The Rise of Neobanks

15 October 2022

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Neobanks, a new generation of non-bank fintech companies, are debunking these stereotypes by providing digital-first—and occasionally digital-only—banking platforms that provide seamless online experiences and low- or no-fee services. Neobanks are bridging the gap between traditional banks' services and shifting consumer expectations in the digital era. they do possess a unique weapon: innovation. Compared to traditional banks, they can offer services and form partnerships faster to better serve their consumers. Investors in venture capital and private equity have been paying close attention to the market prospects for these banks and are becoming more interested in them. On a worldwide scale, neobanks are sweeping the fintech sector. Every day, a new competitor enters the market with the goal of further simplifying financial services. Let's look at what it really implies.

What is a Neobank?

A neobank is a type of digital bank that does not have any physical locations. Neobanking takes place purely online, rather than at a physical facility. It's a broad range of financial service providers pleading with today's tech-savvy clientele. Fintech businesses that provide digital and mobile-first financial solutions such as payments and money transfers, money loans, and more are known as neobanks. As the financial environment shifts toward client experience and happiness, a chasm has formed between what traditional banks provide and what customers want. And Neobanks are attempting to fill that need. Most traditional banks are stymied by legacy-based infrastructure. As a result, they falter when it comes to assisting SMEs with financial services such as offering a payment gateway, invoicing software, and numerous perspectives of cash management, among other things. Because of this gap, as well as the expansion of mobile technologies, it only makes sense for banking services to merge with other financial services.

Why do we really need Neobanks?

We've witnessed a significant shift in the banking business in recent years. With over 2000 fintech businesses in the nation, digital payments are widely accepted. Customers are shifting away from physical banks and cash in favor of internet banking and wallets. India is entering a new era of increasing fintech. Indian customers deal digitally, and the number is rapidly increasing. People are becoming more comfortable making online payments using Google Pay, Paytm, PhonePe, and other services than ever before. When we consider these figures, we can understand the potential that neobanks have in the country. Neobanks offer the flexibility that regular banks do not. They can easily support themselves and generate a profit.

How do neobanks function?

Neobanks operate on an entirely different business model than regular banks. However, neobanks, like regular banks, generate a marginal profit between money intake and lending. And, because there is no physical facility and everything is done online, the consumer costs are much reduced. Neobanks are customer-centric, therefore they offer individualized services to their consumers that are powered by technology. A neobank's decision-making process is driven by data-driven decisions. Because their systems are also highly contemporary, they can gather and analyze data more easily and learn how their clients act in the neobanking ecosystem. Instead, limiting themselves to one or two data points, they develop cohorts of clients depending on their activities.

In 2020, India's neobank firms raised more than $230 million. Neobanks were established in response to the problems posed by the traditional financial services business and the arrival of the digital era. Despite a few snags, the trend is not going away anytime soon. That's fantastic news for an industry that has long needed diversification and a renewed emphasis on accessibility.

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