The Neo Banking Revolution
The Revolution is On!
How would you define a bank?
At the core, a bank is a matchmaker - sourcing money from those who have it and channelling it to those who need it.
But how did banks evolve to become, well, banks?
In the good old days, the House of Medici was the banking overlord in Europe.
The Medici Family not only ushered an era of creativity and art in Europe by funding great artists like Botticelli, Michelangelo and Leonardo Da Vinci but also revolutionised banking.
Those were the times when banking for a profit motive was seen as a sin. Funds were only made available to noble families and rich merchants.
The Family introduced banking for the poor - taking funds from the rich (mostly from The Holy Father in Venice) and extending loans to the entrepreneurial artisans and common men, who wanted to work for themselves.
From challenging nobility to becoming one, The House of Medici left in its wake banking as we know it today.
For centuries, banks have evolved in the traditional way.
And in doing so, they have relied on the atom-based models - opening up physical branches to be as close to the consumers (both, depositors and borrowers) as possible.
Now, the dynamics have changed.
Bits have taken over atoms.
Companies no longer need to be physically close to their consumers, they can do so through one thing that we millennials keep closest to us - our mobile phones.
As is with all old orders - they resist change at first and then call it inevitable.
The traditional banks have been outrightly lazy in adopting new and upcoming technology.
In doing so, they have opened up an opportunity for a new kind of banking to emerge. A system that would do away with the age-old practices of traditional banks, and usher in an era of innovation in this downright boring space.
Enter Neo-Banks
Neo banks are the new fad in town. They are all visionaries can talk about. Let’s try and decode what it is that these new ones have to offer.
Neo banks leverage technology to help address our banking problems. They focus more on “banking” rather than being a bank.
They offer Banking as a Service (BaaS).
Wouldn’t it be great to open bank accounts without having to submit countless documents, identification proofs and signatures?
Remember the pain you went through standing in long queues to withdraw your own funds from the cash counter? Or waiting for three days to have cheques credited to your account?
Now, imagine you could do all this from the comfort of your home, watching a football match on TV and chilling.
Heaven, no?
Changing consumer behaviour has paved the way for neo banks.
We, as consumers, want convenience above everything else.
The treadmill of life is running so fast that there’s usually no time for us to give to ourselves.
Tell me, wouldn’t you prefer spending a few more hours with your parents, kids or spouses, instead of standing in a queue and waiting for your turn to withdraw money?
All human effort, today, is focussed on making things convenient. And that’s what these neo banks seek to do.
Make our lives simpler.
Since the last decade, consumer engagement with technology has skyrocketed. With growing internet and smartphone penetration, and widespread adoption of mobile apps, more and more people have started trusting digital modes of payments(in India, 552.26 crore digital transactions were recorded in March 2020 - a 15% growth, compared to February 2020. The number of transactions per day also went up to 18.5 crores compared to 16.2 crores in Feb 2020).
This has resulted in generating mind-boggling amounts of data every day, enabling innovative startups to harness the powers of artificial intelligence and machine learning-based models to get in-depth insights on consumer behaviour.
By tracking our spending habits, neo banks are in a much better position to assess our “credit-worthiness” without even looking at the traditional credit scores. This, above everything else, helps them reduce their default risk (the risk that a borrower won’t pay back).
As any entrepreneur would ask, how fast is this new market growing?
Well, according to the data published by PwC, the global neo banking industry is expected to grow 20X (from 2018 to 2026).
Neo Banks registered record-breaking funding in Q3 2019, where they raised a total of $1.74 billion over 21 deals. In Q1 2020, the total funding amounted to $1.304 billion over 24 deals.
This is huge.
So, are digital banks and neo banks the same?
Technically, no. Digital banks are the digital avatars of traditional banks. They have their physical twins.
Neo banks, on the other hand, exist only in the realm of bits and electrons. Completely digital.
From a strictly commercial angle, neo banks don’t incur the following costs (and hence can potentially destroy the older banks):
They don’t need offices in every city or village, thereby saving rental and other associated costs.
They don’t need humans to process lots of physical documents, nor do they need a physical place to store these - everything is done at the tap of buttons and digital records are kept. Hence, lower personnel costs.
As the costs of operations for these neo banks are lower, they can offer consumers money or services at much more competitive rates.
Neo banks are rethinking and prioritising experience over products, data over assets and shared access over ownership.
They are betting on consumer data, no-physical presence and personalisation of banking services to demolish old ways of banking. And it seems to be paying off for now.
While these new-comers seek to disrupt the age-old banking sector, would they be able to establish brand loyalty or consumer trust the way some of the traditional banks have?
Or will they be eaten up by the larger fishes in the pond?
We would love to know your take on this.
Till then, stay safe, take care.
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