Neo Banks vs Incumbent Banks

The advent of technology and digital innovation has led to an increase in competition, as well as higher productivity in the financial services space. An example of such innovation is the concept of neo banks, which put very simply is the digital version of a traditional bank. However, as they evolve in the Indian context and worldwide, neo banks are trying to establish themselves as being not only online financial companies but also one who offer a superior customer experience.
 
So where does this leave us with traditional banks (also called the incumbent banks)? Which one is better or do they need to complement each other to serve the broad spectrum of customers across India? Let us understand this better through this blog.
 

What are neo banks?

 
Neo banks are digital-first financial institutions that operate without the use of physical locations. These banks use the online medium to reach out to their consumers and offer their products and services through websites or mobile-based applications.
 
Neo banks usually fall under the category of fintech companies. The most common services offered by them are payment solutions, money lending, and fund transfers. These types of banks rely on their partnered banks to provide licensed services. The reason for this is that the Reserve Bank of India (RBI) has not yet permitted banks to go fully digital.
 

How does a neo bank work?

Neo banks operate on a different model than regular banks. However, their revenue-generating mechanism is the same as that of traditional banks, which are based on the difference between inflow and outflow of funds. Since these banks are entirely online, they save a significant amount of money on things like utility bills, office rent, and large-staff salaries. As a result, businesses are able to offer their services at significantly reduced pricing by lowering subscription fees.
 
Furthermore, neo banks provide more customer-centric or, to put it another way, personalised services. They use cutting-edge technologies to analyse client behaviour. And based on the available information, they tailor and market their products to potential customers.
 
Also Read: The Growth of Digital Lending in India 
 

Benefits of neo banks

 

• Low costs

  Neo banks are not subject to the same strict government and regulatory controls as training financial institutions. They also don't have to invest money in brick-and-mortar branches. Due to both these factors, neo banks are able to offer low-cost products.
   

• Convenience

  Neo banks offer all their financial services at your fingertips. To enjoy these services from the comfort of your own home, you simply need to download their applications.
   

• Quick process

  These banks' transaction settlement times are substantially faster. Whether you are transferring funds or applying for a loan, the process will take anywhere from a few seconds to several minutes.
   

What are incumbent banks?

Traditional banks and incumbent banks are often used interchangeably. These banking institutions have physical branches and are regulated by the RBI. The most common facilities that incumbent banks offer are deposit and lending products. Apart from regular products, they have partnered with multiple financial institutions to provide other services such as mutual fund investing, insurance, and so on.
 

Why do incumbent banks still have an advantage over neo banks?

 

1. Digital illiteracy 

   Neo banks, as previously said, are digital-first financial institutions. However, most Indians, especially those who live in rural regions, are not good with technology. In this scenario, traditional banks will still have the upper hand, even if digital banks grow in popularity.
    

2. Poor smartphone penetration

   According to data, smartphone users make up 54% of India's entire population. This indicates that, despite the popularity of Neo banks, around 46% of the population will remain outside their reach. However, having a smartphone is not mandatory if you rely on incumbent banks for your personal finance needs.
    

3. Services offered

   The product portfolio of Neo banks is quite slim in comparison to traditional banks. The latter offers a wide range of products for all your financial needs. Whether you want to finance a vehicle, pay for your child's higher education, or plan for your retirement, there is a solution to meet your needs.
    

4. Lack of trust

   Neo banks do not have a physical location and are entirely virtual. If you have a problem or a complaint in this situation, you will have a hard time getting the issue resolved. On the other hand, with a traditional bank, all your concerns will be promptly addressed at the branch office or through an extensive network of customer service representatives.
    
   However, neo banks offer customers a free subscription to utilise their services before paying for them to gain their trust.
    

5. Regulatory obstacles

   Another reason why neo banks may struggle to replace traditional financial institutions is regulatory barriers. In India, the term "bank" refers to financial entities that have a permit to receive deposits and disburse funds or other products to consumers from their own books. Financial institutions require the RBI approval to offer the preceding services. However, the RBI has not recognised neo banks yet. These banks are only monitored indirectly by the RBI.
    

6. Dependency

   Neo banks are entirely dependent upon traditional banks and non-banking financial companies (NBFCs) for offering products and services. For example, these banks have partnered with various financial institutions to offer loans to customers.
    

Also Read: Road to Prosperity - How Hero FinCorp is driving financial inclusion
 

To Conclude

The concept of neo banks is new to India. Even though they provide multiple advantages, they also provide an opportunity for scammers and fake lenders. As such, weigh the pros and cons of your banking options before choosing one as your personal finance partner.