Can we bet on neobanks?

“The bank is necessary, but the banks are not,” said Bill Gates in 1994.

Looks like he anticipated today’s trends! For the young people around us, traditional banking conjures up images of brick and mortar buildings, serpentine ATM lines, tons of paperwork, and bankers cross-selling another product. They now relate more easily to a new generation of non-bank fintechs called neobanks, which dispel stereotypical images with their digital-only banking platforms.

Here, we take a look at the offerings of neobanks targeting retail users and highlight the aspects that you need to consider before deciding to subscribe to their services.

What are neobanks?

Although there is no standard definition for neobank, the term describes fintech platforms offering financial services without any physical branch. They enable this through links with approved downstream banks and attempt to offer the latter’s products in a more user-friendly format. For banks, these platforms make it possible to acquire customers without the physical structure.

For this, the platforms receive a customer acquisition commission from banks, an interchange commission when a debit card is used by its customer and possibly income from the cross-selling of other financial products to the user. .

For clients, the advantages of a neobank over a traditional bank are twofold. First, banking services can be used without having to enter the bank. Second, the user interface is designed for a better customer experience. And these come with the bank’s safety net in the background. However, be aware that if an account created with a neobank will make you a back-end bank account holder, the reverse is not possible.

The onboarding process with neobanks is fast, with KYC being done online by submitting the registered Aadhaar card number and / or PAN along with some basic personal information. Almost all of them offer zero balance accounts with no annual maintenance fees. Some of them offer attractive interest rates, thanks to their collaboration with small financing banks which generally offer higher rates. For example, neo-banking platforms such as Niyo and Freo (coming soon) have teamed up with Equitas to offer interest of up to 7% per annum on the savings account.

Neobanks can be classified into two categories: savings-oriented and credit-oriented. While the former may offer solutions for managing expenses, investments, money transfers, and foreign exchange payments, the latter offers money lending options.

Savings banks

Neobanks, which are savings-oriented, digitally provide most of the services related to savings accounts. From the payment infrastructure (IMPS / NEFT / RTGS / UPI), to the provision of checkbooks / sight drafts, to account statements, to adding nominees to accounts, these neobanks offer most of the services offered by a savings account with a traditional bank. Live transaction updates and detailed transaction history are also available.

Neobanks also generally offer debit cards and co-branded prepaid cards in partnership with banks. In case of cash withdrawal or deposit, you can either use the ATM card issued by the neobank, or go directly to the bank branch.

Most of these neo-banking platforms help analyze and track customer spending and come up with smart solutions. Take Fi Money, launched by former creators of Google Pay, in collaboration with Federal Bank. This neobank has created an automated bot that facilitates backup. For example, every time you order from Swiggy or shop on Amazon, the bot will ask you to keep 50 to 100 aside to save.

Jupiter Money, another savings-focused neobank, has created built-in money management features where you can put money aside for your goals. The money is pocketed separately in the savings account for the purpose, but will still continue to earn interest.

Some neobanks also offer wealth management services. Niyox, an offering from Niyo, allows you to invest in direct mutual fund plans through its platform from the savings account opened with them. Kaleidofin’s Kaleido Cash, which focuses on providing financial services, asks you to choose how much you want to save for your goal and prompts you to save each month. The amount will further be invested in mutual funds / FD / RD / insurance on the basis of AI-based financial planning.

Some of these platforms are in beta mode and it may be necessary to register to be on the waiting list to discover their neobanking services.

Of course, these neo-banking services could have certain limitations compared to traditional services currently. Not all neobanks (as of yet) may allow you to give standing instructions to automatically debit the amount of expenses or investments. In addition, some of the financial products available with the traditional banking platform, such as opening a PPF account, are still prohibited.

Quick loans from banks on credit

In credit-oriented neobanks, loan processing could be fast and completely online. All the user may need to do is submit photo ID, Aadhaar number, take a selfie for authentication and submit the relevant documents.

