Neo-banking: Banking for millions of Indians
What is a neobank? Well, it is a buzzword for sure. But it is a digital bank with an app-only presence, with no physical branches. Globally, the 2 reasons it has become interesting is — 1. increasing customer engagement with technology — this is true across verticals, food, commerce, transport. It has now come to banking. 2. Growth in data availability and access — with digital footprints. The revolution started off with Europe as their banking was heavily consolidated in top 5–6 players, dis-incentivizing innovation with low competition.
Back in home, India, we see significant rapid and inclusive developments. 1st, across payments in the form of UPI, and 2nd on data in the form of Account Aggregation. The recent license and ‘Sahamati collective’ brings better access to data. This further enables better credit-scoring and will improve access to credit. Thus, the infrastructure, is largely supportive.
The question then is, do we need a neobank in India? I believe we do as it has the potential to solve huge challenges in India. The market in India can be broken into 2 segments — individuals and SME.
On the individuals front, mass market customers have poor financial inclusion due to lack of reach of traditional banks, distribution challenges, lower risk appetite, and low financial literacy of the TG. For these banks, opening brick-and-mortar branches in T3/T4 cities does not justify the ROI. The mass market, neglected by banks for so long, needs a better platform tailored to this group of people.
In the same individuals bucket, we have millennials who crave for a better net banking UX with better investment advisory and customer service. A survey by a bluechip Indian VC fund showed NPS score for the top banks at a dismal 17%, biggest pain points being buying products — a loan, insurance or mutual fund.
We see less activity in India here, but it requires a lot of capital to grow, execute at scale, and build a mass-market brand. It will take experienced founders, with a strong ability to execute, to make a dent in this market.
On the SME front, there is a large base of Indian SMEs close to 45M. Unlike MNCs, they are underserved in banking and financial services. Thus, this has become a key area of interest for founders and investors.
That was an overview on the demand. In the context of market players, we see a battle between fintechs and banks today. SBI, Kotak and DBS have launched their own apps to cater to growing demand of convenience in the userbase. However, players such as Open and Avail Finance have tied up with banks like ICICI, Yes and DCB to offer similar solutions. For the different neobanks in India, their growth has three acts. The Pledge, The Turn and The Prestige. First is The Pledge — the anchor product or hook to get a captive userbase. For Open, this was an automated bookkeeping tool for SMEs. For Avail Finance, it was personal loans for blue-collared workers like Ola, Swiggy, Zomato riders. Razorpay started as a payment gateway for businesses. NiYO started with a corporate card for white-collar workers. The second act is the Turn — cross-selling different products and services to the userbase. Bankopen is launching a business credit card for SMEs, and a payment gateway. They aggregate invoices, tax/GST filings as well. Razorpay launched a smart current account product with seamless integration of all business payouts. So on. Final act is the hardest, the Prestige. Banking is synonymous with trust and reputation. Incumbent banks have a leverage here if they can build their own tech-stack. Thus, for startups, acquiring customers with a pull-based scheme and a lower CAC will be key to win in the market.
Traditional banks are building solutions for individuals, esp. tech-savvy millennials. While, fintechs largely, are building for employees and SMEs. But each of them has figured out a niche market to target. For SMEs, subscription fees is the channel of monetisation. For consumers, the most straightforward way to monetize is through interchange fees. We are yet to understand if the market is deep enough for just these forms of revenue to be sustainable, or if they will have to expand their product line to create bigger revenue generating vehicles such as lending, insurance etc.
The biggest challenge in this space is regulation. None of these players have banking licenses today. This results in them getting a smaller share of the pie and brings in a dependability risk. How these players go from just front-end to full-stack models is a function of both the company’s ability to innovate as well as the regulation to support this movement.
If you are building a challenger, digital-only bank, or would like to discuss ideas in the space, let us connect.
Note — Kalaari or Kstart is not an investor in the startups that may have been mentioned.
This article was originally published on LinkedIn.
Disclaimer: Views represented in this blog are personal and belong solely to the author and do not represent the views of Kalaari or Kstart.
