Anushruti Singh
More than four months have passed and it appears that the pandemic predictably will cause further harm. Considering the current scenario, situation can only be better if we learn to adapt with the crisis. Digital banking is one such solution that has contained virus as well as has kept the economy running.
It has also pushed a new trend called neobanks in India which are virtual branchless banks. Vinay Bagri, Co-founder and CEO of NiYo bank, one of the prominent neobanking players in India opines, “COVID-19 has brought a disruptive impact on the banking and financial services sector and push towards neobank is one of them.”
The pandemic has although posed several challenges but it also has given way to multiple long-term opportunities due to behavioral changes in customers. Neobanks are still called a niche segment but COVID-19 crisis has brought these at par with traditional banks in terms of popularity.
According to a recent survey conducted by McKinsey & Company on retail bank customers in France, Spain, Italy, Germany, Portugal and United Kingdom, online banking activities have registered a stark increase in all of these countries. Moreover, digital engagements spiked 10 to 20 per cent in China and Italy. This was four weeks after the coronavirus began to spread.
Neobanks – Explanation and Prerequisites
Neobanks are similar as digital banks yet differ a little bit in utility. They possess digital operating business models, are a mobile-app based utility, and provide similar services as that of traditional banks. However, the only difference is that a digital bank is an additional service or subsidiary from a recognised financial firm, while a neobank is an exclusively online entity.
It also infers that neobanks work without any offline banking branch. But, it does not mean a neobank has no office independently or is never in partnership with a traditional bank. Further, neobanks still face a big operational constraint in India as Indian banking systems doesn’t grant virtual banking license to any financial institution. Therefore, it doesn’t allow neobanks to hold customers money.
To adhere to compliance with the regulations, neobanks outsource their banking responsibilities with licensed banks. They hence create a substantial suite of low cost digital and assisted banking solutions. The services can be easily accessed on mobile and these can vary from opening accounts to making deposits or withdrawals.
For instance, NiYo has partnered with IDFC Bank to provide the underlying banking and payment infrastructure. Bagri says, “It is a symbiotic win-win proposition for both the fintech and the partner bank.” He further adds, “All neo-banks in India are powered by traditional bank partners at the backend. Hence, money deposited in a neo-banking account is as secure as it would be in a regular bank account.”
On the other hand, countries like Singapore and UAE has started rolling out digital licences last year.
Indian neobanking players suggest that RBI can also do that shortly. Talking on the current RBI stance on virtual license, Suman Gandham, Founder and CEO of Finin, another neobanking platform in beta testing advises, “The license should not be only for payments bank as neobank is much more than that. I think RBI is taking its time to amend the regulations on virtual banking. This will only help us in providing more services to customers.”
This concept was first started in United Kingdom after the financial crisis ended. It is now being adopted globally. Some the popular banks in this arena are Revolut, Monzo and N26. Indian Neobank players in the arena are Open, NiYo, Yono, Kotak 811, PayZello, Instantpay, Yelo, India Post Payment Bank, EzoBank, and Zeta.
Neobanks as a Beneficial Facility
A neo-bank provides the best of both worlds which is trust, safety and security of a traditional bank and agility, innovation, seamless user convenience from that of a fintech. “Neobanks are designed on virtual infrastructure. One of the advantages of neobanks is that these give seamless services and better digital experience to consumers than any other traditional banks,” says Gandham of Finin pointing out one of the positives of neobanking.
Citing another advantage of neobanks, Bagri adds, “When everything is digital, there is no need to stand in a long queue at a bank branch or fill out extensive paperwork.” Their services are similar to a traditional bank, but with enhanced personalized customer experience. A neo-banking account can be opened through a paperless and presence-less digital process that takes less than five minutes to complete.
In addition to that, round the clock customer service supported by chat-bots, real time payments with machine learning, artificial Intelligence (AI) enabled automated accounting, budgeting at the back end makes it more popular. Also, automated service features such as book-keeping, balance-sheet statements, Good & Services Tax (GST) compliance taxations, insurance, and loans are all just a single click away.
Further, easy to use APIs have made operating apps and conduct banking for mobiles users of all age groups easier. One of the significant advantage is that banking can be done anywhere or anytime with a good internet connection on the mobile. Moreover, identity frauds are rarely bound to happen with several inbuilt verification processes.
Scope of Growth and Trends Supporting Popularity
Started during last decade, digital-only trend has now become the new normal for people as they deal with pandemic related uncertainties. With closed banks and cash deprived ATMs, people are relying on cashless economy.
Capitalizing the opportunity, neobanks are scaling-up rapidly. A recent report by International Data Corp. (IDC) says that every three in five customers are set to adopt digital banking during the next five years in APAC region. According to Zion Market Research, neobanks are also likely to stack up to US$ 395 billion by 2026 globally.
Hence, India will always be a favourite spot for neobanks with the second largest unbanked population of 190 million people as per the World Bank’s Global Findex database. Furthermore, there is immense market potential with the pool of 63.3 million MSMEs in India which are keen to get digitised financially.
Just like small businesses, millennials, and gig economy workers are also prospective customer base for neobanks. A report by FICCI, EY and Nasscom reveal that India leads in the online labour market globally with 24 per cent share. Another report by KellyOCG states that 71 per cent of companies will hire more contract workers in next two years. Presently, the proportion of temporary workers is more than 20 per cent.
According to Bagri, idea behind neobanks for consumers is to have a bank on mobile phone. He says, “There is a huge untapped market potential for various neo-banks to thrive in India. This is because the consumer adoption of fintech in general and neo-banking in particular is picking up rapidly and traditional banks are also keen to partner with such fin-techs to augment their product and service offerings.”
