The Disruption of Traditional Banking
The ‘fintech’ revolution has taken all of us by a storm. A storm that promises a comforting weather and a feel-good rain. The spearhead of this new wave of revolution is the emergence of ‘Neo Banks’. A term that is quiet popular amongst the millennials.
We are in the days of increased ‘Mobile Technology’ where ‘Data’ is perceived as a commodity. Aided by the 5G Revolution, the best days of technology are yet to come. This Mobile Technology along with the advent of Smartphones has made many things simpler. Not just this, the evolving ‘Gig Economy’ which is dominated with Freelancers, Contract workers and Start-ups has led to a new type of Banking.
A completely digitized bank with no physical existence. These Fintech firms offer Banking-as-a-service (BaaS). These are online banks which are 10 times faster than traditional banks and offer a myriad of services. This new kind of banks that operate entirely online is what we refer to as ‘Neo Banks’. In the money-raising arena, the Business surrounding Neo banks have raised 90 million Venture Capital Funding. A testimony to the growth of this new industry, which has won the support of the Smart-phone generation millennials and the raising participants of the Gig Economy.
Broadly there are 2 types of Neo Banks. Ones that operate completely Digital and Online with no physical presence. Secondly, the ones that are online but have tied up with existing banks and guide their digital market. The 2nd ones are gaining popularity because their partnership with existing banks gives symbiotic benefits to both parties. The Neo banks have access to an existing market share and their initial and expansion costs are eliminated. The Existing established banks get to acquire the users of niche segments, which otherwise would be economically unviable for them and also gain the exposure to advanced front-end infrastructure. This generates new users and new data for both parties.
According to the RBI Act, banks that have no physical presence are prohibited from getting a ‘Banking License’. Which means, the 1st category of Neo Banks can’t lend, or accept money and can’t earn or give interest. The 1st category generally don’t work under the traditional functioning of banks but rather engage in other areas of the Fintech space. Thus, they engage in niche operations within the banking industry. This is one key feature of Neo banks. They target specific niches and carter to their needs and gain market share.
Generally Neo Banks operate in a ‘Lean Business Model’. The value chain of the Banking Industry is fragmented between ownership and distribution. Neo Banks help to tackle this issue. Since they are fast in their service disbursement and require less KYC and other regulatory compliances, they are well preferred by millennials and young digital-savy customers. The integration of Big Data analytics and Artificial Intelligence makes it the best option for the future. They offer real time operations facility and the functioning is such that major transaction charges are waived.
