Over the last few years, the banking industry has been undergoing massive digital disruption. The increasing consumer demand for digital banking services has led to the fintech revolution. Neo banks constitute a significant part of the fintech companies disrupting the traditional banking ecosystem and redefining the banking sector.

Introduction to Neo Banks

A Neo Bank is a digital bank that does not have any physical branches. Neo banks provide services related to money transfers, payments, savings accounts, lending, cards, etc. to their customers and can be accessed via a computer, smartphone, or tablet.

Neo Banks are expected to reach USD 66.82 billion in 2022 and are growing at a faster pace of 53.4% compounded annual growth rate from 2022 to 2030. The growing adoption of smartphones and the internet would further accelerate the demand for Neo Bank platforms. Some of the leading Neo Banks are Chime, Revolut, Monzo, N26, Nubank, Jupiter, WeBank, etc.

Neo banks can be categorized into three types:

1. Non-Licensed Fintech that partners with traditional banks. Neo banks in India fall in this category.
2. Traditional banks with their digital-only initiative.
3. Neo Banks with digital banking licenses. This is possible in countries that permit stand-alone digital entities.

Neo Bank is changing the way people do banking

The banking operations have been dependent on physical transactions and till a few decades back, customers could deposit or withdraw money from their home branch only. Once the Core Banking System (CBS) was implemented by the banks, the customer was able to visit any other branch and do the transactions. But still, the customer needed to visit a bank branch to perform any transaction, and banks thus invested heavily in branch expansion to cater to maximum customers.

Over the last two decades, banks started providing certain services such as money transfers, payments, profile detail updates, etc. through online channels and the increasing adoption of the internet has accelerated these services’ usage. But services such as customer onboarding, lending, etc. still require the customer to visit the branch to complete formalities and take a considerable amount of time for delivering the service.

Neo Banks are changing the banking industry in a big way by leveraging technology at its core. The services provided by Neo Banks are completely online and customers can subscribe to these services using smartphones at their convenience. They differentiate with the mobile-first model and provide superior customer service.

How Neo Banks leverage technology for its rapid growth

Neo Banks have modern digital platforms while the majority of the traditional banks still have a legacy-based infrastructure. They leverage technology and artificial intelligence to offer personalized services, data-driven insights, and value-added services to customers while minimizing operating costs.

Neo Banks invest a lot in data science, AI, and ML capabilities to create hyper-personalized solutions for users. Artificial intelligence and machine learning techniques are leveraged for detecting financial fraud, providing investment advice, and virtual assistants. By automating the workflow, Neo Banks offers a better customer experience.

Also, a lot of business benefits are seen with the use of cloud technology. Features can be developed at a faster pace and new application versions are released more than once a week in many Neo Banks, with a lean DevOps team. Based on the application traffic details, the resources are scaled up or scaled down accordingly, and thus cost is always kept optimal.

Why People prefer Neo Banks over Traditional bank

Neo Banks majorly impact transitional banking in terms of the below parameters

1. Low cost: Considering there are no physical branches to take care of and with less complex IT systems, the bank can charge less/no fees when compared to traditional banks with many physical branches and legacy systems.
2. Enhanced Customer Experience: Neo bank apps are highly responsive and well-designed enabling the customer to navigate through the app smoothly and efficiently.
3. Digital Convenience: Neo banking services can be used by the customer via smartphone and there is no need to visit any bank branch like in the case of a traditional bank. When faced with issues related to banking, the Neo bank representative can be contacted through digital mediums.
4. Smart Reporting: All the payments and transactions will be instantly reflected in the app and related details can be tracked seamlessly. Also, Neo banks provide an overview of all expenditures along with a saving goal that can be customized by the customer.
5. Value-added services: Neo Bank apps collect and analyze data with the help of AI and machine learning techniques and recommend customized financial services/products to customers.

The way forward for Neo Banks

Building Trust among customers is of high priority for Neo Banks as they don’t have a physical presence, unlike Traditional banks where customers can reach out to the bank employees through physical branches when faced with challenges.

Also, in countries like India, Neo Banks cannot operate on their own as virtual banking licenses are still not granted. Hence Neo Banks need to partner with regulated banks and financial institutions to offer financial products and services.

Going forward, Neo Bank’s success will be mostly determined by the expansion of products and services, managing impediments in terms of regulation and compliance, data, etc.