Neo-Banks to be pivotal in digital India: Ram Rastogi, Digital Payments Strategist

Neo-Bank is a more agile version of traditional and old-fashioned banking which is more appealing to the younger, digitally savvy Millennials.

Ram Rastogi
Ram Rastogi, Digital Payments Strategist

At the start of the decade, it was payments, then online lending and asset management platforms, and now Neo-Banks are  catching the attention of FinTech investors and entrepreneurs.

According to Zion Market Research , global Neo-Bank Market was worth USD 18.6 Bn in 2018 which is expected to accelerate at a compounded annual growth rate (CAGR) of around 46.5% between 2019 and 2026, generating around USD 394.6 Bn by 2026.The shift in buzz can be attributed to the crowding of the payment segment and tightening of credit markets which had starved lending platforms.

Globally, a vast army of Neo-Banks are targeting all sorts of consumer and small-business niches—from Millennial investors to dentists and franchise owners. McKinsey estimates there are 5,000 startups worldwide offering new and traditional financial services, up from 2,000 just three years ago. In the first nine months of 2019, venture capitalists (VCs) poured USD 2.9 Bn into Neo-Banks, compared with USD 2.3 Bn in all of 2018, reports CB Insights.

Underlying this explosion is new infrastructure that makes starting a neo-bank cheap and easy, plus a rising generation that prefers to do everything from their phones. While it can take years and millions in legal and other costs to launch a real bank, new plug-and-play applications enable a startup to hook up to products supplied by traditional banks and launch with as little as $500,000 in capital.

Neo-Bank is  essentially 100 % digital banks, without any branches. They are called fintech firms which offer Banking as a Services  (BaaS)  ranging from faster accounts, mobile deposits, free debit card, credits, payments and many more without the burden of a physical network.

Neo-Banks don’t have a bank license of their own but count on banking partners to provide services. Indian regulations as such by RBI, however, do not permit 100 % digital banks. Payments banks, which was the closest such model, have had little success and most have been shut down. As such, ventures pitching themselves as ‘neo-banks’ are now offering services built atop a traditional bank’s offerings. Thus, the fintech startups which once promised to replace the banks in India are just complementing banks with better user interfaces and services.

The neo-banking revolution started in India when many Indian startups came up with “Digital Banking” Model, where we saw Airtel Payments Bank, India Post Payments Bank, Fino Payments Bank, Jio Payments Bank, Paytm Payments Bank to name a few. A few banks like SBI created Yono and Kotak -Kotak 811 within the banks .These were the closest model to the “Neo-Banks” in India. The second wave came in the form of what we refer to today as “Neo-Banks” by startups such as Niyo, Open, Razorpay X , Yelo, InstantPay, Hylo, PayZello etc.

Regulatory considerations for Neo- Banks :
In India, virtual banking licences are still not granted, though there are foreign national banks offering digital-only products through their Indian subsidiaries. RBI remains stern in prioritising banks’ physical presence, and lately reinforced the requirement for digital banking service providers to have some physical presence.

Presently, neo-banks in India are addressing the regulatory predicament by outsourcing their banking responsibilities to those with licences, creating strategic partnerships with traditional banks and providing amplified services on behalf of existing ones. This model is already being used worldwide by some of the biggest names in neo-banking.

As part of their business strategy and to overcome regulatory hindrances, neo-banks partner with traditional banks and offer business and consumer banking services. For the end customer, financial and banking services are offered by the neo-bank, but from a regulatory perspective, monetary transactions are managed by their partner banks.

Road Ahead for Neo-Banks :
Attributes and offerings like accessibility, cost-effective multiple banking and financial functionalities under one umbrella, and personalisation are some of the driving factors for neo-banks globally. Secondly, FinTechs are building niche solutions focusing on blue-collar workers and the underserved needs of thin-file MSMEs, which is the way forward.
Neo-Banks will be integral part of the progressive payments and financial solutions in digital India.

With the focus on digital payments and digital way of doing business, neo-banking will be the fastest collaborator with the fairly evolved banking system we have currently, especially to cater to the needs of SMEs as well as consumers across segments.
The success of likes of Monzo, Nubank, Starling Bank etc, the VCs are quite optimistic about Indian FinTechs gaining traction in India.

With competition mounting among traditional banks, new-age Fintechs, technology firms and non-banking entrants, it is yet to be seen whether the market is deep enough for neo-banks to grow sustainably and equitably.

Views expressed in this article are the personal opinion of Ram Rastogi, Digital Payments Strategist;Thought Leader in Financial Services & Reg Tech; Public Policy;Real Time Payments -IMPS/UPI

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