Neobanks: The next revolution in financial services in 2022
Digital Transformation Neobank

Neobanks: The next revolution in financial services in 2022

By Rajarshi April 29, 2022 - 559 views

Neobanks is a term that many of us have heard increasingly over the last couple of years and with good reason. The banking and financial services industry (BFSI) is finally seeing widespread digital transformation over the last few years. New or neobanking is a phenomenon that encompasses multiple new moot points for the sector. These include widening the customer net to include more younger adults and teenagers or the tech-savvy generation to swift and hassle-free onboarding processes, contactless payments, greater financial literacy and user-friendly content, and most importantly, easier access to loans and other offerings.

A Little More About Neobanks

Neobanks may help in filling up the vacuum between services offered by conventional banks and increasing customer expectations in a digital era. They are rapidly transforming the very nature of fintech as we know it and this trend looks set to continue in 2022.

However, neobanks, while similar to digital banks, are slightly different propositions. They are financial institutions providing more affordable options to conventional banking for customers. They do not have physical branches in most cases, providing more inclusive services than conventional players and in a more efficient manner. They deploy AI and other technologies for personalizing services while lowering operating expenditure.

These neobanks may not have their banking licenses but depend upon licensed services from banking and other partners. The RBI still does not permit 100% digital banks and hence this unique operational model. While conventional banking players have earned the trust of customers over decades and are better funded, they are sometimes bogged down by legacy mechanisms while finding it harder to quickly keep up with the evolving requirements of tech-savvy and younger generations of customers.

At the same time, there is a large section of un-served or under-served customers who are not under the purview of the conventional banking sector and never will be. Neobanks are steadily making finance solutions for this ever-expanding demographic.

Core Pointers Worth Noting

  • Neobanks are deploying technological expertise and innovation toward launching newer customer offerings and partnering with more providers for serving customers faster than their conventional counterparts.
  • They cater majorly to SMEs and retail customers who are under-served at conventional lenders. They tap into mobile-driven operational models while ensuring superior customer support.
  • Neobanks are finding acceptance amongst investors who envision a brighter future for these institutions. To put a few statistics into context, neobanks raised a whopping $230 million in 2020 alone as per reports.
  • The growth potential is immense- India had 54% of the population covered by smartphones as of 2020 and this could jump to 96% by 2040 according to estimates. Although 80% of the country has access to a single bank account at least, universal financial inclusion is still some way off.
  • Gen Z surprisingly executes 80% of transactions using cash despite being digitally savvy. They are under-served by the mainstream banking sector which mainly targets salaried customers.
  • A majority of this population enters working life without much knowledge of finance and financial products. Simultaneously, with financial independence, they desire more customized products and simplified knowledge-gathering and marketing interfaces.
  • Neobanks are taking care of this category with 2022 poised to witness rapid expansion with youth-based finance offerings.
  • Traditional banks do not always enable stand-alone bank accounts for minors without guardians. Neobanks are filling up this gap rapidly.
  • Neobanks are also offering comfortable and phone-based finance experiences while enjoying exclusively curated, simplified and gamified content for increasing financial literacy.
  • With fast onboarding, quicker digital account set-up procedures, minimal documentation and other features, neobanks are swiftly scaling up their customer base.

How Does It Stack Up?

As mentioned, 2022 could be the year of youth-centric financial services and products. From contactless and prepaid cards to other contactless financial offerings, online payments, and category-wise spending limits, a lot is in store for customers.

Neobanks are empowering younger customers while encouraging them to be financially responsible. This will be ensured through gamified and highly intuitive financial content for higher awareness and education alike. Of course, the neobanking industry is anticipated to touch $333.4 billion in market size by the year 2026, indicating a CAGR (compounded annual growth rate) of 47.1%.

However, neobanks do have their own sets of advantages and disadvantages as observed to date. The trust factor is of course where they will face hurdles in mounting challenges to conventional banks. Neobanking may come up with models such as freemium subscriptions, memberships and other ‘experiences before you pay’ initiatives for building trust.

Neobanks have lower costs and credit risks, enabling them to offer inexpensive products and solutions to customers with maintenance fees levied every month. These banks also ensure app-based or mobile banking solutions along with facilitating the faster establishment of accounts while processing reports quickly as well. Those providing loans may bypass the regular lengthy application procedure, choosing highly innovative blueprints for credit evaluations instead.

Of course, regulatory issues will be there since the RBI does not officially provide recognition to neobanks as of now, especially since they lack physical branches. Customers may also face some hurdles concerning getting support in person as well. At the same time, the overall service spectrum at neobanks is comparatively lesser than conventional banking institutions.

Yet, 2022 could well be the year of neobanking, a year when conventional models give way to simplified, youth-centric, and most importantly, more convenient personal finance solutions.

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