The emergence of virtual banking

Introduction

Globally, the neo-bank market has been growing at a really fast pace. From an $18.6 Billion in 2018, it now has a projection to reach a valuation of approximately $578 billion by 2027, at a compounded annual growth rate (CAGR) of about 46.5% from 2019 to 2027. From 6 only start-ups before 2010, the number has now crossed 100 and counting as on today with lion’s share coming out of Europe at about 50%, followed by US (almost 30%), and Asia (about 9%). While in many countries (e.g. Germany, UK, Australia, Japan, China, etc.) neo-banks operate as a full-fledged independent bank, In India they operate in partnership with traditional banks (as RBI regulations restrict operations of a 100% Digital Bank).

To gain more insights on ‘the emergence of virtual banking’, in conversation with Aveek Chaudhri, Digital & Fintech Thought Leader.

Top 6 factors for the emergence of virtual banking

Over the last decade, we have witnessed a phenomenal shift taking place at a dizzying pace in the banking and financial services landscape:

  1. Exponential transmutation of consumer behavior and expectations
  2. Creation of new customer segments
  3. Evolution of disruptive products/services on digital platforms
  4. Rise of innovative business models
  5. Entry of new non-banking fintech players (neo-banks)
  6. Creation of Banking as a Platform or Banking as a Service.

Now the entry of these players had not only brought about a great disruption in the ecosystem but also have added a whole new dimension to the game. Most of these players started off as Fintech firms before moving on to become a neo-bank. Leveraging disruptive technologies, platform-centric approach, low cost operating/infrastructure model, agile & lean business & operating model, powered by APIs and data-driven approach, neo-banks have been able to cut through the maze to reach out to the consumers.

With each day, the way value exchange takes place in our ecosystem, becomes more and more digital. From doing business to performing job, from issuing payments to managing wealth. You name it. There are a lot of problems in the ecosystem and neo-banks are solving them one by one.

4 accelerators to digital transformation spree in the banking industry

Digital transformation is a critical point of focus for most banks even before we stepped into a COVID-19 World. However, in the current scenario with travel and direct face-2-face interaction out of the picture and social distancing in play, few things have emerged:

  1. 36% rise in demand on part of the customers for digital Services
  2. Identification of new problems existing within the ecosystem that were hitherto unattended/unidentified.
  3. New models of engagement and interactions that market players can adopt (both Institutions & fintechs/neo-banks)
  4. Understanding of customer expectations and needs in a Post-COVID World

All these factors have led to an increase in the rate of acceleration: development; adoption; and implementation of Digital Initiatives on part of both traditional banks and neo-banks.

Virtual banks are categorized by niche, customized products and services

Many products and consumer segments exist in the market. For example, GenZ/Millennials, in the Self-Employed/Professionals/Salaried segment working in BlueChip firms. Then, MNCs/SMEs/ MSMEs spread across Urban/Semi-Urban/Rural geographies in multi-industry sectors. Based on this picture, multiple combination sets can be identified. What is interesting is that each of these sets has a different set of problem statements and gaps. These can be business banking, lending, working capital, wealth management, foreign remittances, A/c opening, card Issuance, card, and loyalty management, etc along with other non-banking but value-added services like tax management, data/business intelligence, enterprise accounting, payroll, employee experience, travel management, etc.

A neo-bank (especially in Indian Context) identifies gaps or problems specific to a product/service category or in a customer segment; solves them and then offers them to customers in collaboration/partnership with traditional banks on top of the bank’s core products in a separate or bundled fashion.

4 versatile virtual banking business models

The business models of neo-banks are quite different than those of traditional Banks. They have a wide range of options depending on the type of model, product, a segment they operate in.

  1. Simple subscription-based models
  2. Multi-layered subscription models
  3. Fee-based income for VAS (from customers) model
  4. Revenue sharing (with partner banks) model

Of course, like banks, they also earn from the money flowing in and money lending out. From a differentiation point of view, neo-banks offer a superior customer experience. It is simple, convenient & hassle-free. An ‘Uber’ user experience and an affordable cost/price structure for products and services provided.

Open Application Programming Interfaces (API) is the driving force for neo-banks

APIs can be considered as one of the key factors driving the success of neo-and virtual banking. The emergence of APIs brings a transformative shift in all industries, while it entwines and integrates with our way of life. From FMCG to education, from e-Commerce to banking or from travel to entertainment, APIs are everywhere today. While APIs exist for quite some time in banking, however, the rise of open APIs is a new change.

The APIs, which a bank or financial institution opens to the public. Further, it can be used by third-party developers/players to build products/services and brings about transparency, convenience to customers can be termed as Open APIs.

Topic:

Neo Banking

The best financial services are based on customer behaviour.

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