Technology has disrupted the financial sector to the extent that a new word – Fintech – needed to be coined. India, given its high proportion of early tech adopters, welcomed fintechs with open arms. That’s what drove digital payments to such an extent that some of us don’t find the need to carry our wallets every time we step out. The success of this is also highlighted by the transaction volume of UPI payments reaching a whopping 83.75 billion in 2023.

This backdrop made it conducive for neobanks to flourish in India. These financial institutions have solely an online presence without any physical branches. Some of them work independently, while others have formed partnerships with traditional Indian banks. Neobanks are focused on one key aspect – to leverage its technological prowess to provide the best consumer experience in banking services. With lean business models, neobanks exhibit the agile to adapt quickly to changing customer needs.

How Neobanks Are Shaping the Future of Banking in India

Neobanks Are Changing How People Banks in India

Bypassing the cost of setting up brick-and-mortar branches allows neobanks to begin and run operations at a much lower cost than legacy banks. This also enables them to offer their services at lower fees to customers. Being completely online, their barriers to entering new markets are negligible.

The tech-driven, mobile-first solutions provided by neobanks are preferred by the digital natives. India has a high share of digital natives, with Millennials and Gen Z comprising more than 50% of the country’s total population, which is much higher than the global average.

Neobanks are revolutionizing the way Indians experience banking. Leveraging the latest technologies, neobanks offer innovative solutions to make banking seamless for customers. These may include biometric logins, AI financial advisors, chatbots to answer queries, payment tracking tools, budget creation, and real-time notifications.

Neobanks have made banking affordable and accessible, driving financial inclusion. Apart from lower fees, they have low balance requirement and offer transparent pricing. They also have lower documentation requirements and provide instant credit to consumers, gig workers and small businesses.

Legacy Banks are Forced to Adapt

Neobanks have pushed the boundaries by making banking more digital, inclusive and customer centric. They have also caused a radical change in customer expectations.

By leveraging their brand equity and large customer base, traditional banks are making efforts to fortify their competitive positioning by investing in digital transformation initiatives. They are upgrading their digital infrastructure by migrating data systems to the cloud to enhance operational agility.

Legacy banks have also started investing in innovative digital solutions. For instance, the State Bank of India launched SBI YONO (You Only Need One), a digital banking app that is positioned as a one-stop solution for banking, investment, bill payment, insurance, and more. The app users can also apply for preapproved loans and shop online.

Some traditional banks are collaborating with fintechs and neobanks to offer seamless banking services to customers. Neobanks need the support of traditional banks to gain credibility and leverage their licenses.

What Lies Ahead for the Banking Industry?

By prioritizing customer-centric experience, neobanks can focus on hyper-personalization to tailor services to an individual’s needs using AI-driven data insights. Datapoints like location, age, income stability, employment history, spending habits, and active loans can be used to determine a person’s investment propensity, to suggest the most suitable products for them. Spending habits can also be analyzed to determine whether they spend more during specific months.

AI-powered voice banking is also evolving rapidly. This technology allows users to use voice commands to access banking services, like checking their account balance, transferring funds, paying bills, and more.

Given the rise in the number and sophistication of cybercriminals, security is likely to be a top priority for neobanks. Developments in AI are now focused on identifying patterns and anomalies to detect cyberthreat.

Another area of tech advancements could be using blockchain as a disruptive force in the banking industry. This is already transforming cross-border payments, increasing the speed and reliability of identity verification, and making CBDCs (central bank digital currencies) a reality.

IoT (Internet of Things) could be the next area of development, by allowing the seamless integration of home appliances to payment apps. Don’t be surprised if your fridge can someday order milk and bread, and even pay for them, while you’re busy at a meeting!