Are Neo Banks Killing Traditional Banks?
Neo Banks are quickly becoming the banks of the new age. They are offering convenience and services to the customers which have never been offered by traditional banks to date. So how are these “traditional banks” dealing with this change in the status quo? Are these banks, as we know them, getting killed?
What are Neo Banks?
Neo Banks are primarily small startups and companies which provide banking services, without actually having a banking licence. They partner up with traditional players in the banking sector to offer these services. Their primary goal is to keep the customer at the centre of everything — hence the convenience and level of customer service that these neo banks offer have been starkly different from what traditional banks have offered. This is validated in the large growth of 47.1% CAGR that is expected by 2026 in the global neo-banking industry.
What do they offer that traditional banks cannot?
Neo Banks are not exactly competing with traditional banks, but addressing the gaps in the banking system that are left to be filled. This is primarily because Neo Banks can never fully operate as a bank due to no proper banking licences. Therefore, they are completely dependent on the traditional banks to offer back end support to them.
What they do better, especially in India, is manage customer expectations in a better way. This is seen in the way that their mobile applications, which is their main medium of interaction with the customers, are different from the applications of many regular banks.
How are Traditional Banks tackling this?
Traditional banks are taking a two-pronged approach to deal with this new threat to their market. The inorganic approach is to partner with the Neo Banks and offer them the banking infrastructure that they need. This infrastructure can be in the form of opening a bank account or having an open API platform for the neo banks to gain access to the bank’s data. The organic approach is to digitally transform themselves to become competitive with the neo banks. This requires greater investment from the banks but could lead to long term benefits for them as well.
Conclusion
Due to the Neo Banks not having a banking licence by the RBI, the traditional retail banks do not face any threats of them taking over a large chunk of the market. But if and when RBI starts giving out Digital Banking Licences, the traditional banks can face stiff competition to their market shares. Hence these banks need to digitally upgrade themselves and orient themselves to what the customer wants in order to remain relevant and competitive in the market.
