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Neobanking Decoded: Demystifying the New Era of Banking
Neo-banks have turned into a more prevalent option for people as they satisfy the developing expectations of modern users. Its popularity is attributed to the fact that neo banks address the needs of customers in a way that traditional banks cannot. They aim to streamline banking processes and provide prompt service to satisfy customers’ demands.
Neo banks are the hottest trend in the financial sector. In recent years, an increasing number of customers have opted for this advanced, tech-driven, and creative approach to banking since it provides an alternative that is simpler to use. However, numerous people around the world have opened virtual bank accounts, and this is due to more than just curiosity about neo-banking.
Let us explore all about neo-banking, the working of neo banks, its type, regulations, market performance, pros/cons, and a lot more about neo banking in this blog.
What is Neo Banking?
Neo banks are digital-only banking platforms that exist exclusively in the digital realm, offering traditional banking services to their customers through a mobile app or website. They simply do not exist physically.
Traditional banking procedures may be lengthy and unpleasant for customers. By adding a digital and practical layer on top of traditional banking, neo-banks offer a frictionless digital experience. Customers can easily sign up for accounts and start using the services on their own because of the streamlined structure of their technology.
Money transfers, bill payments, and direct deposits or mobile cheque deposits are just some of the banking services provided by neo banks. Additionally, some of these fintech companies include tools for budgeting and saving.
Salient Features of Neo Banking
Smartphone and internet usage are both expanding at a higher rate around the world today. Taking advantage of this scenario, “neo banks” offer services driven by digital infrastructure. Many people are turning to neo banks because they provide a wide range of services that are specifically designed for the needs of modern users. They are dedicated to making banking easier for customers and meeting their needs quickly. Compared to traditional banks, neo banks have the following characteristics:
- Neo bank is app-driven with modern, adaptable, and scalable IT infrastructures offering typical functions like account opening, fund transfer, and customer service that are quick and paperless.
- The absence of physical branches is a defining feature of neo banks, which differentiates them from traditional financial institutions.
- All neo banks represent early-stage financial service providers. They focus on simplifying banking operations and addressing user pain points.
- Putting the customer first is the main motto. Most neo banking services emphasize the customer’s banking experience. With mobile banking, clients’ lives are made easier, and time and resources are saved.
- Due to their digital character, neo banks make it simple for users to open savings accounts, complete with physical debit cards.
- Neo banks are quickly becoming a more realistic choice due to regular banks’ reluctance to provide financial services to specific industries and sectors (such as startups). Some neo-banks offer business-performance-based, high-limit credit cards.
- Neo banks provide a range of services, including personal and corporate loans, intending to reach individuals of the underbanked population.
- Neo banks are closing the void between traditional banks, individuals, and emerging enterprises nationwide.
- Neo banks use traditional banking services and products to streamline economic management. For upselling and cross-selling products, neo banks often form alliances with third parties.
Working of Neo Bank and Its Types
When compared to traditional banks, neo-banks operate under an altogether distinct set of principles. As neo-banks operate online and have no physical location, they can charge far reduced user fees while turning a profit from deposits and loans.
The majority of neo banks partner with traditional financial institutions rather than getting their own banking licenses, while some do hold banking licenses.
The neo bank handles everything from acquiring new customers to ongoing service, including the distribution of its own products.
Decisions at a neo bank are driven mostly by data analysis. Their sophisticated systems allow them to track and study neo banking clients’ behaviors in more detail.
The business models of neo banks are as follows.
Full-stack Digital Banks (licensed)
Digital banks that offer the full range of services are called “full stack” and have been approved by banking regulators. They function as separate entity, issuing deposits and loans while keeping their own name and books. These banks can thrive in today’s digital economy without the excessive costs of maintaining a widespread branch network.
Front-end Neo Banks
A neo bank that focuses on its front end does not have a valid banking license. It usually gets help from a standard financial institution and works with them to offer services to its customers. This type of neo bank frequently uses the balance sheets of traditional banks to fund its operations.
Digital Banking Units
Banks available only in digital form are called “standalone” or “independent” digital banks. To launch a completely digital financial institution, one must first obtain a virtual banking license. After securing investor deposits, these banks can get their banking licenses.
E-wallets
Neo banks serve as e-wallets, allowing clients to save and send money but not all banking services. Example: PayPal, Square Cash, and Venmo.
Hybrid
Neo banks use components from several business models of neo bank to form a hybrid model. Example: Revolut.
There are several neo banks that function similarly to traditional banks, including Monzo in the United Kingdom, Xinja in Australia, and N26 in Europe. Starling Bank in the United Kingdom is another neo bank that charges its customers minimal or no fees at all. To further the “Banking as a Service” concept, some financial institutions provide tools for creating both white-labeled and bank-branded products and services.
