Disruptive technologies have been changing the way banking works and extending the boundaries like never before leading paths to numerous fintech startups across the globe. Money orders transformed into wiring money, which then took the form of electronic money transfer. Internet and mobile banking solutions came into the picture, leading to UPI money transfers. Now, is the time to get along with the new version of banks via neo banks.
What is a Neo Bank in Reality?
Neo banks, also known as challenger banks, are digital banks with no physical existence, i.e. neo banks are entirely online. They offer all the products and services through digital channels, such as over a smartphone and web interface. Neo banks can be thought of as fintech firms that provide financial solutions related to money transfer, money lending, and other related services.
How is a Neo Bank Different?
- Fintech firms partner with actual banks to provide neo bank services.
- They don’t usually have a bank license to host the services. That is, they are not listed under the central regulator (RBI).
- Neo banks stand between the traditional banking system and the customer expectation to bridge the gap towards boosting customer experience.
- They don’t extend credit or provide overdraft facility.
- No need of signing any physical papers or visit a branch office to validate your identity. Just establish a relationship with a neo bank and start using the services.
What Services Are Offered?
As of now, neo banks services are similar to the traditional bank services, but are limited:
- Savings and current accounts
- Money transfer and bill payments
- Other advisory services, such as help in budgeting.
- Loans for individuals and small and medium businesses.
Also, you may be able to pause your debit card with a single tap on the neo bank app, without having to cancel the card to prevent unauthorised transactions as in the case of traditional banking.
Neo banks will be able to support SMEs with financial services, such as invoicing software, payment gateway, and cash management, as they fintech firms are a part of the neo banks.
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Bright Side of Neo Banks
- Quicker Response: Neo banks use innovative ways to process any applications, such as to evaluate creditworthiness.
- Low Costs: Neo banks do not include maintenance fees for their products. This reduces the overall cost of utilising their products and services.
- Transparent System: Expect no surprise/hidden charges when you transact with neo banks. All possible details are informed to the customer before signing off a transaction.
- Prediction: Neo banks make use of technology to predict the kind of transactions you may do shortly, along with showing transaction history. The integration with artificial intelligence gives these banks the required capability to manage finances and prevent problems.
Not-So-Bright Side of Neo Banks
- Limited Regulations: Since this is the dawn for neo banks, there are very few regulations and standards to adhere to. At this stage, there may not be enough legal support in the case of any fraud or an entity to resolve any issues.
- No Physical Interaction: People may still prefer to get specific work done in person than on the internet, especially so in the case of complex transactions.
- Uninsured: Funds you have deposited at a neo bank may not be insured under the Deposit Insurance and Credit Guarantee Corporation (DICGC) as per the guidelines of RBI in the case of traditional banks. Make a thorough check about this and get ready to face the risks even if there is no insurance offered.
Neo banks are well-suited for tech-savvy customers who like to perform banking transactions from their smartphones. Within a year, a few fintech firms have raised around $90 million from venture capital investors to establish neo banks in India. We are about to witness the next big thing in the history of fintech.
For any clarifications/feedback on the topic, please contact the writer at apoorva.n@cleartax.in
