Many new neo banks have come up in the past few years. These neo banks (also known as digital banks) offer the most basic banking services online without the need to visit the physical branch. Not only can you do all transactions online, but you can also open your account online without visiting the branch. However, neo banks have their own limitations and cannot be taken as a substitute to the traditional banking service. Here is a look what all you can get from a neo bank and what are their limitations.
Where neo banks score over traditional banks
When you already have a bank account that offers online and mobile banking facilities then the question arises as to why do you need a digital bank account? It is the product innovation, convenience and user experience where not all traditional banks offer great digital solutions, and this is where these digital banks excel. “If you compare with traditional banks, we have just 100 secs on-boarding time, better user interface, 24*7 customer service and innovative features like Invest the change. That is where we believe we meet customer needs which had hitherto been unmet and hence have an edge over traditional banks,” says Swapnil Bhaskar, Head of Strategy, Niyo, a digital bank.
Moreover, the tech savvy millennials and new generation young adults typically have high expectations from their mobile apps where many of these digital banks have an edge. “The user experience for neo banks is much more attractive and appealing to the urban millennial and Gen-Z in comparison to the digital apps of traditional banks,” says Kashyap Mahavadi, Founder and CEO of Dinero Neobank.
How a neo bank is not a bank
Even though these fintech players use the popular suffix, bank, it does not mean they are anywhere close to being a bank in regulatory terms. “Currently there is no specific regulation of digital banks/neo bank in India. All Neo Banks in India are currently working as a marketing platform with traditional banks,” says Kapil Banwari, Founder and CEO, Fyp, a neo bank.
These digital banks can be considered as one of the many channels of product distribution which a bank usually has. “Neo-banks operate as a banking correspondent (helping in user acquisition and transactions) and technology service providers to the banks, and either are allowed under RBI regulations,” says Bhaskar.
Not under direct supervision of RBI
It is difficult for people to trust an entity with their money if it is not well regulated. Banks enjoy a high degree of trust primarily because accountholders know that they are under RBI’s regulation and are being regularly supervised by the regulator. However, neo banks or fintech companies are not directly regulated by RBI nevertheless, that does not mean that they are completely out of RBI’s clutches.
“These fintechs are indirectly under RBI’s purview. Nearly all neo banks enter into a partnership agreement, they are required to cooperate with external RBI audits. Depending on the financial product, RBI has direct or indirect oversight on the fintech,” Mahavadi.
As banks are well-regulated, and thereby, any entity that they partner with becomes their responsibility as well. “Neo banks are addressing the regulatory predicament by outsourcing their banking responsibilities to those with licenses, creating strategic partnerships with traditional banks and providing amplified services on behalf of existing ones. These associations are governed by the RBI’s Outsourcing Regulations, Business Correspondent Guidelines and Master Directions on Digital Payment Security Controls etc.,” says Godkhindi.
What are the services offered by a neo bank?
“Basic banking products like savings account, debit/ credit cards, loans etc. can be sold by neo-banks with relevant partner in the background,” says Bhaskar.
However, most of the digital banks have limited focus area and are working on their unique specialties when it comes to product and service offerings. “In the current ecosystem, neo banks are currently quite divergent in the products and services offered. In fact, we haven’t heard of any neo bank that offers the full suite of traditional banking products-there are a few that offer only deposits and FDs while others are more focused on credit products,” says Mahavadi.
What a neo bank does not offer
As these digital banks are not allowed to operate like a bank, there are many banking products and services they cannot offer. “Neo-banks cannot accept deposits or offer lending products on their own books. Hence some FinTechs have a non-banking financial company (NBFC) as their parent to engage in lending activities while most others partner with banks and financial institutions,” says Avinash Godkhindi, MD and CEO, Zaggle, a neo bank.
There are other third-party products which is currently out of the product bouquet of most of the digital banks. “Certain products require licenses e.g. to sell Insurance you need license from IRDAI, to sell Mutual funds you need license from SEBI and thus unless neo-bank has the license to sell these products, they can’t engage in the activity,” says Bhaskar.
However, going forward things could change as and they can emulate the entire retail banking system.
