Do Neobanks pose a threat to traditional banking?

By Puja Sharma

As consumer behaviour is changing, leading to changing banking habits. Simultaneously, banks are also looking to offer products and services with advanced automation. The disruption in technology around banking has come a long way. Banks are providing personalised digital offerings and ease of using financial services tools anytime, anywhere.

Neobanks provides transparent financial offerings—with the help of Artificial intelligence and Machine learning it is providing customers with round-the-clock chatbot support, real-time notification, and easy of creation an account among others.

These non-banking service providers are called neobanks and they are challenging the present status of traditional banks, by offering lower-cost models and hyper-distinctive customer-centric service and experiences. Unlike their traditional counterparts, neobanks aren’t constrained by legacy systems, tightly integrated value chains, complex administrative structures, and lofty regulatory requirements. Though neobanks don’t have their bank licenses in India yet, they use partners to offer bank-licensed services.

According to a report by PwC, the global neo bank market was worth $18.6 billion in 2018 and is expected to accelerate at a compounded annual growth rate (CAGR) of around 46.5% between 2019 and 2026, generating around $394.6 billion by 2026.

With no or very low monthly fees on banking services such as minimum balance maintenance, deposits, and withdrawals, neobanks have significant growth potential. Neobanks’ success can be attributed to adoption by millennials, micro, small and medium enterprises (MSMEs), and those with irregular incomes and earnings, adoption of new technologies, and rising consumerism. Investors, venture capitalists, and corporations have become interested in neobanks because of high adoption rates and successful business models, contributing $586.7 million to the total $3.49 billion FinTechs received in March 2018.

Every part of the banking value chain – from what consumers can avail and expect in terms of banking services – can now be accessed by a non-banking service provider through its technological prowess and agile and lean business models. Under these models, retail and small and medium enterprises (SME) banking services are primarily delivered through the internet or other forms of electronic channels instead of physical branches.

Modern technology-based banks, neobanks have become more efficient at serving SMBs than legacy banks because they don’t have physical branches to maintain. To streamline SMB business operations, neobanks offer quick account opening, multitiered – and often fee-free – accounts, as well as integrations with third-party business tools.

Neoanks, distinguish themselves from online banking services by diversifying from mere online banking to high-ranking customer services in addition to digital banking. Banks are struggling to keep up with the rise in innovative technology inventions. A crucial factor to consider is whether neobanks compete with traditional banks or are in collaboration with them.

Providing transparent and customer-centric financial services requires the integration of these two types of banking. The SMB sector accounts for 99% of all businesses globally, and these businesses are crucial to the economies of their countries.  As banks reduced their exposure to risky credit portfolios after the financial crisis, they have struggled to find the right balance between efficiently serving SMBs and delivering the customer experience these companies require.