Witnessing the growth scenario, neobanks are attracting investors despite the sluggish economy. For instance, former Co-Founder of Citrus Pay formed Amica which is set to launch in 2020. He has raised $24 million in seed funding for his new organisation. Some of the neobanks funded in 2019 include big names such as Yelo, Juno, epiFi, Jupiter Money, Ezoto, Walrus etc.
Furthermore, payment gateway Razorpay has forayed into neobanking with its platform RazorpayX. Despite economic instability at the moment, most neo bankers and aspirants believe that investors are looking for products that can make difference in the market. Walrus founder, Bhagaban Behera speaking to SME Futures tells that though investors are cautious about profitability in current scenario, they still appear open for the right idea.
He advises, “If someone has groundbreaking idea and which makes difference in the market, investors are open in giving them money.” The Bengaluru based neobanking startup Walrus in beta stage has clocked undisclosed amount of investments from Better Capital recently. Similarly, Gandham tells us that raising investments has been positive for Finin even during crisis.
He further adds that investors are keen on neobanks in present scenario and professes, “There are neobank startups raising handsome funds through investors. But while they are doing so, investors are also cautious. VCs are also looking at products and what difference they can create. Some funding firms are also in wait and watch mode for the success of new financial companies.”
Neobanks Funded in 2019-2020
Similarly, banks are also foraying in the field of neobanking to encourage consumers for digital transformation. One of the recent additions to this is ICICI bank. It has launched full-stack digital banking platform called ICICIStack offering nearly 500 services covering the full gamut of banking services.
Anup Bagchi, Executive Director, ICICI Bank believes that neobanks are the future of Indian Banking. He says, “We have been working on ICICIStack to offer customers all digital banking services from one single platform for past few years. In the wake of coronavirus outbreak, we have added a host of new services so that customers can experience the uninterrupted banking.”
Another physical financial institution, SBM Bank has tied with a hyper-local fintech startup PayNearby to build an open banking network. Anand Kumar Bajaj, MD & CEO, PayNearby remarks, “We will have more than 20 lakh new age retail partners on ground. They will be sourced in a phased manner. The multi-modular, scalable architecture will allow us to easily plug-and-play different partners. Lastly, APIs will create an ecosystem which will be a great addition to banking facilities.”
Trustworthiness – A Primary Concern
Neobanks are focussed on convenience and enhanced customer experience. Therefore, each one of them keeps in mind requirements of its niche customers. For instance, Open helps SMEs in operating various functions seamlessly; NiYo covers blue collar workers; Finin helps users to simplify manage, save and invest services; and Walrus takes care of financial needs of teenagers.
Increased internet penetration and mobile users has boosted the market potential for neobanks in India. Further, these digital banks eliminate the need of physical presence for banking. This promptly addresses the need for safety and convenience during this pandemic.
Neobanks in India have build services in partnership with traditional banks and have employed various layers of security to ensure our money and personal details are safe and protected. However, it is crucial for users to follow recommended safety measures while conducting any transactions since this is an app-based banking.
It is true that neobanks provide us services of banks such as trading, lending, and fundraising on a single mobile app. But along with the comfort, it also brings the risk of exposing your hard-earned money to cyber-hackers. According to Shomiron Das Gupta, Founder and CEO of DNIF, a cybersecurity provider, though neobanks are more inclined towards providing functionality and features of a bank, they should invest more in security infrastructure.
He further adds that digital banks are slowly gaining momentum in India, but we have to be equally vigilant about their security. He advises, “Cyber threats are constantly evolving and so are cybersecurity measures to thwart them. As neobanks in India are partnering with their traditional counterparts to offer more services to customers, it is important that they employ a fool-proof cybersecurity strategy to further fortify their security.”
In the current economic scenario, customer acquisition can be a challenge for neobanks as most of them deal into niche segments. According to Behera of Walrus, they aim for students as their target audience. Closures of schools and colleges in present times make it difficult for them to approach students but they have overcome this hurdle now.
Behera adds, “Earlier we used to do presentations in campuses but now it is not possible. But to replace that, we have started running digital campaigns where we tell our potential consumers about products that we have. As a low cost alternative, it is working out fine for now.” He further tells that how much corona crisis has pushed the neobank segment also depends on the value proposition of the fintech startup and the consumer base they are targeting.
Future Ahead for Neobanks
“Neobanks are catering to futuristic people, who are ready to take risks and prefer better solution,” claims Behera. Consumers are hence embracing the fact that digital is the present and the future. As a result, they are opting for technology in their routine activities which includes banking. While traditional banks are still modifying their operations, neobanks are already providing every service at a digital platform.
Along with monetising low cost value added offerings, neobanks mostly survive on bank partnerships provided by acquiring new customers for them. Talking about this Gandham of Finin says, “Neobanks are going to play huge role along with traditional banks for on-boarding users and helping them to be more saving savvy and more financially competent.”
There are huge untapped opportunities in a market like India. It can be for a salary account; banking for unserved; underserved working class; blue collared workers; banking for MSMEs; cross-border travel payments; or smart digital bank accounts for students and millennials. To a large extent, Indian neobanks are technology platforms that integrate traditional banks with open APIs.
NiYo’s Bagri asserts, “This makes them inherently scalable, nimble, and flexible. These also possess the ability to innovate on product propositions and business models. Most of the Indian banks are also today are keen to partner with neobanks and are building their digital and technology capabilities to integrate with them through open APIs.”
Based on freemium model, these financial entities are surging swiftly in the current economic scenario. However, the question mark still remains on their revenue model which needs to be sorted out. Going ahead, competition among banking and fintech players is becoming fiercer. Therefore, it is yet to be seen how deep the market is for the former and whether these entities will be able to sustain in the post-COVID era.
