Does a Neobank have  an  Edge  Over a Traditional Bank?

Neobanks are taking over the global fintech sector by storm. The mobile-first banking approach is gaining popularity at an accelerated pace. If you are still on the fence about opening a digital account, read on to find everything about neobanks. 

What is a neobank?

A neobank provides digital and mobile-first financial solutions. Often known as an online bank, internet-only bank, virtual bank or digital bank, neobank is a type of direct bank that operates exclusively online without the traditional physical brick and mortar branch networks. This significantly helps save on costs of maintaining a physical branch and the fintech offering neobanking services is able to pass on the benefits to their users in the form of cashback rewards from time to time. Their aim is to provide a hassle-free digital banking experience to the tech-savvy consumer of today and reaching to the deepest corner of the country so nobody’s left unbanked.

One of the first fully functional direct banks was launched in the USA in late 1995 and from then on their popularity began gaining momentum resulting in their number increasing at a steady pace. The term “neobank” started making waves during 2016 when they gained footing in the market and became competitors for the traditional banks which are burdened by their high operating costs (opex).

Neobanks are mainly of two kinds: ones that have their own banking license and others that partner with traditional banks to provide financial services. While some countries such as Brazil, Germany, Singapore, South Africa, and the UK allow digital banking licenses, India is far from that. In India, the neobanks usually partner with a traditional bank(s) to provide a multitude of financial services.

Each one of them specializes in providing one or more financial services such as savings accounts, fixed deposits, instant loans, credit cards, mutual funds, etc. 

Benefits of a neo-bank

Smooth banking experience: Do you find the apps and websites of your traditional banks confusing to navigate? Welcome to the world of neobanks that are fintechs at their core. Along with providing a range of financial services, they are moving towards customer experience and satisfaction by laying great importance on providing excellent UI/UX for a seamless digital banking experience.

Product bouquet: Since the neobanks are free to partner with multiple banks and financial institutions, they are able to offer a wide range of financial services. For instance, partnering with one bank to provide a savings account, another to provide a forex card, yet another for mutual fund investments, and so on.

Consumer-specific products: Traditional banks still live by “one size fits all” but the neobanks are not bound by that approach. They have the freedom to create customized products for different user groups based on their financial needs. For instance, Niyo has a range of segment-based products such as:

• Niyo Bharat: A prepaid salary card for blue-collar workers
• Niyo Global: A zero forex card for the global Indian traveller
• NiyoX: A 2-in-1 savings and investments platform for the millennials
• Niyo Money: A complete wealth management suite for active investors  

Segment specific products help in offering financial services that actually matter to their respective audience.    

The differentiating factor

Did you wonder what differentiates a neobank from a traditional bank? Why one should bank with a neobank when they ultimately partner with a traditional bank and offer the same interest rate on their savings account as the bank partner? The easiest way to answer this question is the various partnerships of a neobank offer multiple solutions on a single platform and letting go of either one of them would mean you won’t benefit from the other. For instance, NiyoX provides high-interest rate savings account in partnership with Equitas Small Finance Bank and the wealth segment is powered by Niyo Money in partnership with 5Paisa. While banking directly with the bank for the high-interest rate is viable, you’ll lose out on the wealth management aspect of NiyoX. The convenience this bundle brings in is unparalleled, not to mention one e-KYC holds good for both the savings and wealth accounts.

With a 100% digital onboarding process of neobanks, in the quickest time possible, the days of filling out paperwork is far left behind.

Associated risks

If the banking partner doesn’t have a robust financial status, it could go bust. The insurance provided by RBI covers deposits only up to ₹ 5 Lakhs, so choose the right neobank with a stable bank partner.

The bank could drop their interest rate at any time, so if you’re associating with a neobank for the sole reason of high-interest rate, it might stop serving your purpose.

In the rare case where the relationship between the bank partner and the neobank falls apart, the neobank might offload its users.

Association with a neobanking product that offers multiple solutions would mean that they would try to cross-sell services that you are not looking for in particular. 

Due diligence

What to look for before opening an account with a neobank? It’s a good idea to check the credibility and financial health of the bank partner because essentially your money is parked with the partner bank and not the neobank.

Check if the partner bank has a branch near you. Opening an account with the associated neobank would mean that you never ever have to visit the branch, but just in case you need it for any services that need you to be physically present, it’s convenient to have one close by. 

Assess if the neobank’s core strength aligns with your needs. Some of them focus mainly on savings accounts, wealth management, or lending. It’s up to you to decide what kind of service fits you the best.

To sum it up, the positive aspects of a neobank outweigh those of a traditional bank. With the entire world going the digital route and the constant development in technology, neobanks are on an upward trend.