Recent years have witnessed a massive drift in the financial sector. Indian customers are embracing digital means of transactions and moving away from traditional banking methods. The integration of technology and banking services has changed the banking landscape, making transactions quicker, cheaper and more customer-oriented. One of the latest buzz words in the fintech sector is ‘Neo Banks’
What is Neo-banking?
Neobanks are like digital banks, with an entirely online presence. These are fintech firms that leverage technology and artificial intelligence (AI) to provide personalised services to their customers.They provide complete digital banking experience through mobile applications.
How do they operate?
Neo-banks can be classified under 3 different categories depending on their style of operations -
The first type features those non-licensed fintech companies that have partnered with a traditional bank. Usually, these banks have outdated infrastructure and legacy systems. Neo-banks put a layer of its digital services and products over these legacy systems to make banking services flexible, accessible and scalable.
The second type is when a traditional bank launches its digital-only initiative in the form of neo-banks.
The third type is the neo-bank that has its own digital banking licenses. However, these type of neo-banks exist only in those countries that permit stand-alone digital entities. (Currently, RBI does not provide banking licence to any entity which does not have a physical presence)
How are Neo-banks regulated?
The Indian regulatory regime does not allow for the grant of virtual banking licenses. RBI (through its 2015 circular) has mandated the requirement for digital banking service providers to have some physical presence. As a result, neo-banks can provide banking related services only by partnering with licensed banking institutions and non-banking financial companies. RBI has also issued circulars in 2006 and 2010 which deal with outsourcing of financial services by banks and use of business correspondents by banks, which are relevant for neo-banks
In addition to these, since neo-banks are in possession of users’ personal data, they need to comply with India’s Information Technology Act & Rules.
Why Neo-Banking?
While the earlier generations might be satisfied with the traditional banking system, the tech-savvy new generations are an impatient lot and want things done at the click of a button. Some of the key benefits associated with neo-banks are:
These neo banks are creating specialised offerings that concentrate on the under-served demands of blue-collar employees and MSMEs, which is the path forward and a much needed impetus in the current situation.
How safe is Neo-banking?
Security is the number one concerning factor when it comes to digital transactions. Neo bank application implements 2FA (2-factor authorization), Biometric verification, RBAC (Role-Based Access Control), encryption technology along with other security measures to protect customer data. The applications are built to ensure compliance with anti-money laundering laws, complete privacy of customers and to prevent malware attacks.
Which are the Neo-banks in India?
InstantPay, Niyo, Open, and RazorpayX are some of the major players in this segment.
There are 11 neo banks in India currently, and a couple of more are in the process of entering the market.
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