What is a Neo-Bank ?
I am Aarihant Aaryan! Welcome to the Iron sharpen Iron newsletter,
Every week I share my homework from my startup journey, learnings on human behavior, and sometimes decoding industries, business models for fun, Can’t control my curiosity :) )
Neo-banks is the new version of banking. Neobanks are digital platforms, they don’t own any physical offices or branches, but they do everything that traditional banks do but more efficiently.
There are different Neo-banks coming up for different target groups, Fampay - Neobank for teens, Jupiter - Neobank for millennials, RazorpayX for SME’s
Few of the Indian Neo-banks listed here 👇, The best Neo-bank experience I had was on Jupiter :)
Can Neo-banks be trusted?
When I was referring my friends to open an account with neo-banks, one common question was will my money be safe? It isn’t a scam, right?
To mention, these firms don't have a bank license of their own “but rely on bank partners to offer licensed services” since RBI doesn’t allow banks to be 100% digital yet.
What is the difference between Neo-banks and Traditional Banks?
Traditional banks have been in the ecosystem for so many decades but those long lines, app outages, bad experiences never end.
I have been using a leading traditional banking app for 5 years and never experienced a major update.
Banks got super busy in compliance and regulation, they forgot about the “consumer experience”
Yes, they had relationship managers, the last time my relationship manager called me was to sell me an insurance product or a SIP.
Relationship managers focused more on cross-selling rather than building “Relationships”
Neo-banks are experience first companies, they make banking more fun with their design and animations, I have been using a few neo-banks for a few months and the number of constant updates is amazing it speaks volumes about their customer obsession.
They care about my financial inclusion. Small features like Insights over my spending, helping me to hide my balance when people are around and etc play a major difference.
How does Neo-bank impact a user and their behavior?
The average time I spend and transactions I do have drastically increased on Neo-Banks, I hardly make any transactions from my traditional bank.
Also, an interesting shift I noticed is I don’t remember the last time I did a UPI transaction on phonepe, paytm, or gpay.
Tho I can only use UPI ID to make a P2P transaction on a Neo-bank, I am still hooked to it because of the seamless process and experience.
Why Neobank - Business side story
If you look at the data most of the credit cards, personal loans, health insurance, life insurance, mutual funds are disbursed to consumers by “Banks” - Even with a bad experience they have a higher market share.
But here things get very interesting :
The number of credit cards issued in India is 67.6 Million, for a country like India where the working population is greater than > 501 Million.
Fun fact: More than 1.1 Billion credit cards are issued in the USA.
Only 2.6 Million people invest in the stock market, remember India has issued 445 million pan cards to date.
The total insurance penetration rate in India is 3.76% ( Life insurance 2.82% and non-life 0.94% )
More than 1 in 3 Indians live from paycheck to paycheck
57% of all Indians have less than Rs.5000 /- in their savings accounts or emergency fund.
Financial literacy and wellness should have started from banks, but they failed immensely at educating the user.
With the kind of experience and customer obsession Neo-Banks operate in, they will be able to penetrate the market faster than banks.
How will neo-banks make money?
There will be a few micro revenue sources like MDR, chequebook fees.
As said, with an experience-first approach Neo-banks aim to build engagement with you which would lead to a greater relationship, and later on leverage the relationship to advise and enable you with financial products varying from investments, insurance, and credit products.
I see them going forward for an ecosystem business model but where they will be enablers not service providers like banks.
Enablers as in be your financial partner and enable you to get access to loans and other financial products.
Remember, enablers do make good commissions with fewer operations.
Key things Neo-banks will have to do to win IMO :
Trust - Build trust, India is a low trust country and in a country like India you can do 2 things to build trust :
A great experience creates trust and also keeps amplifying the signal that you provide the best experience.
Get backed by folks who are highly trusted, trust is decentralized in nature.
Win the game of deposits. While many folks focus on a number of transactions. the right number would be the number of deposits.
Many will assume getting salary deposits would be enough but it would get more recurring and fixed deposits.
I.e Indians held over 611.8 Billion dollars / 46 trillion rupees as individual assets in bank fixed deposits.
If Neo-banks can crack this, they will not end up being enablers in the long run This image should make little sense :)
If you have any questions or doubts, feel free to comment would love to learn and answer them for you 🙌