To make banking more convenient and meaningful, some financial technology companies are launching neo-banks. These startups are partnering with traditional banks and offering better solutions by using novel methods such as using artificial intelligence (AI) to analyze monthly spends.
In India, the initial neo-banks that were launched targeted business customers. These included Open by Open Financial Technologies or RazorpayX. Now, some fintech entities are launching them in the retail segment. Globally, neo banks offer 100% digital banking services.
Since the Reserve Bank of India (RBI) tightly regulates banking licenses in India, neo-banks are offering services built on the offerings of a traditional bank.
How are they different?
Neo banks are not the same as traditional banks, though both have a mobile-first approach and emphasize on digital operating models.
Digital banks are often the online-only subsidiary of an established and regulated entity in the banking sector. Neo-banks, on the other hand, exist solely online—without any physical branches—in partnership with traditional banks. This enables them to navigate and comply with the regulatory environment.
According to PwC, the global neo-bank market was worth $18.6 billion in 2018 and is expected to grow at a compounded annual growth rate of around 46.5% between 2019 and 2026, generating around $394.6 billion by 2026.
The growth is driven by their low-cost model with no or low monthly fees on banking services such as maintaining minimum balance, deposits and withdrawals.
What do they offer?
One of the latest entrants in the space in Finin. The fintech has tied up with three banks, but did not want to reveal the names yet as they are still in the process of raising funds. The tie-ups with multiple banks are for different functions. For example, they have tied with one for savings accounts and another for current accounts. The name of the partnered bank is displayed on the savings account and cards. Every purchase that a customer makes is eligible for a 2% cashback. It also offers complimentary airport lounge access, mobile protection plan and a metal debit card, which looks more premium than a traditional plastic one.
The startup uses AI to analyze the spends of the customer. It generates reports that give insights on the spending and saving behaviour. It also suggests data-driven investment plans. For example, just like online mutual fund platforms, customers can set up goals. The AI-driven platform will suggest a mix of investments and allocation each month. “A neo-bank like ours uses technology extensively to manage finances, predict activity in accounts, and send regular push notifications to alert customers if their spends are going over the allocated budgets," said Suman Gandham, founder and CEO, Finin.
NiYO, another entity in this space, has been around for some time. It had partnered with DCB Bank and IDFC First Bank for different offerings. Customers can open an account instantly, and can get up to 7% interest on the savings bank account for which the startup has partnered with IDFC First. It’s debit cards offer zero forex mark-up for international spends.
Other neo-banks that focus on the retail space include Yelo by 0.5Bn FinHealth and PayZello. These platforms are also offering new-age features through their platforms.
While many newer solutions from these entities are around smart analytics and savings and investments; they are also working on solutions that can attract customers. NiYO, for example, offers a debit card (in partnership with DCB Bank) with no mark-up fee when the customer uses it overseas. The platform competes with forex cards in this space. Finin is working on cheaper and faster solutions for inward remittance where it targets freelancers.
Should you try them?
All the transactions done on their platforms involve the banks that these neo-banks have partnered with. The debit card or the savings account that these neo-banks offer belong to the partner scheduled commercial banks, which are governed by RBI.
If you like the proposition by any of these neo-banks, look at the banks that they have partnered with. If you are comfortable with the names of the partners, you can start small to try their services. As this category is relatively new in the banking space, don’t open your primary banking account with them. Startups that run neo-banks, too, understand that consumers may not shift their entire banking operations to them as the neo-banks are still in the nascent stage and it will take some time to establish trust.
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