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What is a cheaper alternative to traditional banking?

By Puja Sharma

December 14, 2021

  • AI
  • APIs
  • Banks
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neobanks

Neobanking is a cheaper alternative to traditional banking. It is a type of banking system without the actual traditional physical branch. It is a digital bank, with all its operations online. Neobanks offers many other services compared to traditional banks with greater efficiency. These banks are also called internet-only banks, virtual banks, or digital banks.

Neobanks first garnered attention in the wake of the financial crisis in the UK around 2009 and were also called the challenger banks. Neobanks are far more efficient in terms of customer engagement, user experience, is cost-effective, and is faster, hence are preferred by people in this day and age.

In India, although nascent with the ease of doing business and increased usage of smartphones– for online shopping, payments, investment; Neobanks are overshadowing traditional banks. The covid-19 pandemic, and people staying at home, gave a tailwind to such digital banks in the country.

Is it safer than traditional banks?

With fewer regulations and low credit risks, makes Neobanks is an easier and inexpensive solution for the millennials today. It offers banking services such as bills payments, prepaid accounts, money transfer, and savings accounts among others.

Although India is a huge market for internet consumption and usage of social media, yet for Neobanks it is a long way go as the Reserve bank of India (RBI) doesn’t allow banks to be 100% digital, and that banks must still have some physical presence. India is densely populated, with people of different age groups coming from different backgrounds, which creates trust issues among consumers while using such digital banks.

Neobanks which leverages technology, such as AI, machine learning, APIs, is helping MSMEs, startups, local mom-and-pop shops with online payments, invoices, and other benefits, allowing these small businesses to overall thrive during the nationwide lockdown and in a tech-savvy world.

Many such startups in India are eclipsing traditional banking, some of which are:

  • Jupiter: A Bengaluru-based Neobank, which allows customers to open a bank account digitally. The company last raised a round of up to $45m led by Brazil’s FinTech firm Nubank.
  • RazorPayX: Razorpay, India’s leading Payments and Business Banking platform, April 2021 announced its Series E fundraise of $160m. This financing round has tripled the company’s valuation to $3 Billion in less than six months, signalling one of the fastest increases in valuation for an Indian Unicorn.
  • NiYO: NiYO is a fintech company that helps salaried employees access company benefits and other financial services. Founded in 2015, NiYO partners with companies (employers) and banks to offer employees the opportunity to access their benefits, such as healthcare or food allowances, through a digital platform.

The future

As per the report, the global neo-banking market size is expected to reach $333.4bn by 2026, market growth of 47.1% CAGR over the next five years.

Countries like Australia and the US have licensed neo-banks, Commercial banks now collaborate with Neobanks to provide better adaptable solutions across business segments with the use of technology like open banking APIs, artificial intelligence, machine learning, and data science. In India Neobanks are still not licensed, however, they do have a collaborative partnership, where Neobanks offers technology and data and these traditional banks remain the money custodians.

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