Regulations around Neo Banking
The UK has recently taken steps to regulate neo banking more tightly. Banks must now comply with the Payment Services Regulation 2017, which ensures that neo banks are held to the same standard as other banks. This includes preventing fraud, protecting customers’ money, and ensuring that customers’ data is secure.
In addition to traditional banks, the FCA (Financial Conduct Authority) oversees neo banks to ensure they comply with consumer protection regulations. This increased regulation is essential to protect customers and ensure that neo banks are providing the best services possible.
Difference between Traditional Banking and Neo Banking
| Description | Traditional Banking | Neo Banking |
| Mode of Operation | Physically Present & applications. | Only digital presence |
| License | Must be licensed | May be licensed or work in association with traditional banks |
| Time | Takes time for every banking operation. | Every banking operation like opening of account takes place instantly. |
| Cost | Comparatively higher | Serves customer at cheaper cost |
| Customer service | Depends on the staff | Best customer service is their focus |
| Practices | Traditional practices | Innovative practices with incorporation of advanced technologies |
Factors influencing the growth of Neo banks
- Digitalization
- Integration of latest technologies in Neo banking
- Growing popularity among small and medium size enterprises and retail sectors
- Collaboration with financial institution
- Increased focus on customer satisfaction
- Faster, paperless documentation
Major Players in Neo Banking
- Monzo Bank Ltd. (UK)
- Chime Financial Inc. (US)
- Starling Bank (UK)
- Sofi (US)
- N26 (Germany)
- Atom Bank (UK)
- Revolut (UK)
- Mybank (China)
- Webank, Inc. (China)
- Open (India)
Neo Banks in Global Market
With a compound annual growth rate (CAGR) of 49.8%, the size of the worldwide neo banking sector has increased from $79.1 billion in 2022 to $118.51 billion (about $360 per person in the US) in 2023, as per a reliable neo bank global report. The market for neo banking is projected to reach $556.66 billion in 2027 at a CAGR of 47.2%.
The new banking sector is expanding due to mounting demands for digitalization in financial institutions worldwide. By leveraging technologies like AI (Artificial Intelligence), automation, Big Data, DevOps, and the cloud, neo banks can offer highly customized services at competitive rates.
As per a recent research report, in 2022, Europe’s portion of worldwide sales was over 29.0%, making it the region with the largest market share overall. The Asia-Pacific region is anticipated to experience the highest growth rate during the projected horizon.
The expansion of regional markets can be traced back to the proliferation of cutting-edge technologies and the prompt adoption of novel products. In addition, businesses are concentrating on developing product platforms and forming partnerships to fortify their standing in the market. Several neo banks in the area have opened physical branches as part of their O2O distribution strategy, opening new avenues for expansion.
The market’s growth is anticipated to be sped up by increasing penetration of internet services and the proliferation of smartphones. Easy and quick banking services, as well as the advent of digital-only banks across nations like Japan, India, and China, are also predicted to help the expansion of the regional industry. The region’s young population is speculated to be advantageous for the adoption of neo banks.
Pros of Neo Banking
- Low operational costs, user-friendly, and faster onboarding.
- Customers benefit from lower interest rates and no or cheap transaction fees.
- Neo banks operate 24/7, making operations faster. One can easily make payments anytime, anywhere.
- Their AI-enabled customer support solves issues instantly offering personalized customer service.
- As neo banks use advanced technology, their systems are highly secure and private. Complete data security for customers becomes a top goal.
- Customers of neo banks can do much of their banking via a mobile app or a computer, any time of day or night at a faster rate.
Cons of Neo Banking
- Neo banks do not offer as many services as regular banks, thus senior citizens and less tech-savvy customers may not feel comfortable using them.
- Lack of reliability and trust.
- Before signing up for premium services, users may need to try out their services, sometimes for free.
- Due to the absence of clear standards and legal framework, neo banks are unable to operate autonomously. If such institutions go bankrupt, consumers may not have any legal remedy or pre-defined methods to protect their money.
- Neo banks lack experience. Like other startups, many have opened recently and could fail.
Use cases of Neo Banking
When compared to conventional banks, neo banks provide a number of advantages, including more accessibility and lower fees for their services. As you can see, Neo Banks are having an effect with services like quick account opening, rapid crediting, and trouble-free & secure cross border payments. So, let us look at some of Neo Bank’s more intriguing use cases.
Enjoy the convenience of Neo Mobile Banking wherever you go.
While there are already mobile banking apps available, the unique aspect of a neo bank is that you do not even require a bank account to sign up for mobile banking! Neo Banking on mobile allows for instantaneous fund transfers, alerts, savings, and premium features like early credit or cashback.
Incorporation of Open banking in Neo Bank
Open banking promotes monetary revolution by means of neo banks, allowing for improved account consolidation and management. And it is all done legally, in accordance with the updated Payment Services Directive (PSD2) and the General Data Protection Regulation (GDPR).
Open banking has enabled neo banks to compete in a financial sector previously dominated by traditional banks. This has resulted in more individualized services being made available to consumers. Open banking and neo banks work together for the good of customers and the advancement of financial industry innovation.
