Explainer: Neo Banks vs Traditional Banking

What is the News?

Neo-Banks bridge the gap between the services that traditional banks offer and the evolving expectations of customers in the digital age. They are changing the face of fintech and could one day eclipse traditional banks. 

What are Neo Banks?

Neo-banks are online-only financial technology (fintech) companies that operate solely digitally or via mobile apps. Simply put, neo-banks are digital banks without any physical branches.

What is the difference between Neo Banks and traditional Banks?

Firstly, in India, Neobanks don’t have a bank licence of their own but rely on bank partners to offer licensed services. That’s because the Reserve Bank of India (RBI) doesn’t allow banks to be 100% digital yet (though some foreign banks offer digital-only products through their local units).

Secondly, Neo-banks are disrupting the traditional banking system by leveraging technology and artificial intelligence (AI) to offer a range of personalised services to customers. On the other hand, traditional banks follow an omni-channel approach i.e. having both physical (through branches and ATMs) and digital banking presence to offer a multitude of products and services.

Can Neo Banks replace Traditional Banks?

Not entirely. Neo-banks offer only a small range of products and services as compared to a whole gamut of services that traditional banks offer. 

Besides, since neo-banks are highly digital-focused, they may not be able to cater to the banking needs of non-tech-savvy consumers or people from the rural parts of the country, who believe in face-to-face interaction with their financial custodians. As of 2020, India had a smartphone penetration rate of just about 54%.

What are the challenges that they face?

Firstly, building trust. Unlike traditional banks, neo-banks don’t have a physical presence, so customers cannot literally ‘bank upon’ them in case of any issues/challenges. 

Secondly, neo-banks are yet to be recognised by the Reserve Bank of India (RBI). So, they have to engage with regulated banks and financial institutions to offer financial products and services

Source: This post is based on the article “Explainer: Neo Banks vs Traditional Banking” published by Hindu Businessline on 4th December 2021.