How Neobanks are Transforming the Indian Banking Sector?

MARKET OVERVIEW

A neobank is a digital bank, which doesn’t own any physical branch, and is mostly managed by mobile and web applications. It gives a more personalized and user-friendly experience than traditional banks, with the same but limited offerings. It offers multiple financial services starting from money transfer to opening a bank account, while most of the neobanks partner with traditional banks to acquire more customers seamlessly.

The main reason for the success of neobanks is higher adoption among Millennial, MSMEs, irregular income earners, innovative technology adopters, and rising consumerism. The high adoption rate has also stimulated investors, corporations, and venture capitalists’ interest and led to grab total funding in the range of $200-$250 million from 2018 till date. Moreover, neobanks offer a low-cost model for end consumers with nominal monthly fees on various banking services like deposits, withdrawals, and minimum balance maintenance.

On a global level, the number of neobanks is increasing exponentially. In the last two years, neobanks have increased their customer base six times from 7.7 million in 2018 to almost 39 million in 2020. The global neobank market is expected to grow at a CAGR of around 50% in the next five years. Globally they are famous for faster customer acquisition and meeting consumer demands as compared to traditional banks.

NEOBANKS IN INDIA

As of now, there are about 24 neobanks in India, including digital-only brands of traditional banks like State Bank of India’s YONO and Kotak Mahindra Bank’s 811; and a few more are in transit. Neobanks in India has been able to raise massive funds. Alone in 2019, more than $90 Million was raised by neobanks. Razorpay X and Niyo are the major neobanks operating in India.

RBI has not issued any neobanking licenses yet; therefore, neobanks have to tie up with traditional banks to offer their services. India’s largest private bank, ICICI, has taken the lead in the neobank sector and has partnered with three neobanks viz. Open, Instant Play, and Yelo.

Moreover, in India, neobank plays a vital role by catering its services for SMEs and by helping them in managing their finances conveniently. It helps these businesses by automating their accounting processes, generating and tracking invoices concerning tax laws, send and receive payments, and access third-party banking and business applications from its platform. It allows multiple businesses to all together manage their banking needs under a single platform.

BENEFITS OF NEOBANKS

There are various benefits of neobanks as follows:

• An account can be opened within a couple of minutes directly on your phone, and the process is very smooth.
• They offer free debit/credit cards, which could be managed directly through Smartphones.
• These cards could also be used for international payments without additional charges and with the same current exchange rates.
• It has easy to use interface in the form of a responsive and well-designed app.
• One can easily view transactions and up-to-date balance through a banking app and manage them efficiently.
• A chat feature is also made available for 24x7 customer services.
• They also provide additional features like expenses tracker and savings goal along with their regular offerings.

MARKET DYNAMICS OF NEOBANKS IN INDIA

Neobanks is the need of this digital era. The customer needs to interact with banking services on the go and in a much-improved manner. Neobanks are competent in providing a highly enhanced, timely, and personalized customer experience, where traditional banks are lagging.

The processes of neobanks are much more transparent; they strive to provide real-time notifications and statements of any charges and penalties incurred by the customer. Neobanks provide specialized business banking services, including payments, receivables, budgeting and, expense management. Neobanks build next-gen business banking solutions enabling digital transformation with user-friendly interfaces and easy-to-understand and valuable insights.

Aside from implementing primary banking services, neobanks offer automated and easy to use APIs for real-time accounting and conciliation services for bookkeeping, balance sheets, profit and loss statements, and various taxation services that too on mobile for affordable prices.

How Neobanks and Traditional Banks Work Together?

RBI emphasizes banks’ physical presence and has intensified that digital banking service providers should also have a physical presence. Though neobanks do not provide any of the bank’s primary services, such as deposits, interest on deposits, or loans but to abide by RBI regulations, they partner with traditional banks.

They tie up with traditional banks and perform sourcing and front-end management while the traditional banks process all the transactions. They’re sales agents for the banks; they attract clients through their user-friendly platforms and varied services they deliver. At the same time, all the resulting transactions are conducted on the back-end of the banks. Traditional banks are willing to partner with neobanks for gaining customers from specific target markets so that they could expand their business and increase revenue just by sharing their back-end infrastructures.

Challenges Faced by Neobanks in India

Though neobanks are scaling up in India, they face several challenges:

• RBI has not permitted 100% digitalization of banks. So they can’t carry out their operations independently and have to partner with traditional banks. In contrast, their global counterparts provide a wider variety of services, such as deposits, interest, or loans.
• Another disadvantage for neobanks is the scale; the lack of capital and initial resources can be a significant setback, primarily as they compete with larger established banks. Furthermore, a significant obstacle could be to gain customer trust; although customers search for better experiences, they can initially hesitate to switch to a new experience.
• In urban areas, customers will quickly adopt neobanks. Still, the challenge will remain with the rural market where there is a vast population that prefers to visit physical banks and are not much aware of digital banking.
• Another major challenge could be low revenue generation due to low UPI transfer charges, interchange fees, and payments.
• Private Banks such as HDFC Bank, ICICI Bank, Kotak Mahindra Bank and public sector banks such as SBI have invested heavily in digital banking services through various platforms, such as net banking, UPI, mobile apps, etc. leading to a rise in competition.

