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Today’s banks look very different from the banks of the yesteryears. Gone are the days when banks performed their core services of lending and taking deposits through physical touch-points. Rising consumer expectations have resulted in banks enhancing the scope of services on offer and mediums through which these services can be availed. Emerging technologies have ushered in new business models, from retail to mobile banking to neo-banking.
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Neo-banks are revolutionizing the future of banking globally. The global neo-bank market was worth USD 18.6 billion in 2018 and is expected to accelerate at a compounded annual growth rate (CAGR) of around 46.5% between 2019 and 2026, generating around USD 394.6 billion by 2026.
What constitutes as a ‘neo-bank’ differs from country to country based on the regulatory framework formulated by the central bank and the government. Globally, ‘neo-banks’ are essentially 100 percent digital banks, which offer services ranging from accounts, credits and payments without the burden of a physical network. In India, however, regulations do not permit 100 percent digital banks therefore ‘neo-banks’ in India offer services built atop a traditional bank’s offerings.
India’s ‘Neo’ Moment
Indian fintech companies have successfully addressed several issues plaguing the industry and made significant strides in the digital payments, insurance and lending space. However, banking is one sector where incumbents have enjoyed an unchallenged dominance. While mobile banking users increased by 13% and 92% in value and volume terms during 2017 and 2018, India is still home to the world's second-largest unbanked population, an estimated 190 million people, according to the World Bank’s Global Findex database. Neo-banks have a great opportunity to disrupt the industry and take banking to the unbanked masses.
Companies like Niyo Solutions, Payzello, Walrus & Jupiter are focusing on retail banking by building a product that allows customers to manage all their finances in one place, setting up automatic payments, tracking expenditure, making deposits, anytime and anywhere, without the need to queue in a bank while companies such as RazorpayX, Open & even Paytm have launched products catering to the needs of merchants and SMEs, enabling them to open and operate current accounts, manage expenses, make payouts, maintain account books, etc.
Neo-banks with their leaner business models and superior technologies are better placed to target specific customer segments than traditional banks. Their inherently nimble and scalable business model allows them to expand faster and create a better, more innovative product stack than traditional banks that are burdened with cumbersome organizational and structural problems. Neo-banks are better equipped to acquire and retain customers through seamless account creation, better rewards and discounts programmes, hyper-enhanced and personalized customer experience through chatbots, simple and engaging mobile apps. Additionally, their ability to track transactions enable them to offer deep insights about the state of personal finances through intuitive budgeting, investing and money-tracking tools.
While traditional banks have tried to keep up with the times with mobile banking apps, however, not only the banks that have adopted such measures are few and far between, the functionality and feature set offered by such apps are lacklustre compared to neo-banks that offer crisp, intuitive, feature-rich and glitch-free experience.
For businesses, apart from providing primary banking services, neo-banks offer automated and near real-time accounting and reconciliation services for bookkeeping, balance sheets, profit and loss statements and taxation services such as GST-compliant invoicing, tax payments record keeping and reconciliation, and the ability to manage multiple accounts through a single mobile platform. The easy-to-deploy and operate APIs that integrate banking into the accounting and payment infrastructure are beneficial for businesses with significant expenditure and a large number of employees, to be provided with such insights, reduce expenditure and boost productivity and revenue. Traditional Banks have made efforts to make credit more accessible through targeted schemes for certain industries, Mudra loans and even ‘psbloansin59mins’, however, tech-driven entrepreneurs of the day remain underbanked or perhaps even unbanked due to lack of innovative services offered by traditional banks.
VC Resurgence in Fin-tech 2.0
Neo banks in India raised $116 million in 2019, a seven-times jump year-on-year, according to data from Venture Intelligence. While the figure itself is not huge, what’s striking is that many of these companies raised seed rounds of $5-20 million on paper ideas alone without having launched actual products.
In 2019, Open raised $30 million in a Series B round, led by Tiger Global Management and is also backed by Beenext, Speedinvest, Angellist, Tanglin Venture Partners, 3one4 Capital, Recruit Strategic Partners and Unicorn India Ventures.
Another Neo-Bank, EpiFi, founded by former Google Pay executives Sujith Narayanan and Sumit Gwalani, raised $13.2M in seed round led by Sequoia India, Ribbit Capital and Hillhouse Capital this year.
(Photo: The Mint)
Flipkart’s co-founder Sachin Bansal’s start-up Navi Technologies, which is currently offering instant loans upto Rs. 2 lakh, has made a series of acquisitions in the past couple of years and has applied for a universal banking licence from the Reserve Bank of India and a mutual fund licence from SEBI (which has recently gotten rejected). Sachin Bansal has poured over $450 million in Navi Technologies.
Consumer inertia is a major challenge for neo-banks. Trust is of paramount importance in this sector. The incumbents have consumer trust and easy access to funds. The recent failure of cooperative banks like PMC Bank, CKP Bank and the acute liquidity issues faced by Yes Bank have eroded consumer confidence and made them more cautious about where they park their savings. While GenZ and millennials, may be open to giving neo-banking a try, the challenge will lie in becoming the primary bank account of the users and profitably serving account that is not the primary account of the user.
The lack of regulatory framework also casts gloomy clouds over the future of neo-banks. RBI is dutybound to protect the interests of consumers and has often taken a conservative approach towards new products. For instance, the crypto industry had to fight a long drawn-out legal battle for its existence.
With the objective to foster responsible innovation, RBI launched a ‘Regulatory Sandbox Framework’ that allows fin-techs to live test new products in a controlled environment that address gaps in the financial ecosystem. The Framework allows applicants to test innovative products and technologies for a stipulated time and even avail regulatory relaxation. Neo-banks can use this window to test innovative API services, mobile apps, KYC methods, etc.
The recent years have witnessed a strong push towards financial inclusion. During FY07–19, deposits grew at a CAGR of 11.11 per cent and reached US$ 1.86 trillion by FY19. As financial and digital literacy increases, consumer expectations from banks will continue to rise. Neo-banks will be perfectly placed to deliver on these expectations with their ability to provide hyper-personalized service. Neo-banks have disrupted markets in US, UK and Brazil. Unlike these countries, neo-banks in India do not have to compete against the traditional banks rather they have to work in tandem. Over the past few years, banks have been obsessed with fin-tech partnerships. It has become a path for innovation as well as digital transformation. Neo-banks perfectly fit in value chains of traditional banks. Neo-banks can put traditional banks at the centre of their customer’s daily life. The future of banking is certainly digital. The success of banks in the future will depend on their ability to analyse consumer insights and provide services that improve the lives of the customers. The results of these efforts will perhaps have their impact on the strategic direction, organizational culture, and bottom-line results of the institution only in the long-run.
Gautam Marwah is the founder of Indianaut, a platform showcasing and strengthening India's next best analytical and creative minds.