-peer payments online is convenient without a flurry of fees. The agile nature of neobanks, which generally have fewer regulatory hurdles to clear, also often means easier account set-up and faster processing times. In addition, the Government of India and the Reserve Bank of India regulating the DBUs have enabled the ‘trust’ element into these new-age banking for the next-gen society or the nation. 

Customers considering making the leap from a legacy bank to a digital-first one will want to consider the factors:

  • The financial products on offer—e.g., checking accounts, money transfer platforms, etc.—and how they meet your needs
  • ATM prevalence and accessibility
  • Any fees or “fine print” charges that do exist, particularly for overdrafts
  • The rates available for interest-bearing accounts
  • Financial education or budgeting features that come with the platform

Prospective Neobank customers should also assess their comfort level using technology platforms. For example, are you willing to download another app and give it access to your financial data? Are you comfortable discussing banking needs with a chatbot? Is online-only customer service appealing, or do you prefer in-person support?

To Summarize, Neo Banks or Digital Banking is the future of the Financial Services Industry. You can refer to my article about Neo Banks here. Besides, ‘Digital Transformation’ in the Banking world will disrupt the traditional banking systems. India has become the hub of the ever-growing ‘Fintech’ world, and Bangalore the Capital. Neobanks have emerged in response to a new, digital era—and to address the pain points related to the financial services market of yesteryears and will become the future of the Banking Industry.