Innovative saving and investment products by digital banks
These digital banks have also brought in a lot of innovative products which appeal to different needs of customers. These include:
Niyo is India’s first 2-in-1 Digital Savings + Wealth account. The savings product provides 7% interest rate and zero forex markup, Wealth lets user invest in zero commission mutual funds. Niyo, also has a feature called ‘Invest the Change’ which allows users to convert their spare change change into investments.
There is also an app that comes with an artificial intelligence-based digital financial assistant called Ask.Fi offered by Fi, a digital bank. It brings a voice-enabled search and finance tracking tool to the user’s fingertips. Users can link other bank accounts with Fi through the Account Aggregator framework to get a comprehensive view of their finances.
Fi has also a feature called Jars where users can categorise their savings using ‘Jars’ (smart and fixed deposits) for various goals like saving for a trip or a new phone. These savings earn 5.1% interest per year. Moreover, they can also have some ‘FIT’ Rules to inculcate mini saving habits. FIT rules automate micro-transfers into jars based on customisable rules like – ‘When I order food online, put aside Rs 100 in Goa trip jar’. This helps getting over the inertia to save without going all out on cutting down expenditure.
Dinero has a mix of credit and investment products that allow users to set financial goals and help them build healthy financial habits to achieve them (while rewarding them for doing so). Users can partly invest and partly borrow to meet their goals faster. Rewards are given in the form of fractional digital gold instead of a typical cashback.
Small ticket credit products
Most of the credit products offered by these banks are focused on people who are new to credit or who are underserved by the existing banks. “Neo banks owing to their superior and effective use of advanced technologies are better placed to provide customised, small ticket loans to these customers. These customers would be gig economy workers, blue / grey collar workers and tech savvy millennials among others,” he adds.
These small credit products have higher appeal among the tech savvy people. “Buy Now Pay Later or UPI-based credit products are attracting young digital natives who prefer digital commerce and a seamless checkout experience. Typically, small-ticket credit products are quite attractive for urban millennials in Tier-1 and Tier-2 cities. Additionally, the college-age Gen Z generation is one of the biggest customer groups for small-ticket credit products,” says Mahavadi.
How the KYC process impacts your banking with a digital bank
The approach towards KYC is largely driven by the partner bank in line with their compliance framework. Most digital banks rely on digital combination of PAN and Aadhaar infrastructure to do the KYC. “Fi verifies the PAN card and Aadhaar details submitted by a user while registering on the app against government databases. As an additional security step and to prevent any fraud, Fi does a video-based check to verify that the person opening the account is the same person whose documents have been submitted. This is powered by machine learning, and usually does not require human intervention,” says Gwalani.
Aadhaar based quick mini-KYC: If full KYC is not possible the quickest way to start digital banking is to do a minimum KYC using Aadhaar. “Usually doing a full-KYC of a customer is a pre-requisite for complete access to a banking product or a service. If a customer does not want to complete a full KYC, they can opt for a limited digital Aadhar based verification but there are certain restrictions that follow such as transaction limits and deposit limits. KYC processes are fully digital for most of these banks/financial institutions,” says Mahavadi.
KYC based restrictions: There are many limitations on the kind of transactions you can do unless you go for full KYC. “Initially, a minimum KYC is done, and customer cannot load more than Rs 1 lakh in their account. Further, there are restrictions on the transactions as well,” says Bhaskar.
Full KYC must within a year: At the time of opening the account you may get some concession with KYC however there is a time limit within which you do not comply with full KYC requirement. “A user whose documents are not found in the Central KYC registry is initially onboarded under minimum KYC which can be upgraded to full KYC immediately or within a year. A full KYC verification involves a three-minute video call within the app with a representative of Fi’s bank partner,” says Gwalani.
Account freeze without full KYC: If you fail to comply with full KYC requirement within this time limit not only the transactions will remain restricted, but your account can be frozen. “Minimum KYC users can maintain a balance of up to Rs 1 lakh, deposits of up to Rs 2 lakh and the account is frozen after a year. There are no such limits or expiry for full KYC users,” says Gwalani.
Quick way to unfreeze your account: “The customer can quickly convert to a Full KYC customer and remove all restrictions by scheduling offline KYC or through Video KYC. We also leverage CKYC to expedite the KYC process,” says Bhaskar.
Original source: https://economictimes.indiatimes.com