Why Neobanks are the Future and How to Build One
Talking about Fintech and not including Neo Banks? Can’t miss this one!
Let’s jump straight into it.
What exactly are Neo Banks? And what’s the craze about them in the Fintech Industry?
Neo Bank is the term used to describe a completely digital bank, that exists and offers services without any physical branches. Neo banks are also called Challenger Banks, the reason for this name will be discussed later in the blog.
What’s making neobanks a popular term, especially amongst the GenZs?
It’s the reason they were built on. Neo banks are a response to the changing needs of customers in the digital age. They are often cheaper than traditional banks and may offer more competitive interest rates.
Let’s understand this with some statistics around Neo Banks.
In just three years, the global customer base of neobanks has grown from 2 million to 15 million, and the number of neobanks has increased from around 70 to over 250. According to stats, the global neobank market is growing at a CAGR rate of over 47% and is expected to hit $722,60 billion by 2028.(SDK.finance)
What’s so attractive about Neobanks?
With the world shifting towards “digital-everything”, the emergence of Neobanks seemed the next step in the future of innovative and digitally equipped financial banking. Replacing the inherent need of having a physical bank to reach out to, NeoBanks are the one stop destination for all the banking needs, be it around savings accounts, current accounts, debit and credit cards, digital money transfers, payment solutions, or lending.
By leveraging technologies like artificial intelligence (AI), automation, and cloud computing -something that traditional banks lack, Neobanks are attracting a large part of the ‘modern’ customers who want their needs to be fulfilled ‘at one click’. This is the reason why they are often called ‘Challenger Banks’. As their name says, these digital banks ‘challenge’ the traditional banking system by targeting both personal and business consumers who are often overlooked by high-street banks.
We will go deeper into the making of Neobanks later in the blog.
Do Neo Banks need collaborations with physical banks?
This question often comes up when talking about Neobanks in India. Since Neobanks are not considered fully fledged banks and do not have banking licenses, they are not directly regulated by the RBI (Reserve Bank of India). The RBI prohibits them from acquiring a banking license.
Instead, Neo Banks rely on partners who offer financial services like instant payments, lending, or money transfers.
Who are the partners here?
Neobanks partner with licensed banks that are governed by the RBI. Some of these banks include :
How Do Neobanks Earn?
This is the most interesting part of the blog if you are someone aspiring to build a neobank of your own or someone already in the Fintech industry, trying to grasp some interesting business models.
We can help you build your own Fintech with custom features and robust security. Our team of Fintech experts and enthusiasts is excited to meet you!
Getting back to the topic, let’s unbox this business model!
How are Neobanks built
While there are two types of NeoBanks, Full Stack Neobank (independent bank with a banking license )and Front End Neobanks (the one we discussed above, which partner with traditional banks to operate), in this blog we will be discussing the Business Model of Front End Neobanks, since those are the ones popular and allowed in India.
Taking help from Niyo– India’s first fintech to pursue Neo Banking, we can understand the model underneath the working of Front End Neobanks.
Let’s revise the cases where Front End Neobanks work best
- Do not have a banking license
- Form partnerships with much larger and established banks
- Core banking system (CBS) uses off-the-shelf or third-party technology
- Only control customer interface (front end of value chain)
- Apps for both B2C and B2B are supported
- Niche segment targeting (millennials, SMBs, entrepreneurs)
While being supported by the traditional banks from below, Neobanks foster strategic partnerships and a way for businesses to perform businesses without any hindrance, going fully digital. Centred around customers, Neobanks have a innovative USP while working under the regulations put by the regulatory bodies, providing a seamless experience, legally.
To understand the regulations for building Fintech, read our dedicated blog here.
India’s leading Neobanks
There are several neo-banks available in India. Given below are the examples of some of the most popular of them in the country
- Instant Pay
- Jupiter
- Niyo
- Fi Money
- Razor Pay X
- Finin
- Freo
- Kotak Mahindra Neo Bank
- OCare Neo
- Open
- Mahila Money
- DBS Bank
- Uni Card
- Zolve
- Mool
- Fam Pay
- Walrus Club
Summing up
Building a Neobank in India is possible, given you follow all the rules and regulations by the regulating bodies. It is the next trend in Digital Finance, and a great opportunity to tap into, given the huge customer base in India(Gen Z Population loves digital experiences). If you want to build your own Neobank, we can help you.