Centralized Account Management and Expense Monitoring
With neo banks, you may not only register a bank account but also track your expenditure. If you have several bank accounts, those can also be incorporated into the neo banking application. Access everything with a simple tap on the screen. This is the might of neo banking!
Avoids the Hassle of Making Cross border Payment
There is still a problem with the difficulties encountered by migrants worldwide, whether they are moving inside or across countries. Open bank accounts, digital transactions, and remittances would make it much simpler to overcome these obstacles. To meet the demands of those many customers, neo banks are concentrating on improving customer service, streamlining processes, and decreasing transaction costs.
Neo banks, in their capacity as authorized banks, can issue rapid payments for manageable fees. Users have the option to send and receive funds instantaneously, send money across borders, or set up periodic payments.
Quick Credit, Loans, and a Variety of Mortgage Options
If you have a need and want a tailored banking solution, Neo Bank may be the answer. With a neo bank, if you have cash on hand, you can open a savings account, and if you have a great business idea, you can acquire a loan right away.
Customized Financial Products to Save More
Neo bank is a digital platform that may aid anyone in creating a portfolio tailored to his or her specific income and demands. A customer’s future lending activity is determined not by his wealth or credit score, but by his score, which is based on his loan repayment history.
Concluding Thoughts
With a Neo Bank, one can get a full suite of banking options designed for your specific needs. The emergence of neo banks has ushered in a new era in the way individuals and corporations’ approach international financial dealings.
Rapid money transfers, instant currency exchange, quick account opening, loans, Debit Forex cards, and access to thousands of ATMs worldwide are just some of the many services they provide.
Moreover, neo banks’ cutting-edge functions, user-friendly digital interface, and attentive customer service are what truly set them apart. Convenience is the true value of neo banks to customers. From account opening to card barring, everything may be done via phone.
It may look like traditional banks are having a challenging time competing with neo banks, but this is not the case. Neo banks will use their alliances with banks to target new markets with their financial services. During the next few years, a plethora of cutting-edge neo banks will emerge, each catering to a certain niche.
The future of banking, and whether neo banks will prevail or traditional banks will adapt to the current changes, is still up in the air.
MG’s Value Proposition in Digital Banking – Seeing in a new light
Banking post-pandemic has profoundly disrupted and has pressed a reset button as 56% of the global population are intended to avoid branch banking. The new thinking to adapt to the new normal for the banking and financial services stipulated the digitisation of customer onboarding and deposit-taking.
A smooth customer onboarding journey is becoming the norm rather than a differentiator. Fenergo, a digital transformation fintech firm states that about 70% of the millennials demand a frictionless integrated onboarding experience across all banking channels and one in three (36%) financial institutions have faced customer abandonment due to inefficient onboarding. To support the market conditions, customer needs to be combined with cost-effective business operating model with an increased demand for digital interaction, banks are accelerated to invest in fintech solutions to avoid the tedious application process with an all-round service offering – fast processes – easy banking – any time and from anywhere.
Digital Customer Onboarding improves customer experience with intuitive navigation by aggregating their data to make the process smoother or even effortless. The digital platform provides reliable online identification services that help the banks to quickly verify the customer data and subsequently accelerate the customer’s access to the banking products and services.
Financial Institutions are striving hard to leverage innovative technologies ranging from Artificial Intelligence, Behavioural Biometrics to Machine Learning to improve their existing mechanism of data capturing, KYC validation and due diligence checks while onboarding the customer.
Robust eKYC Validation
Enhanced customer due-diligence checks using AI & ML techniques reduces KYC risks for the banks and real-time integration of eKYC offered by third party API Services along with customer onboarding workflow substantially improves the process of AML monitoring and fraud detection & control.
Augmented Customer Experience
Intuitive user interface for onboarding with real-time notifications, gives the customer an instant gratification than the paper-based application forms.
Customer-Centric Offerings
Digital Onboarding empowers the banks to build a data-driven customer acquisition strategy with machine learning using statistical models and historical data of the customer. Banks can explore the behavioural analytics of the customer to offer them more tailored offerings improving customer satisfaction & retention rate.
Operational Effectiveness
AI-powered digitisation techniques entail the banks redesign the existing customer onboarding process and deliver high-quality products and services with minimal overheads optimising the onboarding time. Operational efficiency achieved through digital onboarding along with AI/ML-based Straight Through Processing (STP) eliminates manual data entry and processing errors with exponentially better customer service.
Macro Global PERA delivers an enormous value proposition as an integrated platform for customer onboarding and deposit-taking by enabling the banks to accelerate their customer acquisition in a simplified and streamlined manner to optimise the operational cost alongside ensuring regulatory compliance. To discover more on how Macro Global with its subject matter expertise can help you address the challenges, please reach us on salesdesk@macroglobal.co.uk (or) +44 0204 574 2433.