Neo Banking and Enterprise Risk Management (ERM)

Neo banking is a relatively new concept that has grown in popularity in recent years. They are digital-only banks that have no physical branches. Their aim is to provide a unified banking experience via mobile apps and web interfaces. The adoption of the neo-banking concept accelerated due to the COVID-19 pandemic, as consumers increasingly sought online banking services to mee their needs, in response to the prolonged lockdowns and social isolation. Global adoption of digital banking also saw a 72% increase, driven by the pandemic. (Business World and Retail Banker, 2022)

The Global Scenario

The global neo-banking market size is projected to reach $333 billion by 2026, growing at a CAGR of 46.5% from 2021 to 2026 (MarketsandMarkets Research, 2022-23). Neo banks globally are on track to reach 394 million customers by 2023, up from 33 million in 2017 (Chartis Research and EY estimates, 2022). This represents a compound annual growth rate of 46%. Additionally, they are expected to hold over $300 billion in deposits by 2023, up from $20 billion in 2016 (Business Insider Intelligence, 2023). The number of neo banks operating worldwide had grown from just a handful in 2010 to over 200 by the end of 2020 (S&P Global, 2022). In the United States, the number of neo banking customers was expected to reach 40 million by the end of 2022, up from 26 million in 2020 (Cornerstone Advisors, 2022). Similarly, in Latin America, neo banks are projected to reach 60 million users by 2025, up from just 1.6 million in 2019.

In Europe, the neo banking market is dominated by a few large players, with some of the most well-known neo banks being Chime, Revolut, N26, Monzo and Starling Bank. Chime, for example, reported 12 million accounts in early 2022, while Revolut reported ~18 million users, as of December 2022. (Informa, 2023, and The Financial Brand, 2022) Europe is currently the largest market for neo banks, accounting for more than 60% of the global neo bank customers. The UK is the largest European neo bank market, with over 20 million customers. (Accenture, 2022).

Asia is also emerging as a significant neo banking market, with China and India leading the way. The number of neo bank customers in China is projected to reach 300 million by 2025, while neo banks are expected to reach a market size of $6 billion in India by 2025. (Statista Reports, 2023) Globally, 80% of consumers are willing to use digital-only banks for at least one financial product. (Deloitte, 2023)

Neo Banking in India

Neo banking is a relatively new concept in India, with 30+ firms offering such services. Some noteworthy names are Razorpay, Niyo and Open, which have collectively raised $1+ billion in funds, as of December 2022 (KPMG Insights, 2023). These banks are targeting the millennial and Gen Z populations, who are tech-savvy and prefer digital banking services. The key offerings include virtual debit cards, instant account opening and personalised savings options. Many neo banks in India have partnered with traditional banks to offer banking services to customers. For example, Niyo has partnered with IDFC First Bank, while Open has partnered with ICICI Bank.

Neo banking startups in India have garnered significant funding in recent years. For example, in 2021, Niyo Solutions raised $35 million, while Open Financial Technologies raised $100 million (TechCrunch, 2022). The neo banking industry in India is expected to reach a market size of $100 billion by 2025, with a potential consumer base of 150 million. (RedSeer Consulting, 2023)

Neo banking and AI work together to identify the customer’s pulse and offer the most relevant solutions. Although insights are being gathered from historic information, simulation are likely to have much of an influence, given that historical insights aren’t the best indicator of how people will behave in the future. The development of tailored solutions would result from the synthesis of insights obtained by algos and futuristic vision imbued with client insights data. Through an array of outlets, people are now taking personal money management more seriously and are more anxious about saving for retirement. So, careful planning is essential.

A smart products/services provider would not attempt to resolve all problems of a client organisation. Rather it would concentrate on building some of the core competency on its own and leverage the best practices through joint GTMs. Neo banking provides plenty of opportunities to pair up with pertinent partners and get the best of custom-fit offerings to address the needs of a neo banking client. Insights, blended with historical performance data from customers and AI-enabled projection of a customer’s future behaviours, have proved highly useful in identifying the most suitable financial solutions.

Unique Risks and How to Manage Them

Neo banks face a unique set of risks that traditional banks may not encounter. For example, they rely heavily on technology to deliver their services, making them vulnerable to cyber-attacks and system failures. Also, they need to cope up with regulatory and governance frameworks as stipulated by the respective central bank. Additionally, neo banks may lack the capability and resources of traditional banks when it comes to compliance, regulation and risk management. The author would suggest the following to have a sturdy and practical ERM framework.

Neo banks must incorporate a robust ERM framework that is tailored to their distinctive specs to control these risks. This framework should ideally include:

  • Recognition of the risks they are exposed to, including credit, market, operational, fraud and cyber risk. They will need to create strategies to minimise these risks and rank them according to how they might impact the firm.
  • Continuous assessment and evaluation of their risk exposure and modifying their strategy as necessary. This involves conducting stress tests to assess the effects of various situations and routinely assessing important risk indicators.
  • Well defined governance and control mechanisms must be established to guarantee that risk management is integrated into daily operations. This includes creating risk committees, selecting risk officers, and implementing risk management policies and procedures.
  • Complying with all relevant regulations and laws. This includes understanding the regulatory environment in which they operate, keeping up with regulatory changes and ensuring that their internal policies and procedures are in line with the latest regulatory framework.
  • Establish clear guidelines for communication and reporting to ensure that all stakeholders are aware of the organisation’s risk exposure and the steps being taken to manage it. This includes regular reporting to the board of directors and external stakeholders, such as regulators and investors.

In conclusion, neo banks are a promising development in the financial services industry, but they face unique risks that must be managed effectively. By adopting a comprehensive ERM framework, coupled with the power of analytics and AI, neo banks can identify, assess and manage these risks and ensure their long-term success.