How neobanks are disrupting the traditional banking ecosystem

India’s banking ecosystem has come a long way from where it was a few decades ago. One of the major paradigm changes took place with the integration of the Core Banking System (CBS) into the industry. Earlier, banking operations in India were performed in silos.

A customer could only deposit/withdraw funds from his/her home branch. Doing so from any other branch was a long-drawn and complicated process. All this changed with CBS integration.

Gradually, other bottlenecks such as high waiting periods for withdrawals and passbook updates were eliminated with automated machines. Beginning from 1978, banks had already forayed into foreign exchange and as Foreign Exchange Management Act (FEMA) replaced FERA in 1999, both inward remittances and outward remittances grew with robust regulatory supervision.

All these developments have given rise to the modern banking system. But can we call this pace of change optimal? If the pace of other market verticals holds any significance, then it’s surely not. It wouldn’t be wrong to say that we are also catering to 21st-century customers with a 20th-century mindset. Why? Let’s begin with a few considerations.

ALSO READ

Future of Work: Neobanks set to take fintech to the next level, says Razorpay Co-founder

Banking on banks: What has changed and how it changes everything else

Banking operations have historically been dependent on physical transactions. For the same purpose, banks had to create an elaborate network of bank branches and regional head offices. They further required channel partners for wide-ranging use cases, including the secure transfer of cash and other forms of bank clearances. From physical security to the security of technological tools that support modern banking operations, banks have deployed considerable resources.

Still, present-day bank operations are far from optimal. Their customer satisfaction is also not up to the mark owing to physical constraints. But why is that? It is because millennials prefer services the other way around.

At present, studies indicate that the Indian millennial workforce contribution is above the 50 percent mark. By 2025, this figure is projected to reach 75 percent. So, as the millennial generation becomes a force to reckon with by attaining more spending power, it is critical to understand how much they differ from other generations.

In millennial-centric research conducted by Steelcase, workplace dynamics were found to be changing with increased millennial participation. Out of the seven shifts highlighted by the study, a few included ‘global outlook’, ‘distinctive identity’, ‘growth mindset’, and ‘collaboration’.

In another research by Deloitte, some of the most uncommon traits of millennials were that they ‘dislike ambiguity’, ‘deliberate’, and ‘enjoy planning’. They also prefer ‘sameness’ and are ‘reflective’. To set things straight, banks have not been able to accommodate these needs. These need gaps are precisely what neobanks are bridging today.

Changing the paradigm: Why neobanks are gaining more traction

Of late, more people are flocking towards digital channels for across-the-board needs. This includes everything from shopping to entertainment, from service booking to bill payments. The same holds for banking-related requirements. For catering to such needs, modern banking operations need ultramodern solutions. It is where neobanks have a considerable edge.

For the uninitiated, neobanks are primarily tech-driven and extend their services exclusively online. Leveraging technology, they are also able to focus better on the customer needs. For instance, paving the way for better financial planning, neobanks come equipped with expense management tools with categorisation for expenses.

They also empower customers to create saving goals with auto-transfer of extra money from expenditure to savings account. Some players even round off every transaction and keep investing the small change to their customers’ delight. After all, the petty cash converts into a sizable deposit for customers in the long haul.

On top of it, millennials get to enjoy an omnichannel spending ability. It fulfills their need for ‘sameness’. They can travel globally and make their expenses in local denominations over there. This not only equips them with superior flexibility but also proves to be a more cost-effective alternative. It is also why neobanks are finding more takers amongst international travelers including students enrolled in foreign institutions and vacationers. To give you a perspective, people can save more than INR 60,000 in a $30,000 transfer abroad vis-à-vis conventional means. 

Neobanks do not have to maintain extensive infrastructure as conventional banks do. This eliminates relevant costs, including that of property, people, resources, equipment, and their management. The cost advantage directly gets transferred to their customers in the form of economical and value-for-money services.

They can innovate much faster than traditional banks. As regulators are also supporting innovative fintech models via approaches such as regulatory sandboxing, their positions are only getting strengthened with time.

It’s no surprise then that more people, especially millennials, are not only supporting the rise of neobanks but also actively driving it. The limitations of traditional banks have left sizable voids today. Neobanks are simply helping customers overcome them.