What Prospects for Neobanks?

EghtesadOnline: The Central Bank of Iran is to authorize the first neobank by the March yearend but digital banking experts doubt the readiness of the banking industry to admit fully digital players.

News ID: ۷۸۶۵۵۵

29 June 2021

Last September the CBI deputy governor for innovative technologies said one or more neobanks are expected to start operation in 2021. The plan apparently is being assessed by the CBI’s executive board.

Neobank is a new type of bank available to customers only through mobile applications and personal computer platforms. These institutions are reinventing the practices and processes associated with traditional banking.

Financial services offered by the innovative lenders, mostly via a mobile app, are in accord with customers' needs mined largely from data on consumer behavior.

Offering the latest in innovation and access, these entities also meet the needs of underserved market segments such as the unbanked and underbanked, immigrants, freelancers, independent contractors and small businesses.

However, experts believe that introducing neobanks in Iran is a complicated process. The Way2pay website discussed the issue with experts last week.

The majority said that the CBI should first ease regulations for  the operation of lendtech and electronic wallet services, as it would help institutionalize the provision of innovative services by non-banks.

Nima Amirshekari, digital banking expert and an advisor to the CBI, said given the challenges the banking network is facing it would be hard for the regulator to focus on innovative services. Thus, regulating lendtech services or e-wallets would be more reasonable for now.

LendTech uses complex algorithms to match creditors with borrowers. It does this matching according to the specifications of each party. The platforms assess borrowers according to their credit scores.

Iran’s banking sector also seems to be unaware of the underlying notion of neobanks as they have stuck to their old and traditional ways for years.

Amirshekari said the main difference between traditional banks and neobanks is in business plans. "A traditional banking business plan focuses on attracting deposits, extending loans, making transactions, issuing guarantees," he said. "Neobanks, however, focus on integrating banking services with services offered by other sectors such as insurance, stock market, or currency exchanges to find and offer a different solution to their customers."

Hamed Ghanadpour, a banking expert, said big tech companies are capable of running neobanks but the CBI is unlikely to accept them. He did not elaborate.

Iran’s banking sector has visibly lagged behind innovation and technological advancement seen in most countries. However, some banks are gradually embracing advanced methods to offer better and superior services. An estimated 30-35 million people use e-banking services in the country.

Vahid Siami, banking expert, said neobanks can help improve and expand financial access and financial inclusion. "Enhancing financial access is a priority of central banks. The CBI needs to do likewise.”