NeoBanks: Filling the Gaps in Traditional Banking from an Indian Perspective
In the rapidly evolving landscape of financial technology, neobanks have emerged as game-changers, offering fully digital banking services that address the limitations of traditional banks. While traditional banks rely on physical branches, neobanks operate exclusively through digital platforms, providing seamless and efficient banking experiences to their customers.
Currently, two main types of neobank models exist. The first is the standalone model, which operates independently if central banks issue digital banking licenses. Countries like the US, UK, and Malaysia have embraced this approach. The second model is partnership-based, where neobanks collaborate with existing traditional banks to provide financial services. In the case of India, where digital banking licenses are not yet issued, neobanks have to rely on partnerships.
The market potential for neobanks is immense. In 2022, the neobank market was valued at $67 billion, and it is projected to reach a staggering $2048 billion by 2030, growing at a compounded annual growth rate (CAGR) of 53.8%. Notably, leading neobanks like Nubank and Chime witnessed a significant increase in their market value between 2020 and 2021.
The rise of neobanks can be attributed to several factors. The number of neobanks globally has soared from eight in 2014 to over four hundred in 2021, driven by the increased internet usage from 35% in 2014 to 60% in 2021. Furthermore, traditional banks have established digital subsidiaries to compete with neobanks. For instance, SBI Yono, a digital banking solution, has emerged as a formidable competitor. Mashreq Neo and Bank ABC have also ventured into digital banking in the Middle East.
Competitive Analysis of Industry
A competitive analysis of the industry reveals a highly competitive landscape. The industry is crowded with established players, and traditional banks are striving to introduce digital services to keep up with neobanks. The threat of new entrants is also significant, as fintech startups can enter the market at a lower cost compared to traditional institutions. Additionally, neobanks depend on third-party providers for their infrastructure, giving them low bargaining power. However, customers have high bargaining power, given the abundance of options in the digital banking space. Finally, neobanks face a high threat of substitutes, as new fintechs with similar offerings continue to emerge.
Growth Drivers of Neobanks
Neobanks are propelled by several growth drivers. They leverage artificial intelligence to provide personalized offers and encompass various features such as budgeting, investing, and banking capabilities within a single application. Neobanks offer swift and accessible services at significantly lower costs. External factors like internet and smartphone penetration have enabled neobanks to reach remote populations that were previously underserved. Furthermore, advancements in technology, such as AI/ML and cloud computing, have allowed neobanks to establish their infrastructure more cost-effectively, leveraging data analytics and natural language processing (NLP) for chatbot interactions.
Challenges to Neobanks
Despite the immense potential, neobanks also face several challenges. One significant hurdle is the lack of trust from the public, who still prefer to keep their money in nationalized banks with physical branches. The absence of a physical location to report deception raises concerns for customers considering entirely digital banking. Furthermore, neobanks in India are still dependent on traditional banks for essential services like banking licenses, deposit accounts, and loan facilities. Regulatory issues also persist, as the Reserve Bank of India is yet to recognize neobanks as independent institutions and issue digital banking licenses, unlike central banks in other South Asian countries. Additionally, neobanks face fierce competition from super-apps offering similar services, such as mobile wallets and investment platforms. Even traditional banks have joined the digital race, launching their own digital services. Lastly, the entry of big tech players like Amazon, Facebook, Google, and Apple into the finance industry poses a substantial threat to neobanks, given their technological expertise and vast capital.
Customer Segmentation
To understand neobank offerings, it is crucial to consider customer segmentation. Neobanks primarily cater to salaried individuals, as evident from their product offerings. However, teenagers and senior citizens remain unexplored territories for neobanks. Teenagers can find options like Fampay, which offers a wallet facility, while senior citizens require specialized products like pension plans, personal accident insurance, medical bill discounts, and higher interest rates on deposits. Traditional banks, such as Indusind Bank, ICICI Bank, and HDFC Bank, provide products tailored for this age group. Neobanks have yet to offer comparable solutions.
In terms of corporate customers, SMEs often struggle to access credit from traditional banks due to the lack of assets for collateral and perceived higher risk. Neobanks have stepped in to address these challenges, catering to SMEs with their digital technologies and faster loan processing. Mahilla Money, for example, empowers rural women by providing loans to female entrepreneurs.
Role of Neobanks in Financial Inclusion
Neobanks have a crucial role to play in achieving financial inclusion in India. Their quick and remote account opening process, accessible through smartphones, offers a viable solution for the unbanked population. Currently, only one-third of bank branches serve approximately two-thirds of India’s rural population, leading to a severe imbalance. More than 17000 people are dependent on one single branch in rural India. However, with the rising penetration of smartphones, which is projected to reach 88% by 2030 and 96% by 2040, neobanks can bridge this gap. By enabling instant online account opening and leveraging the growth of the internet across urban and rural areas, neobanks have the potential to bring financial inclusion to the masses.
Future of Neobanks
Looking ahead, neobanks face both opportunities and challenges. Traditional banks will likely seek to merge with or acquire neobanks to strengthen their digital proposition and withstand intense competition. As more fintech startups emerge, existing banks and neobanks must rethink their strategies to defend their market share. Central banks in various countries have started issuing digital-only banking licenses, although the Reserve Bank of India is yet to do so. Neobanks can promote financial inclusion by aligning their product offerings to serve the underserved population, thereby enhancing their credibility with regulators. Finally, building a sustainable business model will be crucial for neobanks, as many are currently burning cash to acquire customers and provide innovative products. By optimizing digital marketing strategies and focusing on achieving scale, neobanks can achieve long-term viability.
