Neo Banks: Threat to Traditional Banking System

Research
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Table of Contents
Chapter 1: Introduction....................................................................................................................3
1.1 Background to the problem....................................................................................................3
1.2 Background of the study........................................................................................................4
Chapter 2: Objectives of the study...................................................................................................6
2.1 Problem statement..................................................................................................................6
2.2 Objectives of the study...........................................................................................................7
2.3 Hypothesis statement.............................................................................................................7
References......................................................................................................................................12
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Chapter 1: Introduction
1.1 Background to the problem
Technological advancements are resulting in rapid changes within the banking industry. Banks
are trying their best to use disruptive technologies in a way of changing customer behaviors
through targeting the transparency, customer service and customer convenience and so on. Banks
change their operational as well as business models with the changing expectations and
behaviors of customers. This dynamic aspect of banking industry has given rise to new business
models named neo banks. Hopkinson, et al., 2019, explained that neo banks define as the digital
banking firms offering financial services through digital platform such as payment transfer,
banking account transactions and personal & business loans and so on. Substantial growth of neo
banks is fuelled by low-cost business model. There are many perspectives through which neo
banks are challenging the traditional banking systems and making them different from each other
(Hopkinson, et al., 2019). Neo banks do not have any physical location or branches for providing
financial and banking services. These banks have aimed to offer the new banking evolution age.
Such type of banks reaches directly to customers through personal computer and mobile app
platforms without having physical branch networks. These systems have mostly affected and
challenged the traditional banking models. Neo banks drive traditional banking to integrate
innovation in their business models and financial services they offered. Digitalization has driven
high pressure to banks for meeting customer expectations and requirements. Due to this,
traditional banking has become highly burdened with such pressure in context of digitalization.
According to Barker, 2019, the substantial growth of neo banks has been largely contributed by
the customer behavior and preferences. Neo banks offer wider convenience, excellent services
and greater customer experience than the not-so-digitalized banking systems. Digitalization
brings wider convenience which is preferred by all the customers. Neo banks eliminate the need
of standing and waiting in a long queue or visiting far-distanced banks requiring time
consumption (Barker, 2019).
Legacy system of traditional banks has added to the vulnerability of customer shifting towards
neo banks. Their legacy system features with high-cost maintenance and rigidity for
implementing changes. The cloud-native and digital platforms of neo banks are grabbing
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traditional banks’ customer share through the adoption of digital-first strategies. Due to these, the
traditional banks are fighting with their head-to-foot efforts for bringing their customers back.
Neo banks are disrupting the banking sector of the world (PRITCHARD, 2019). They have
brought innovation in key areas of customer experience, transparency, money management tools
and low-cost structure. Neo banks have become prominent mainly in few major markets such as
Australia, Europe and the US. The cause behind the emergence of neo banks has identified as
bringing transformation in banking industry. The neo banks are a step ahead in the global
banking sector due to their profitability fuelled by low-cost business structure (Hastie, 2019).
With the rise of new banking platforms such as neo banks, banking functions have gone beyond
paying off credit cards, invoicing of an item cost and paying off the debit cards and so on.
Traditional banking systems have remained behind the neo banks due to the transformation of
the way of making and receiving payments regarding goods and services by people (Saksonova,
and Kuzmina-Merlino, 2017). Neo banks cater the needs and wants of customers who seek
beneficial alternatives of big banks. They offer an alternative to customers who are fed up of big
banks and their tiring services. Neo banks have created several problems to traditional banking
systems along with driving them for innovation. The legacy technological system of neo banks
has reflected a major shift in the banking and financial industry of the global market. SETH,
2019, explained that as per the previous research, the projections show an immense growth of
45% from 2017 to 2025 in the neo banking sector.
1.2 Background of the study
This research is conducted for analyzing neo banks pose a serious threat to traditional banks. The
thesis defines the research problem as neo banks as a killing factor of traditional banking system.
To some extent, it would be wrong to refuse the validity and accuracy of this thesis due to
shifting customer behavior towards neo banks. It has been identified that the performance of
traditional banks is affecting due to the substantial growth of neo banks. Neo banks have created
barriers to the growth and success of traditional banking system due to the convenience and
experience it offers to customers (Ketterer, 2017). Digitalization has contributed to these barriers
and neo banks have overtaken the traditional banks.
This research will analyze the root causes of superiority of neo banks over traditional banking
system. Previous studies have researched how neo banks are killing the traditional banking
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