Introduction to neobanks and open banking

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Of late, the talk on neobanks has started to increase multifold. Many financial experts seem to have conflicting opinions about these banks and their operations. While some believe that neobanks are the next big financial revolution, others don’t seem to take them seriously at all. One of the reasons for financial experts having such wildly differing views has to do with the fact that neo banking as a concept is something that’s fairly very new.

In this chapter, we’re going to be looking at the concept of neobanks and how they’re bringing about a change in the financial landscape. And while we’re at it, we’ll be touching upon the concept of open banking as well. Okay so, without any further ado, let’s start with the neobank meaning.

What is a neobank?

A neobank is essentially a bank that operates entirely online. What this means is that it has no physical branches whatsoever, and all the banking operations are carried out online through various digital channels.

Since neobanks provide their services through digital means, many tend to equate them with digital banks. However, they’re not one and the same. Digital banks are basically online subsidiaries of existing physical banking corporations, whereas neobanks exist purely online - with no physical presence.

How do neobanks operate?

There are two primary types of neobanks in existence - neobanks that have a banking licence and neobanks that don’t. In the U.K and other countries, there are special regulations designed to provide these neobanks with restricted banking licences.

Neobanks with a banking licence operate just like regular banks. This means they are allowed to accept deposits from customers too. On the other hand, the neobanks without a banking licence are not permitted to hold customers’ deposits. And so, they partner with traditional banks to provide banking services like deposits and withdrawals.

In India, the Reserve Bank of India’s regulations and guidelines mandate the existence of physical branches for a banking licence. Therefore, none of the neobanks in India have a banking licence of their own yet. So, they are not permitted to hold customers’ money. To circumvent this issue, almost all of the major neobanks in India have partnered with traditional banking institutions to provide regular banking services to their customers.

What are the advantages of neobanking?

Neobanking gives users many advantages, all of which make payments and transactions much easier for them in general. Here are some benefits of neobanking.

  • Hassle-free account creation
  • Seamless international payments
  • User-friendly interface
  • Smart reporting
 

Okay so, what is open banking then?

Now that you’re well versed with the neo banking meaning, let’s take a look at the concept of open banking.

Open banking is a practice that essentially gives third party entities access to and control of consumer banking data, transaction data, and other financial data. It uses APIs, or Application Programming Interfaces, through which a third-party entity can access and control the banking and financial data of a consumer. Having trouble understanding this concept? Here’s an example that can help you out.

Let’s say that you have a savings bank account with ICICI Bank. Now, in order to access your banking data, control your bank account, and effect fund transfers, you would have to either use ICICI Bank’s mobile application or log into ICICI Bank’s netbanking webpage, right? Open banking tends to do away with the need to use ICICI Bank’s infrastructure. In fact, with open banking, you can use any third-party mobile application to access and control your ICICI Bank account. Sounds neat, doesn’t it?

Wrapping up

The concepts of neo banking and open banking are relatively still in the nascent stage in India. However, their potential is immense. With an increasing number of individuals transitioning to digital channels for their banking needs, neo banking and open banking are likely to gain even more traction in the near future. Simultaneously, digital payments are also picking up pace. Head to the next chapter to learn more about payment innovations in India.

A quick recap

  • A neobank is essentially a bank that operates entirely online. 
  • What this means is that it has no physical branches whatsoever, and all the banking operations are carried out online through various digital channels. 
  • There are two primary types of neobanks in existence - neobanks that have a banking licence and neobanks that don’t. 
  • Neobanks with a banking licence operate just like regular banks. This means they are allowed to accept deposits from customers too. On the other hand, the neobanks without a banking licence are not permitted to hold customers’ deposits. 
  • Open banking is a practice that essentially gives third party entities access to and control of consumer banking data, transaction data, and other financial data.

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FAQ'S

As of March 2021, there are as many as 10 neobanks currently operational in India.
Banking services like deposits and withdrawals, loan services, accounts and receivables management, invoicing, payment scheduling, and tax payments are a few of the services provided by neobanks.
Since neobanks operate completely online with no physical infrastructure, they incur lower operational costs, which are then transferred to the customer in the form of lower cost structures.
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