Neo-banking: Can We Trust?
Fahid Fayaz Darangay
Neo-banks are digital banks that do not have any physical branches but provide all financial services to their consumers through apps that can be accessed through a smartphone or any other smart device.
They require minimum paperwork, are affordable, charge minimum to zero transaction fees, and are borderless, unlike traditional banks. They are also referred to as challenger banks because they have disrupted the entire traditional banking model with a tech-driven alternative mode of banking.
Among the increasing customer base of neo-banks are people who travel globally frequently, students, tech-savvy millennials and even the financially illiterate who can now easily access their bank accounts while on the go on their mobile phones.
Neo banks have brought about a paradigm shift in the way Indians are managing their money and their banking requirements today. These digital financial institutions deploy the latest technology stack to enable safe and secure banking transactions for their consumers while also managing their finances and investment through personalized commitment and care — all through your mobile phone.
They give you the flexibility to travel anywhere in the world without having to carry cash with you. They are paperless and have done away with the fees charged for withdrawing cash abroad or on every purchase made through an international debit card. You can open an account with a neo-bank in just 10 minutes with minimum paperwork, and you’re sent a virtual debit card for use immediately. Additionally, access to global investment opportunities, easy international student banking and low-cost global spending are a few more key features of a neo bank.
Money deposited in a neo-banking account is as secure as it would be in a regular bank account in India. All the neo-banks in India work on a partnership model with traditional banks. This means that customer funds are parked in an underlying bank account.
In fact, if your account is a savings or current account with a traditional bank, RBI guarantees customer funds upto ?5 lakhs through Deposit Insurance and Credit Guarantee Corporation (DICGC) insurance. The same is applicable for customer accounts opened with neo-banks, since the underlying account is provided by a traditional bank.
With no physical branches, many consumers may assume that they will not be able to access their money in case of an emergency. However, established, full-stack neo-banks typically provide their customers with full access to ATM withdrawals. For example, with our Niyo IDFC FIRST Bank account, we allow customers to withdraw funds from ATMs both in India and abroad and transfer funds to their bank accounts 24X7 from our mobile app.
One big advantage neo-banks have over traditional banks is that they aren’t reliant on old legacy systems, and hence tend to have a strong focus on security and safety while designing their platforms. For our Niyo IDFC FIRST Bank account, for instance, we have built innovative features such as:
• Locking/Unlocking the entire card or any specific transaction type
• ATM and login PIN resetting
• Setting transaction limits depending on the channel or type of transaction
• Hiding account balance and card number within the app
• Live transaction updates and detailed transaction history log
Additionally, neo-banks are all mandated to follow the same set of regulatory requirements like data localization norms or 2 factor authentications (2FA) for card based transactions. Furthermore, neo-banks were among the first to adopt more advanced transaction security enhancing models like MCC block, single-use virtual cards, and tokenized online transactions.
When it comes to matters of money, Indian customers still prefer having access to a person they can relay their queries or concerns to directly. Most full-stack neo-banks offer multiple options for customers to communicate with them. Customers can contact neo-bank customer support via phone, IVR, email, online chat, in-app chat, WhatsApp, etc. With Niyo IDFC First Bank account, our customer support team provides 24X7 access to customers through all the aforementioned channels. We also have a clearly defined escalation matrix, including nodal officers and a grievance redressal officer similar to traditional banks.
Unlike a traditional banking system, neobanks have a completely different business model altogether. But, like traditional banks, neobanks do make money marginally between money inflow and lending.
And, since there isn’t a physical location and that they’re completely online, the customer fees are slashed by a significant amount. Because Neobanks are customer-centric, they provide personalized services to their customers that are fired up via technology.
Data-driven decisions drive the decision-making process of a neobank. Since their platforms are also very modernized, it becomes easier for them to collect and analyze data and understand how their customers behave in the neobanking ecosystem. Based on these observations, they create cohorts of customers based on their actions rather than merely sticking to one or two data points.
Scope in India
In 2020, the penetration rate of smartphones in India reached 54 per cent and was estimated to reach 96 per cent in 2040, more than doubled from the financial year 2016, when only 22 per cent of the mobile subscribers were using a smartphone. In 2020, the volume of smartphone shipments across India was around 149.7 million.
With the smartphone penetration in India set to grow multifold in the coming years, there is a vast scope of growth for Neo banks in India. Neo banks target three main classes of customers:
— The high-end consumers are always on the lookout for a better seamless experience that aligns across all their digital touch points, be it an Apple, Amazon or Facebook.
— The underbanked customers who don’t have access to quality banking and have unstable, irregular incomes yet can benefit from a digital financial platform.
— Customers with special needs, such as independent contractors, freelancers, Uber drivers, etc., may need very short-term loans to smoothen their cash flow.
In India, MSME’s account for about 95% of the country’s industrial units but have not been covered by conventional banks. Neo-banks give this MSMEs access to financial services through a formal banking and credit system.
The prime factor driving the growth of neo-banks in India is that traditional banks are yet unable to offer the range of services they offer safely and effectively on a digital platform. Going ahead, neo-banks are only going to get bigger and better with improvements in technology. Already neo-banks have real-time data and lego-blocks like architecture, making it very easy to roll out new features and products.
What is interesting is that it is the customers that are driving this wave of change in the business of banking as they become more demanding about the experience and the value, they expect from their banking experience.
(The author holds a Masters in Financial Economics from Madras School of Economics, Chennai)