Freo’s Moneytap offers faster approval of the 3,000 lakh to 5 lakh credit line subject to the customer’s credit profile. Moneytap offers personal loans to employees with a minimum wage of 30,000 per month at interest rates starting at 13 percent per year for a period of three to 36 months. Freo also offers Freo Pay, which promotes Buy Now and Pay Later (BNPL). Freo Pay offers you an interest-free mini-credit limit (500-3,000) which can be used instantly through UPI transactions with different merchants (local merchants such as bakers, grocers, traders, etc.).

Neobanks usually partner with an NBFC or other financial institution to provide loans. Their credit services partnership does not have to be with the same bank they have linked with to provide a savings account. For example, Freo has a link with Equitas Small Finance Bank for a savings account while Freo’s credit lending platform, Moneytap, has partnered with financial institutions such as HDB Financial Services, DM Finance and Apollo Finvest India. The platform has also partnered with RBL Bank to offer credit cards.

One can also get the credit related services online from the digital loan applications in the market. The difference between fintechs and neobanks for lending is that the former is a subset of the general banking services of the latter. Additionally, if you have a savings account with a neobank, it will create a credit profile based on account usage, which could help speed up sanctioning and processing of loans.

That aside, most neobanks seek to access your contacts, gallery, and other app details on your mobile phone, during setup, to assess the creditworthiness of customers who don’t have a rating. appropriate credit. While all of these features can be tempting, it’s important to remember that easy access to credit can also be a double-edged sword.

Regulations, grievance resolution

The banking regulator in India, unlike a few other countries, does not recognize virtual banks and therefore does not specifically regulate neobanks. There is therefore a lack of direct supervision by the RBI on neobanks.

However, the RBI has imposed the requirement for digital banking providers to have some physical presence. Thus, the neobanks linked up with banks or financial institutions directly supervised by the RBI. Thus, the money of any account opened with a neobank, backed by a bank regulated by the RBI, will also be insured up to 5 lakh under the DICGC law, since client funds are parked with a bank. underlying bank.

In terms of payments, according to Niyo, neo-banks are all forced to follow the same set of regulatory requirements, such as two-factor authentication for card transactions.

In the event of complaints relating to the account backed by a bank / NBFC, one can contact the néobanque as well as the bank / NBFC for repair. You can also file a complaint on the RBI’s Sachet website (https://sachet.rbi.org.in), if the problem is not resolved within a reasonable time.

Relevance

Considering the user-friendly interface of neobanks, transactions can be carried out with comfort and convenience. But neobanks have their drawbacks.

Some of the reviews of these neobank apps claim that the app balance doesn’t update quickly and customer support is poor. If so, the goal of having a neo-banking app, which promises transparent transactions, may not be fully achieved. Since neobanks are digital-only platforms, there is always the cloud of cybersecurity and privacy breaches. In addition, since some of the services provided by these platforms are based on the granted access (application permissions) to user data, any data protection law / regulation could have an impact on certain features.

Customers should check whether a particular neobank fits their needs. For example, a customer looking for a better banking transaction experience may not need neobanking services focused on credit. In addition, the principle behind neobanks is to sell products such as mutual funds, insurance and credit-related services. Sleek user interfaces could entice customers to adopt a service they aren’t looking for or subscribe to a product they don’t need.

An account with a neobank cannot be a complete substitute for an account with a traditional bank. You can only think of this as a secondary account for a faster and better bank. Unlike banks, neobanks do not benefit from proven infrastructure and knowledge in risk management and compliance.

In the event of a neobank failure, while the impact on the customer may not be direct because your account is in fact with the bank or the NBFC, the dependence on these platforms may disrupt the banking experience. Banks are also increasing the focus on online and app-based services these days, especially after Covid-induced “stay at home” trends. Yono from SBI and 811 from Kotak offer most of the services offered by these neobanks fintech and are better alternatives than fintech platforms of the new era. For financial advice, there are also other reliable service providers outside of the neo-banking system.

If you are looking for quick loans, instead of neobank loans, you may want to consider gold loans or loans against FD or other better regulated financial assets.