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Neo Banking

The Road to the New Banking Ecosystem in India

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Did you know that the banking system in India dates back to 1770? Surprising, isn’t it?

India has one of the most robust banking systems in the world. This can be a double edged sword – on one hand, it is beneficial for the larger public to have such an established system, but on the other hand, it seems a bit too conservative to adapt to the new innovations in the banking industry around the world.

Before jumping into innovations in the tech space or the banking industry, let’s take a look at some numbers. For a population of 950 million people above the age of 15, nearly 20% of our population does not have a bank account. However, there is a small victory to celebrate here. Compared to the global average of 31% of unbanked adults(1), India is faring better. Could this change? Read on to know..

We are well aware of the term,“fintech” which has taken off all around the world since 2017(2). The newest trend in this evolving market is neo banking.

The Neo-Banking Play

So, what is Neo Banking?

The word neo comes from the Greek word neos meaning new or recent. Neo banking is a fully digitised and automated banking system where you do your everyday banking activities online without the need for a physical branch.

This concept is relatively new to India with very few players in the market- e.g., Open Bank, Razorpay, etc.,.

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Just to clarify, Neo banks are not licensed institutions that fall under the central bank, but they are technology platforms which try to bridge the gap between the customer and the banks.

Okay, but how is this different to net banking offered by my banker?

Allow me to highlight a few instances where neo banking will make life easier:

i) Many of us have multiple bank accounts across various banks. What if there was a single dashboard to integrate all of your accounts?

ii) Invoicing and accounting solutions where data is automatically pulled from your bank accounts and accounted for;

iii) Data analytics solutions running on your transactions and offering customized products for you based on the analytics;

These are just a handful of benefits off the top of my head.

It’s starting to sound like I am campaigning for neo banking companies. But, the truth of the matter is that, it’s just a shift waiting to happen. In the coming years, the banking industry is going to undergo a massive overhaul.

I remember going to banks where the files were stored on MS-Dos and every single transaction right from cheque deposit to cash deposit to cash withdrawal required our physical presence. Then came the Core Banking System where all branches of a bank were interconnected and internet banking were used for making transactions. We started transacting through online banking.

Post demonetization, we started transacting through digital wallets, UPI, etc.,. The fear of doing digital transactions dissipated overnight and it became a part of our life. Nowadays a large majority of our transactions are done digitally.

Due to the robust infrastructure of traditional banks, they are not in a position to provide certain solutions which in turn can be provided by these neo banking platforms. The next wave is digital banking where all banks share the customer data which will flow through the neo banking platforms in order to enhance the customer experience and offer customized products to each customer.

There are already quite a  lot of neo banks/challenger banks that have come up in European countries, USA, Brazil, etc. The global neo banking industry is projected to reach $471 billion by 2027(3). This might be an understatement, but it is going to disrupt the entire banking industry.

Globally, regulatory agencies are providing their best to encourage neo banks in their respective countries. RBI should also take steps to make the environment conducive for the neo banking platforms to evolve in India. This will soon be a way of life and it’s easier to embrace change than resist it.

Coming to the startup ecosystem, every company in the fintech industry is moving their cards towards the neo banking play. The phase of online lending and online asset management in the fintech segment has faded. The new trend is neo banking. Over the past 3-4 years, we have seen a slow but steady rise in the neo banking sector.

With the pandemic and incessant lockdowns forcing us to radically rethink the way we conduct business, it’s time for us to fasten our seatbelts- the growth of neo banking is going to be supersonic.

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