Neo Banks vs Traditional Banks: Is there a competition?

Neo Banks are the new age banks with supreme technological advancement over their predecessor. But this does not make them a threat to Traditional Banks, as being projected by various publishers. On the contrary, they quintessentially complement each other. The survival instinct signals for the collaboration between the two, where, the traditional bank will act as the backend partner while the neo bank takes the frontend position, exercising their expertise while smartly covering each other’s deficiency.

An understanding of the collaborative ecosystem is necessary, not only for the players but also for the end users who will eventually have a say on the success of the entire show. This will help in sharpeningthe clarity of theirinterdependency and theirseamless integration that will catalyse the emergence of a new progressive banking system. Few of the complementing featurescan be summarised on the following fronts:

Delivery of the Services:

Neo banks, as fintech companies, enjoy the usage of best technologies to serve their clients. It’s the technology that have put them as a front runner in the Banking space. Their service speed can be measured in minutes unlike, in the case of, the traditional banks where the measuring unit can be days or months. To quote, Neos can get the loan processed in minutes without the requirement of physical documents for verification by using the services of the Account Aggregator, one of the players in the Neo ecosystem havingonline access to the borrower’s bank accounts,who can simply share the desired details with the lenders through online mode after acquiring online approval by the borrower. The AI based platforms installed at lenders’ end can then simply accept or reject the loan proposal, based on their machine analysis, in minutes.Further, various other financial services, such as, virtual saving accounts, family pool accounts, Payment cards and others can be availed in a jiffy from the comfort of one’s own space through neo apps.

Thetraditional banks, on the other hand, heavily depend on physical documents and human involvement for accepting or rejecting the loan applications, taking days to do so. These requirements further restrict their reach to the needy, who has a steady cashflow but may not necessarily fulfil the redundant eligibility criterion set by traditional banks. Thus, they loose on customer base and also bear heavy employee cost.In such a scenario, it is highly desirable for traditional banks to utilize the features of the Neos to expand their reach and make their services more efficient by forming a mutual partnership.

Access to the services

Neo banks provide mobile app-based platforms to access its bouquet of services while traditional banks have brick-n-mortar branches. Though, traditional banks too have app-based platforms but these platforms are not exhaustive in nature.

Specific vs fit-for-all strategy:

Neo banks prefer to stick to their core strength and their pioneering strategy – “know the clients in a way no one else does”, thereby making them choose a specific set of clients to create their niche. On the other hand, traditional banks follow single fit-for-all strategy. For example, neo banks offer great banking services to specific categories of clients such as international tourists, expats, foreign students or teenagers, while traditional banks have little to offer to these categories.

Personal Touch

Neo bank is no less than a personal finance manager. Neos not only provide access to all the bank accounts, held by an individual or a business group on a single app dashboard but can also manage bank reconciliation, accounting entries, budgeting and wealth enhancement activities for their clients. These add-on services provide them with a macro and a micro view of their clients’ financial status at any given point of time, which can help them to encourage their clients to opt for the best resources for availing funds, creating a win-win situation for all. A Neo Bank can make an investment advice in liquid funds, if an amount has been lying idle in the client’s bank for a certain period, just as a personal finance manager would have done.

To keep up the sheen of that personal touch, neo banks prefer to serve specified group of clients in order to provide breakthrough solutions to them by understanding their needs on a micro level. A Neo, like FININ concentrates on minimizing the high costs involved with inward remittances while another Neo, like YELO focuses on low income mass market, gold & healthcare sectors and creating goal-based saving strategies for their clients.

Traditional banksmay lagin offering such highly personalized services to all of their clients due to the limited access they have to the client’s overall financial status. leave alone, any other services beyond the banking scope. All though, few traditional banks are trying to make use of the technologies that allow the public to open saving accounts from their home using in-app interface system or provide the analysis of monthly expenditure to the clients or make loan offers based on the auto-analysis of their clients’ cashflow positions, but still theycannot match the personalization offered by Neos. What they can do to bridge the gap is to make use of this strength of Neos by forming collaborations and fosteringa mutually beneficial relationship.

Infrastructure

  1. Technology Upgradation:

Traditional bank, being burdened with its own bureaucratic issues and heavy expenditure on physical infrastructure, finds difficult to upgrade the adopted technology too often. On the other hand, Neo bank thrives on technological advancements as those are the only assets it invests in. To quote,FAMPAY, a neo, launched numberless card for teenagers, in partnership with IDFC bank thereby taking the security level a notch higher and tapped a segment of client having a large base.

  • Legal Relationship:

The digital bank is a subsidiary to a traditional bank while neo bank comes as partner to the traditional bank.

Business Perspective

  1. Profitability:

While most of the traditional banks are marred with the burden of NPAs and huge expenditure on the maintenance of their physical infrastructures, neo banks, going light on both the fronts, are being expected to have a compounded annual growth rate of 46.5% between 2019 2026 and to generate $394.60 billion by 2026 as quoted by PWC report.

  • Valuation:

The business valuation of traditional bank is more Balance sheet oriented while neo bank is valued on the basis of its user-growth rate and technology owned.

To conclude, Neo banking is synonymous to Simplistic Banking.Neosare the catalyst that will activate the economic growth of the land by integrating the financial needs of the majority of the population, across the society strata, with the seamless virtual banking platformand with extreme personalization. Let’s embrace the change!!