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Neobanks in India: Getting to Know the Important Benefits and Challenges

Neobanks in India

Traditional banks have met all of our financial needs, including loans, deposit accounts, debit and credit cards, and insurance. The majority of a bank’s clients’ needs have been met with the assistance of its global network of branches. By founding neobanks in India, however, fintech startups and companies have created a comfortable, hassle-free banking experience for the 21st century.

The use of automation, machine learning, and artificial intelligence have enabled fintech companies to provide a variety of solutions to the difficulties faced by traditional bank customers. Neobanks bridge the gap between the services offered by conventional banks and clients’ growing expectations in the digital age. They are transforming fintech and may one day surpass traditional banks.

Many individuals may confuse neobanks and digital banks. Both offer banking services through smartphones and other mobile devices, making them comparable. However, the parallels cease there.

Evolution of Banking in India

India’s financial awareness has grown over time. People are investing in traditional securities like bonds, fixed deposits, mutual funds, and crypto. While we’re learning the latest in finance, let’s not forget its rich history.

Even before independence, India’s banking system achieved great strides. History and civics textbooks describe the establishment of the Indian democratic constitution and its many features. However, you probably do not know about India’s banking history. Read on to find out more information.

The beginning: before 1947

Pre-independence India had 600 banks. The Bank of Hindustan (1770-1832) was India’s first bank, while the Oudh Commercial Bank (1881-1958) was the first commercial bank.

Unpredictable bank failures forced the government to act. And the government passed the Banking Regulation Act of 1949 to regulate banks and prevent financial disasters.

Nationalization wave: after 1947

The Indian government nationalized banks, including the RBI, in 1949 under the Banking Regulation Act. Before the Act, all central banks were privately held, providing their owners with an unfair advantage. The Act encouraged rural residents to use banks and discouraged them from using moneylenders.

Modern era: 1991-present

After the 1990s, the Indian government promoted foreign involvement in the banking industry. This brought global banks and private investors to India, leading to innovations like ATMs and e-banking. Private sector banks were the most prominent development during this time.

The government permitted private banks when it formed the Narasimham Committee in 1991 to stabilise nationalised institutions. RBI and India’s government eventually treated private and public banks equally. Later, payment banks were created. So far, there have been numerous innovations made to keep the financial system moving in the right direction

What is Neo Bank?

Neobanking refers to a bank that works without a physical branch network, i.e., a style of banking that functions solely online. Typically, neobanks provide a similar variety of services as conventional banks. Neobanks facilitate virtually everything, from account opening to evaluating the creditworthiness of individuals and businesses.

Neobanks and digital banks are frequently used interchangeably. Even though both types of banks offer exclusively digital services, it is crucial to remember that the digital bank is typically an online-only partner or a subsidiary of a traditional bank. Neo-bank, on the other hand, is an independent financial technology corporation operating without a physical presence.

As neobanks provide greater interest rates and reduced costs, the concept of neobanks has been appealing to tech-savvy individuals who prefer to manage their finances via mobile phones or tablets.

Benefits of Neobanks in India

We can see why a Neobank in India seems to be effective. Let’s look at the benefits of Neobanks in India:

1. Ease of account opening

Even while the process to open a standard bank account is simpler than in the past, there is still a significant amount of paperwork and form-filling required to start a bank account, and some banks require consumers to visit a branch to open a deposit account. There is no need for consumers to visit a branch to open an account with neobanks, as branches do not exist! A mobile phone can open an account in two to three steps.

2. Cost-effective

Neobanks save a substantial amount of money because of the absence of physical branches. Therefore, there are no withdrawal fees and no yearly or monthly maintenance fees.

3. Easy-to-use interface

Using advanced technologies, neobanks increase the customer experience. The applications and websites are quite responsive, unlike those of traditional banks, whose net-banking websites frequently have bugs and mobile application lag.

4. A blessing for MSMEs

The process of disbursing funds to vendors and other parties is lengthy, laborious, and occasionally tedious. Neobanks promote simplicity; transparently simplify the entire process by lowering the amount of human labour required and by providing uniform platforms to track the transfer of money. In addition, various services, such as taxation, budgeting, and accounting, are provided to MSMEs at reasonable charges.

Challenges for Neobanks in India

Despite the many benefits of neobanks, it is still not perfect. Let’s look at some of the challenges of Neobanks in India.

  1. Regulatory and compliance considerations can be the key hindrance to the success of neobanks in the financial sector. In India, for instance, the banking regulator RBI has not yet issued a banking licence to an independent entity to operate as a bank without branches.
  2. In general, the number of products offered by neobanks is reduced. Occasionally, administrative obstacles prevent neobanks from providing mortgages and other lending services.
  3. Neobanks do not offer a core banking facility; hence, high-net-worth individuals who prefer to conduct business in person are not drawn to this type of bank.
  4. Due to safety and security issues, even though neobanking has become a millennial trend and a topic of intrigue, it is still not widely employed.

 

Neobanks in India

Neobanks vs Traditional Banks

Neobanks and traditional banks differ significantly in many ways. The following table explains these differences better.

