Over the past 18 months, fintech segment has been receiving attention from the investors across the globe. As customers are getting more tech-savvy, the Indian banking sector is renovating the mode of operations. Often accused of being too traditional, conservative, or lazy─ banking sector has lately seen a fair bit of technology-infused disruption such as online fintech lending, digital payments, or mobile banking. In 2019, fintech startups managed to raise $ 3.7 billion and global ‘neobank’ sector is expected to touch the Compounded Annual Growth Rate (CAGR) of 43 per cent. With heavy investments made in disruptive technology, virtual bank sector’s success depends on the domestic regulator framework. Pandemic has undoubtedly intensified the need for digital operations but there is revolution underway has to be bolstered with a business-friendly regulatory system.
What are Neobanks?
Neobanks are primarily digital-first branchless banks providing a host of financial services.
The concept first surfaced in the UK after the 2008 financial crisis. Historically, the banking sector in the UK has been dominated by a small number of large banks. Prior to the crisis, setting up a bank in the UK was an extremely expensive and long-winded process. So much so that when Metro Bank was issued a license in 2010, it was the first to do so in 100 years!
However, post the crisis, it was seen as essential to open up the banking sector in the UK in order to achieve a broader and a more financially-resilient sector. A 2019 report by AT Kearney stated that European neobanks gained more than 15 million customers between 2011 and 2019. And by 2023, they are projected to have up to 85 million customers─ equivalent to 20% of Europe’s population over the age of 14.
The concept is being adopted across the world ─ NuBank, Chime, Revolut, Monzo and N26 are the most popular neobank companies.
Neobanks in India
With the financial landscape in India shifting towards an increased focus on customer experience and satisfaction, augmented by the Government’s push towards digital-led financial inclusion, traditional banks have been found much wanting.
Most traditional banks are bogged down by legacy infrastructure, processing costs, dependency on human resources, and the old fashioned branch network (leasing obligations, exposure to commercial real estate).
The offline component of their service means higher customer acquisition costs (you recall all the mail you get from your bank which you don’t end up opening?!) e.g. Traditional retail banks’ customer acquisition costs stand at $200 vs. $1-$38 for a neobank, as per Finnovate Research.
Neobanks aim to focus just on the essentials. They have a low cost structure (no branches, no monthly fees, no withdrawal costs), allowing them to grant higher rates on saving and fixed deposits, simple and engaging mobile experience, near real time services for account opening, payments, balance checking, opening and redeeming deposits, free debit cards, 24×7 support via chatbots etc.
In fact, neobanks in India raised $116m in 2019, a seven-fold jump YoY (as per Venture Intelligence). Many of them have raised seed rounds of $5m-20m without having launched any actual products─ a clear testament to rising investor appetite.
Some notable players are Open, NiYo, Yono, Kotak 811, PayZello, Instantpay, Yelo, India Post Payment Bank, EzoBank, and Zeta.
Roadblocks in the Rise of Neobanking Startups in India
Neobanks, however, still face a big operational constraint in India─ they do not have a banking license of their own, and therefore outsource their banking responsibilities to licensed banks. For instance, NiYO has a partnership with DCB Bank while Open works with ICICI Bank.
Now, even if RBI were to grant these neobanks banking licences, one needs to be wary of the last time it did so in 2015─ when RBI allowed payments banks to be set up. Despite a dozen getting licences, the restrictions on deposits and a ban on lending meant that none of these could prove to be a disruptor in the true sense.
Moreover, given the fact that private-sector lenders like HDFC Bank, Axis Bank and ICICI Bank still dominate the banking sector having a lion’s share of corporate and salary accounts, the pace of growth might not be as exponential as expected.
One can also not completely disregard the fact that these lenders have innovated and tried to keep pace with change over the years. They are now also seeking to increase their share in net banking.
An unclear revenue model coupled with customers’ inertia to switch, might prove to be deterrent.
Neobanks system is a great proposition for consumers who prefer money management through a mobile app. But does that hold true for the majority of the population in India, especially the rural, elderly and technologically-challenged sections of the society?
Given the regulatory and structural constraints, will neobanks be able to live up to the hype?
Nevertheless, one good thing that might arise with the rise of these neobanks is that traditional banks might be forced to improve their product offerings and digital capabilities─ aiming to serve customers better and in a more seamless manner.