All About Neobanks: The Next-Gen Banking Solution

neo banking

Banking and finance are leading the digital transformation revolution worldwide. Every day, we see new services and financial tools floated in the market, devised with the digital customer in mind. One significant trend of digitalization in the banking industry is the advent of Neobanks.

Even though there are over 250 neobanks in the world today, financial experts, governments, and Neobanks themselves are still figuring out the nuances of operations, regulations, and sustainable business models for this banking sector. If you are also curious about the functioning of Neobanks, read on to know more about what is Neo banking, how Neobanks are run, and how they are different from traditional banks.

What is a Neobank?

When asked “What is a Neobank?” most people answer, “Digital banks” or “Net banking services”. But that is far from the truth.

Neobanks are financial institutions that function as online-only banks. They have no physical presence or branches like a traditional bank. They offer banking services strictly online via mobile apps or online banking. And Neobanks enable their customers to make convenient online transactions, control accounts in real-time and get customized services.

As Neobanks don’t have physical branches, they have low maintenance and infrastructure costs. It enables them to offer the same services as a traditional bank at lower rates. However, the services each Neobank can offer depend on their bank license.

How do Neobanks Operate?

Neobanks function online and are technically defined as fintech companies rather than banks. They provide additional services and a digital interface for the technology-driven customers from the Gen Z and Millennial demographics. In India, most Neobanks operate in partnership with traditional banks.

So far, there is no definitive business model for Neobanks. Most Neobanks focus on niche customers and mold their services to suit their target customer base. If we look closely at different Neobanks, we will see a stark difference in how each company runs its business. One common aspect, however, is the use of cutting-edge technology and a tendency to stick to the online space. Neobanks use Artificial Intelligence, machine learning, and data science to analyse customer data and personalize their services to suit their customers.

Also Read: Things You Need to Know About Advance Digital and Business Banking

What is the Difference Between a Digital Bank & a Neobank?

Contrary to popular belief, digital banks and Neobanks are not synonyms. Neobanks are full-fledged banks that operate in the online space. On the other hand, digital banks are online platforms of well-known traditional banks.

Digital banks are a business wing for traditional banks; they find representation in the branches of their conventional bank. Therefore, digital banks can offer a broader range of services and cater to large sections of the banking audience. In contrast, Neobanks are fintech institutions with no physical branches and are focused on online services. But on the positive side, staying online helps Neobanks reach audiences who don’t have access to a bank branch or those sections of the audience who cannot afford the traditional bank fees.

How do Neobanks Make Money?

There are various ways for Neobanks to make money in their business model. Experts divide them into five broad categories –

  1. Interchange: Some Neobanks use interchange as a revenue driver. Merchants who accept the Neobank credit card as a mode of payment pay Neobank an interchange fee for processing the payment. Usually, this fee is about 1.5% of the total purchase amount. Every time a customer uses Neobank’s card as a payment method, Neobank gets paid.
  2. Credit-led Business Model: Many Neobanks start with a credit offering and launch their bank accounts. Leading with a credit offering helps Neobanks gain profit through interest payments.
  3. Ecosystem-Led Model: Neobanks use high-performing APIs to create an ecosystem of financial services to become a one-stop solution for their customers’ financial needs. Ancillary services such as insurance, investment, and credit brokers help increase profit potential.
  4. Asset

Safety & Security of Neobanks

In India, the Reserve Bank has decreed that Neobanks must operate in partnership with traditional banks. It helps secure funds in an underlying account while offering the flexibility of online operations. Neobanks also leverage technology to provide the safety of data and funds through cutting-edge cyber-security solutions. The RBI has also put strict norms such as two-factor authorization and data localization to ensure safe and secure operations in Neobanks.

The rise of Neobanks has triggered radical changes in the financial sector. It has opened up the marketplace for online financial instruments and pushed traditional banks to offer better online banking services to all customers. With convenience, safety, and innovative service, Neobanks is set to challenge traditional banks in the coming years.

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