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The Rise of Challenger Banks And Digital Transformation


By: Kishan Sundar

The year gone by propelled fundamental changes in customer behavior. As customers sought safety in the confines of their homes, their adoption of digital technologies rapidly accelerated. From videoconferencing, peer-to-peer payments, online banking, et al, customers turned to digital banking in place of physical banks for their financial needs. In response to the pandemic, several measures were also considered to reduce physical contact and make contactless banking the new norm. As a result, non-banking finance entities such as neobanks began placing services on the fingertips of every customer with a strong focus on hyper distinctive approach for customer convenience.

Transformation of the banking landscape

Traditionally, India has been a cash-based society with more than 190 million Indians not having a bank account since 2017. The journey from ‘cash’ to ‘cashless’ was predominantly driven by strong government policies such as ‘demonetization’ and ‘Digital India’. The onset of the lockdown only propelled this behavioral change, supported by investment in new technologies and the rise of fintech players in the market.

Today, neo banks have made it possible to transact, create accounts, apply for loans, and even additional services such as budgeting, within a few clicks from our phones, from anywhere, at any time.

Digitalization after all, is an evolution, and transformation has become essential for banks to future proof their business model.

Neobanks in a snapshot

Neobanks leverage banking APIs and pipes to offer customers banking services that range from account facilities to financial transactions. These challenger banks do not have any physical real estate and offer their services through mobile or digital mediums. There are primarily two types of neobanks – with a banking license or without. In the absence of a license, the former type of neobanks partner with traditional banks to provide services, while the latter type operates independently.

Despite the advent of these challenger banks, a large section of customers continues to rely on traditional banks for their financial needs. However, the introduction of AI among challenger banks coupled with the pandemic served as a game changer in the way people avail banking services.

Neobanks versus digital banks

Neobanks are commonly mistaken for digital banks. Albeit both challengers offer similar online banking services, neobanks exist online only. Digital banks on the other hand are online counterparts of an existing banking player.

Let us explore how neobanks are gaining acceptance, and the way they are going to change how banking services have been perceived so far.

Banking’s new frontier – easier, faster, more convenient

Customers nowadays prioritize convenience above other consideration sets. They are happy to avoid arduous paperwork or long queues to avail banking services. The new age customer prefers banking transactions that implement paperless banking and automated backend services, making the experience simpler and more efficient. As the financial services sector involves handling extremely sensitive data in large capacities, implementing automation also allows enterprises and organisations to meet their objectives with maximum productivity as there is limited worry of misplacing information and data is stored on the cloud for the employees to access.

A few advantages that enable neobanks play a crucial role in making the banking process simpler, convenient, and more meaningful for customers include:

  • A focused customer base that includes tech savvy millennials, MSMEs, et al, who are not habituated to traditional ways of banking
  • Lower capital investment because of lack of physical infrastructure
  • Limited fees/charges and proficient customer acquisition
  • Cloud-based infrastructure
  • Business banking solutions include a variety of services such as payments, receivables, budget and spend management.

Empowering SMEs and MSMEs

MSMEs, widely known as the ‘backbone of India’s economy’ have struggled with access to finance for years. These small businesses typically rely on personal savings or unauthorized money lenders to manage their finances. The inception of neobanks addresses this struggle at the core as they provide advanced financial solutions to assist MSMEs. Where traditional banks find it difficult to change their legacy technology, neobanks are nimble and can provide easy banking solution compliance.


For the new age customer that wants a convenient, easy, and hassle-free solution, neobanks make for an apt choice. With 24/7 facilities, real-time solutions such as fund transfers, personalized services as per income and spending habits, neobanks clearly resonate with customers.

Enhanced security

The finance sector is perhaps the most data-sensitive sector across the globe, which means the players of this industry need to tighten their reins on their cybersecurity measures faster and in a more robust manner than anyone else. With the heavy dependency on digital banking, this need is stronger today than ever. To address this, neobanks have several redundancies built-in along with advanced role based access control and two-factor authentication. These anticipate and avoid ransomware attacks in their applications, thus empowering the customer to use their applications in total privacy.

Challenger banks such as neobanks also provide competitive pricing, financial inclusivity, and clarity of personal finances. The current year will witness the rise of hybrid banking, a collaborative effort between neobanks and established banks following the RBI guidelines. This will allow neobanks access to a much larger customer base. It will also enable financial organisations to modify these applications to specific individual preferences and requirements, thus allowing financial establishments to innovate and grow at faster speed.

Neobanks in India

Neobanking is still in its nascent stage in India. Globally, the neobank segment is a decade old with a global market that is expected to generate a whopping USD 394.6 billion by 2026. In India, this segment is quickly scaling despite aggressive lags such as fickle customers and lack of regulations to enable the segment’s growth. For example, the Reserve Bank of India (RBI) has not allowed a 100% digital banking model for India, yet. This lack of regulation forces neobanks to resort to partnering with traditional banks.

One of the challenging factors to adopt neobanking will be acquiring a banking license. Neobanks are usually established and operated by non-banking financial institutions or FinTech that rely on a banking partner to deliver banking services.

The rapidly increasing adoption and reliance on digital payments is driving neobanks towards becoming an integral part of the financial ecosystem. However, external dependency, partnership obligations, and regulatory bottlenecks could heavily affect the adoption of neobanking.

It is therefore imperative for traditional banks to work in collaboration with neobanks to enhance their own processes and services.

(The author is Senior Vice President, Digital Business Unit, Maveric Systems and the views expressed in the article are his own)

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