Times are such that, every startup is a Fin-tech & every Fin-tech is a Neo Bank.
In June 2021, Berkshire Hathaway had invested $500 Mn in a Brazil based Neo Bank called ‘Nu Bank’. This deal valued the company at $30B, making it one of the most valuable Fintech in the world.
Neo Banks are taking the world by storm. They first emerged in UK (Monzo, Atom Bank) in 2015 & quickly spread across the world. The global Neo banking market size is at $35B as of 2020 & is expected to reach $722B by 2028 at a CAGR of 47%. That’s one heck of a growth projection. So we thought we should cover this & see what’s in it the store?
What is a Neo Bank?
A Neo Bank is a Fintech which provides online banking services in collaboration with a traditional bank. Think of it like an additional layer on an existing bank’s infrastructure. It is a virtual bank without any physical branches. They provide complete banking experience through mobile app. The features include:
- Banking-as-a-service (BaaS)
- Customized products
- Focus on High Tech
- Low cost & quick processing time
The architecture of a Neo Bank
*Image Source: Niyo
There are two kinds of Neo Banks. Licensed & Non-licensed.
Neo Banks who have their own banking license comes under Licensed category. Banking regulators in US, Europe & South East Asia allows fin-techs to have the own banking license.
However, things are different in India. RBI do not allow Neo Banks to have a banking licence. Hence all the Neo Banks in India are Non-licensed.
How are Neo Banks different from Digital Banks?
Digital banks like DBS, YONO, 811 by Kotak are mobile centric apps. However they are an extension of all the services provided by the underlying bank. Nothing more.
Neo Banks on the other hand, do not have a Banking licence. They get into an arrangement with the partner bank for customer ownership, revenue and profit sharing. They can offer products across various banks.
For example, Niyo offers 7% savings account by partnering with Equitas. They also provide a Global debit card issued by DCB. This helps the users to have access to various products on single platform.
How do they make money?
Just like any traditional bank, Neo Banks also make money from:
Interest income
Neo Banks have access to our spending profile. They are leveraging this data by offering lending / BNPL (Buy now pay later) services. They borrow from the partner bank & lend it to us. The difference between these rates is their income.
Interchange income
They levy interchange fee on credit or debit card transactions using EPOS machines. However this revenue stream was impacted due to the restrictions of MDR by the RBI.
Fee based income
This includes subscription fees, cross selling products like insurance, wealth management etc.
Neo Banks in India
Inspite of the regulatory hurdles in India, this space had seen a huge interest with multiple players entering the market. As of now, there are 12 active Neo Banks in India & few more are in pipeline. They have cumulatively raised ~$250 Mn in funding till date.
They are basically targeting two segments – Retail & SME. Every Neo Bank usually starts with an anchor product (Credit card, Forex, Savings account, Payroll etc) that is focused on one of the target segments.
*Click to enlarge
The challenges of Neo Banks
Yelo, which was focused on Gig workers had shutdown its operations in July 2021. Funded by Matrix Partners, Better capital etc, the company failed to figure out a business model & monetise their services. Identifying the target segment & designing a sustainable product is the most critical aspect of a Neo Bank.
Unlike the west, Neo Banks in India continue to depend on the partner banks for their offerings. They are forced to design their products in alignment with the underlying bank.
Niyo initially partnered with IDFC First Bank & launched the 7% savings account. However for some reason, IDFC First Bank withdrew the partnership with Niyo. They later went ahead with Equitas to offer the same product at 7%. This uncertainty will dampener new product launches by the Neo Banks.
Neo Banks has to establish the trust among the depositors. Many still prefer a physical presence of their bank.
Semi urban & rural India will be the toughest market for them to crack. Having said that, the urban, millennial & Gen Z crowd itself offers them a multi decade opportunity.
Should you open an account?
I would say, Yes.
If you are tech savvy & looking for new age banking experience, you must surely check them out. They offer unique solutions when compared to the traditional one fit all products. You can get the best of multiple banks on single platform.
Everyone is in customer acquisition mode & a lot running on VC money. They are going to be aggressive in marketing, cash backs etc for the next few years.
The account will be created with the underlying bank. This will ensure that you are eligible for an insurance of Rs 5 lakh as per DICGC guidelines.
So, what are you waiting for? Check the products, choose the one best suited for you & just sign up.
Few tips:
- Stay with the top 3-4 players. They have scale in terms of customers, which will help them to negotiate better deals with the underlying bank.
- Do not make this as your primary account.
- Give more importance to Neo Bank over underlying bank. All the customer service, new product launches, easy of Banking etc are handled by Neo Bank only.
- This can be the first bank account for your teenager son / daughter.
To get full access to our premium research, model equity and debt portfolios, and vibrant member forum, subscribe to Capitalmind Premium.
