Future of NeoBanking in India
A NeoBank is a special kind of a digital bank. Both digital banks and Neobanks have their operating model based on a mobile app and provide services similar to traditional banks. However, digital banks are generally additional services provided by a bank or a financial institution subsidiary, whereas NeoBanks are complete online entities.
NeoBanks in India have recently received a fair amount of interest from the PE/VC domain, with companies in this area receiving more than $110mn of funding in 2019. Some of the big players in the Indian NeoBanking space include names like NiYo, Open, Payzello, InstantPay, Epifi, and many more.
Currently, COVID-19 has wholly disrupted India’s banking and financial services landscape and has proven to be a boon for the upcoming NeoBanking and Digital Banking startups. Even though the pandemic has created several challenges, it has also given way to several new opportunities in the coming future due to customer behavior changes. COVID-19 has certainly pushed NeoBanking in a competitive position to traditional banking
The positive side of NeoBanking
NeoBanks bring together the best of both the traditional banking and the emerging fintech world. They are an amalgamation of safety, security, and trust from the traditional banking world and innovation, agility, and user experience that comes from the fintech world. Being built on a virtual infrastructure, they provide seamless services and excellent digital experience to customers compared to any traditional bank. NeoBanks also provide real-time payments with Machine learning, Artificial Intelligence (AI) enabled accounting, 24/7 customer service powered by chatbots, and other automated features such as insurance, loans, balance sheet statements, GST compliance taxations all just a few clicks away.
Recent reports suggest that every 3 in 5 customers will adopt digital banking in the coming five years in the Asia Pacific region. NeoBanks are likely to become a 395 billion USD market by 2026 globally. Hence, India is going to be a favourite for the NeoBanking market, with the second-largest unbanked population in the world standing at 190 million people, according to World Bank’s Global Findex Data. Small businesses will be a massive market for Neobanks, with 63.3 million MSMEs in India, which might look to get financed digitally in the future. Also, millennials and gig economy workers are potential customers. Reports suggest that India has the largest market share in the online labour market globally, with a 24% market share, and 71% more companies will hire more contract workers in the next two years. All these data are further validated by investors who are pumping in millions of dollars into startups in this space despite the current economic instability because they believe NeoBanks have the potential to create a groundbreaking difference in the market.
Traditional Indian Banks’ Point of View
The traditional banks are also slowly entering the NeoBanking space, convinced with the idea that digital transformation is the key to banking in the future. Banks such as ICICI Bank, IDFC Bank, DCB Bank, Federal Bank, and many more have partnered with startups to provide banking services and expand their base. ICICI Bank has launched a completely digital platform called ICICIStack, which offers nearly 500+ services covering the complete banking services spectrum. State Bank of India, the largest public sector bank in the country, possibly the last bank that anyone would expect to enter this space, recently launched a fully digital service called Yono in 2017. By the end of 2019, SBI had almost 6 million digital savings accounts and 17 million registered accounts. Yono offers more than 30 financial products, including mutual funds, insurance, and loans.
Constraints/ Current Landscape in India
NeoBanks in India still face a significant regulatory constraint as compared to its foreign competitors. The Indian banking systems do not allow NeoBanks to hold money because RBI’s regulations do not grant a banking license to such digital banks. Hence to comply with these regulations, NeoBanks in India have to partner with the traditional banks with licenses to provide the banking services. RBI is still skeptical about providing the virtual licenses after it experiments with the small finance banks and payment banks and would likely focus on integrating new players into the banking ecosystem to stabilize their footings.
Cyber-crime has been continuously evolving with the evolving technology era. Though Digital Banks and NeoBanks are gaining momentum slowly, they need to be extremely vigilant about the security and the threats associated with it. Along with the comfort these banks provide, they also bring an immense risk of exposing people’s hard-earned money to hackers. Today these Digital Banks and NeoBanks are more inclined towards providing functionality, but they should equally focus on investing in the security infrastructure and providing a fool-proof security strategy.
Future Ahead
Neobanks are catering to people who are risk-takers and who prefer the best solution available. Customers are slowly embracing the fact that digital is the future and hence are opting for technology in all their routine work and activities, including banking.
There is an enormous untapped market in India, be it for a salary account; blue-collar employees; cross-border payments; banking for unserved, students, millennials & MSMEs, and many more. Indian NeoBanks today are tech platforms integrated with traditional banks using APIs. This makes them very flexible and scalable, increasing the ability to innovate products and the business model continuously. Most traditional banks are interested in partnering with these NeoBanks to build their digital capabilities for the future.
Amidst all this, it is also essential to keep in mind that India is still at a point where the people’s trust in private institutions can wear away very quickly with just one small mistake. With scams happening almost every year and with the Yes Bank incident, a small misstep will not bode well for any player in the NeoBanking space. A lot is happening in the banking and fintech space, and going ahead, the competition in this space will only get fiercer. Time is going to be the best judge, and we need to wait and watch where these entities go in the future and whether they will be able to survive post the COVID era or not.
