Neo bank – a must have to focus on the
Micro Niche
By Asif Basheer . August 12, 2022
Neo banks are making their presence all over the world. A product that has gained momentum in the financial technology (fintech) and digital development. Neo banks are completely digital, with no physical presence and hence with enormous reach with the huge penetration of internet.
Neo Banks works through seamless integrations into open APIs (Automatic Program Interface) provided by other platforms (like banks , NBFC, Insurance companies etc ) as well as offering APIs from their Neo Banking platforms for other institutions, making them almost a complete solution to create a focused but full stack banking needs.
Getting started.
New commercial banks have inefficient business models as evidenced by high cost to income, and high cost to serve numbers. Banks and fintechs offering digital banking services (so-called, neo-banks) rely primarily on digital channels that organically have high efficiency metrics compared to incumbent commercial banks. This structural feature makes them a potentially effective channel through which policymakers can achieve social goals like empowering the hitherto under-banked small businesses, and enhancing trust among retail consumers.
Neo-banking business models emerged globally in the aftermath of the global financial crisis as a response to loss of faith in the incumbent banks. It came of age in 2015 in markets like the United Kingdom and has since matured. Three models of these “challenger banks” (so-called because of their emergence in the aftermath of global financial crisis) appear to have emerged globally.
- Neo-banks: These neo-banks partner with incumbent licensed banks to offer “over-the-top” services to the consumers “renting” the balance sheet of a bank (properly so called) to lend and issue deposits from. (Open Technologies, RazorPayX, Dave)
- By planting this idea before you begin training, they automatically think about how they can apply what they learned to what they do at the workplace.
- Full-Stack (Licensed) Digital banks: These entities are fully functional banks, regulated by the banking regulator and accept deposits and offer loans on their own balance sheet. (Starling, Webank, Kakao, Monzo, N26)
- (Autonomous) unit of traditional banks: These entities are essentially neo- banking operations of traditional banks that function autonomously and compete with stand-alone neo-banks. (Marcus,25 (Goldman Sachs) 811 (Kotak Mahindra Bank), and Yono (State Bank of India).
Digital Banks are a huge success.
- Business proposition of neo-banks is niche products targeted to demographics that are under-catered to, by main street banks(eg. Small businesses, migrants, Blue collar pay check-to-pay check, retail consumers, gig economy workers and millennials).
- They offer speed (and its corollary, the absence of friction), superior user experience relative to traditional banks and low cost and transparent cost structures, to their consumers.
- P2P lending and transactions is extremely simple and easy.
- High security that the neo banks offer in terms of a product.
Cost is key.
Estimates indicate that Neo Banks have high cost efficiency. We bank for instance incurs a per- account operation cost of $0.5. Compare that to traditional banks and (depending where we are), it may come up to 10-20 times higher@ .In the Indian context, a FIBAC 2019 Annual Insights Report estimated the banking industry cost to income ratio as a percentage is at about 50 %. Looking beneath the hood, it is apparent that cost to income ratios as a percentage of large and medium PSBs and also old private banks are more than 50%. The new private banks, while they run a more efficient operation relative to their peers, still had a cost to income ratio as a percentage; as high as 43%.
These ratios reduce their reach by excluding micro and small businesses, and credit of smaller tickets. Digital banks offer promise because their business model can organically cut down Cost-to-serve and Customer Acquisition Cost (CAC) thus offering them the headroom to expand coverage than the incumbent commercial bank.
Neo Bank - more of compliance than license.
A company may not need a full banking license to start a neo bank. Most challenger banks started with simple core banking systems and an umbrella license. In certain countries like Australia , approvals from Government organisations are required for digital only banks . Stipulated capital requirements in many countries are often waived off or based on discretion of the monetary agencies spread it over 3 years. Finding the right banking partner, or financial institution can be an easy way to start your neo bank.