Particulars
Neo Banks
Traditional Banks
Meaning
Neobanks are direct banks that operate exclusively online without traditional physical branch locations.
The traditional banking system involves a financial institution managing money that its clients deposit in the bank, while the bank uses this money to lend to individuals or businesses (charging interest).
Banking License
In some cases
Yes
Credit Card
In some cases
Yes
Branches
No
Yes
Face-to-Face Communication
No
Yes
Characteristics
Flexibility
Stability
Target Market
SMEs, Institutions run by Younger Generation
Large Businesses, General Public
Strengths
  • Speed: Absence of expenses related to maintaining the bank’s branch network.
  • Low Commissions: Some Neo Banks do not have commissions.
  • Convenience: The ability to access a wide network of ATMs independently without incurring additional charges due to affiliations with a large number of banks, 24/7 access via advanced chatbots.
  • Multichannel Cooperation: Interaction with customers in offices and branches, as well as via digital tools (e-mail, SMS, application, website)
  • Huge customer base.
  • Trustworthy relations with the customers.
  • Offering a wide selection of products and services.
Weaknesses
  • Lack of trust
  • One-way interaction with customers through digital tools.
  • Expensive IT support and online services.
  • Loan products are limited (no car loans, mortgages, and other types of loans).
  • Excessive administrative costs.
  • Increased costs for office and branch and customer service.
  • Costs in offices and branches.
  • Change and decision-making time, as well as administration (bureaucracy).
Opportunity
  • Development of new technology and inventions.
  • Online sales are expanding geographically.
  • Service expansion with the involvement of new consumers.
  • New technology and innovations are being introduced.
  • Establishing additional offices in various places to provide greater access
Threats
  • Cybersecurity threats.
  • Risks associated with being less regulated than traditional banks.
  • Long-Term profitability risk owing to delivering low-cost services to attract new clients.
  • Loss of market share.
  • Shrinking customer base.

How to choose a Neobank?

Neobanks may provide a great deal of convenience as a result of their total digital presence. In terms of their offerings, however, they are largely or entirely not controlled by RBI at present. Therefore, it is necessary to select one based on its competence in banking and finance-related risk management.

Before selecting a neobank, there are five essential factors to consider:

1. Determine your banking needs

The type of banking partner one requires depends on the complexity of one’s banking demands. Before signing up for a neobank, it is advisable to familiarise oneself with the services offered by one’s current bank, as the majority of digital banking apps now provide the same range of features as a neobank.

2. Insurance

Banking is a business of trust, and the government promises to safeguard depositors against default through an insurance scheme. This insurance policy guarantees that the insurer will compensate depositors if the bank fails to repay deposits. Not all regulations apply to neobanks. The easiest method to engage with neobanks is to determine whether or not they offer a private deposit insurance programme to protect depositors.

3. You are comfortable with technology

Neobanks operate best for tech-savvy individuals who desire mobile banking. The user interfaces of neobank applications are basic and uncluttered.

4. Money management

You want to improve your money management skills in a society that lives on encouraging you to spend more and more cash. With their user-friendliness, neobanks can considerably aid in the design of a reward and goal-based system. As money saved is money made, such programmes can motivate you to invest sensibly and monitor all unnecessary expenditures.

5. Account management and reconciliation

If you own a business or are an entrepreneur, you may require many systems to manage your finances. Neobanks can consolidate all of this information and provide business insights through their reports, hence reducing decision-making time.

Plans of Neobanks in India

Although neobanking in India appears to be a relatively new idea, the future looks quite hopeful, as more young people and businesses seek the services of these virtual banks than their traditional counterparts. Although neobanks began to appear in 2013, it was not until 2018 that this virtual form of banking flourished in India.

By 2018, 7.7 million Indians preferred online banking, a number that was expected to be tripled by 2020. Moreover, as E-Commerce and internet firms in India continue to achieve significant success, the outlook for neobanks is rather positive.

Conclusion

Neobanking is a new way of doing business in India. It not only helps people and businesses that use smart banking, but it also helps them to manage their money and even make it grow over time. Neobanks in India have grown a lot because they use new technology and have the idea that financial services should be made to fit each person.

Traditional banks and challenger banks are doing everything they can to join the race, but neobanks have already passed the halfway point. Their easy-to-use and up-to-date technical systems, as well as their low-cost or free banking services, higher savings rates, and custom financial solutions, are helping them to do well. We won’t be surprised if the neobanks become the leaders of their industry in the next few years.

FAQs

1. Is neobanking new in India?

Ans: Yes, compared to the conventional banking system, neobanking in India is a relatively new idea that has only existed for the past decade.

2. Does RBI regulate Neobanks in India?

Ans: Although neo banks are not directly regulated by the RBI, this does not mean they are fully free of its jurisdiction. They are indirectly subject to the RBI’s jurisdiction.

3. Is Neobank legal in India?

Ans: Neobanks and most of the products they offer are not explicitly regulated in India. Still, they have to follow circular rules (because they are connected to regulated realities), and when they burn their products, they have to follow non-supervising morals.

4. What is the outlook for India’s Neobanks?

Ans: Neobanking is growing increasingly popular in India. As an increasing number of e-commerce organizations and internet businesses favour neo banking over conventional banking, the concept will expand in the future.

5. Do neobanks have physical locations?

Ans: Neobanks are digital banks without physical branches. Neobanking is conducted online, as opposed to at a physical facility.

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