IMPACT OF TECHNOLOGY

Technology helps the banking and financial services industry proliferate, enabling banks and Fintech companies to move into more functional areas, such as small business lending, that formerly had been the area of local banks. To keep up with the tech revolution, there has been a strong demand to adapt and incorporate emerging technologies, including AI, Big Data, and Cloud Computing, among others.

Visiting a bank branch today has become a distorted version of the past, while Fintech and banking’s future lies in Smartphone applications. Consumers are increasingly demanding easy digital access to their bank accounts, particularly on a mobile device. To satisfy these modern demands, leading banks are partnering with neobanks.

Therefore, neobanks need to create and incorporate technologies that enable them to deliver their services while making efficient use of their data that needs to be on the cloud and physical premises. A few of the technological advancements in the neobank sector are as follows:

Artificial Intelligence (AI):

Neobanks have gained immensely from embracing newer technologies like AI, resulting in lower expenses and more sales across multiple channels. AI also allows financial institutions to make more efficient decisions on lending and to handle risk better. This framework interacts with other technologies, such as big data analytics, voice interfaces, RPA, etc. Besides, AI is also instrumental in enhancing the protection, prevention, and detection of fraud for financial institutions. The technology facilitates mitigating risk and managing lending decisions for financial institutions and is central to making other technologies work. It is also the best source for collecting data regarding customers.

Big Data:

With the increasing amount of data produced by neobanks, it is becoming difficult to obtain actionable insights that can lead to suitable prospects. Big Data let banks best know about their customers, helping them to make business decisions in real-time by evaluating consumer purchasing patterns, sales management, marketing strategies, product cross-selling, fraud detection, customer feedback analysis, and many more. Besides, it helps to recognize the latest industry dynamics and streamline internal risk control procedures.

Cloud Computing:

Cloud banking is the futuristic weaponry that neobanks would like to embrace. This is primarily because they want to reduce costs across the retail & corporate banking segments and deliver better product & service offerings. With the support of API integration, which can be easily incorporated with neobanks quickly, new product launches would become faster. They will be the main differentiating factor in the cloud banking space.

More development and technological innovations will help neobanks meet the regulatory and enforcement framework defined by the RBI. Like GDPR in European countries or CCPA regulations in the US State of California, banks need to comply with unique regulations and store data in the appropriate geo-locations accordingly.

FUTURE OF NEOBANKING IN INDIA

Open Banking: The introduction of open banking can be a significant opportunity for neobanks, as it will open many new ways for them. Open banking is now breaking ground internationally, with legislation passed by the US, the UK, and Europe to promote innovation by open banking in the banking ecosystem. Open banking enables large banks to exchange specific, consensus-based consumer information with third-party players, such as neobanks, who can use it to introduce fresh, more intuitive financial products and services.

Banking Platforms: Customers accept the notion that the future is digital, so in their everyday jobs and activities, including banking, they opt for technology. India’s market, be it cross-border payments, salary accounts, or blue-collar workers, is massively untapped. Indian neobanks today are tech platforms that are integrated using APIs with traditional banks, and they could help provide the customer with all the digital services.

Customer Onboarding: Neobank could also help resolve the complexities of financial institutions and banking services with other services, such as opening immigrant bank accounts, enabling it by modern onboarding processes not dependent on formal identification and documentation. Initially, with narrow goals, neobanks could grow by incorporating more features and services over time.

Better Customer Experience: Although digital and neobanks are gathering momentum, most are yet to show profitability. But, they have tremendous potential to be disruptors in banking and financial services and convincing traditional banks to invest in new-age technology and re-engineering processes to provide a smooth and rapid customer experience to be successful.

M&A and Partnerships: Profit margins are slim even though regulatory bodies are supporting more players and digitalization. Thus, there is no space for new entrants. As the sector matures, we expect to see more M&A operations. The SME market for the new banks is the region that is expected to see the most growth. This sector is mainly underdeveloped and served poorly. The ability to improve services is, therefore, plentiful. As rivalry among traditional banks, new-age Fintech companies, and non-banking companies increases, neobanks have to keep an eye on the market to see if it is sufficiently substantial for them to expand efficiently and equitably. Their performance’s fundamental determinants will be how neobanks would handle critical obstacles in regulation and enforcement, data and safety, smooth API integration, and expansion of products and services.

CONCLUSION

The country’s current digital transformation rate has opened up a wide range of areas for neobanks to join and grow. The next level of innovation and disruption in the traditional banking environment is represented by neobanks, with their unique and experiential offerings. While digital banks and neobanks are gaining momentum, most are yet to demonstrate sustained profitability. So, profitability and competitive agility remain the weak points for neobanks.

It is impossible to reach $394.6 billion by 2026 unless India plays an active role as the driving force of innovation in Fintech. Therefore, RBI must come out with and accept its virtual bank policy and regulations by issuing banking licenses in the country. It will take a few years for banking in India to be converted from branch banking to fully online banking.