Neo Banks in India – A Definitive Guide

With each passing day, we are moving towards a more digital world. Even before coronavirus forced us to work from home, people were turning more towards digital channels of getting things done. The banking industry also saw a plethora of digital offerings with Neo Banks being the major focus today.

In this article, we are going to cover all about Neo Banks, how they work, what are their pros and cons, and how are they changing banking as we know it.

Neo Banks – The Basics

In very simple terms, a Neo Bank is a 100% digital bank. It offers its services through online channels only and does not have any physical branch presence.

It’s an umbrella of financial service providers who are focussed on today’s tech-savvy generation. They can be called as fintech firms that provide digital and mobile-oriented financial solutions, money transfers, saving / checking accounts, and more either as a standalone entity or in partnership with a bank.

These are technology driven firms that utilize digital channels for acquiring and servicing their customers. They are trying to bridge the gap between customer expectations & traditional bank offerings by enhancing customer experience.

As a neobank customer, you just need to download the bank’s app and voilà, you’re all set. You can access all of their services from your mobile phone and that too in real time. Their support is available 24/7, which makes it all the more alluring in today’s fast-paced world.

Neobanks in India

Due to prevailing regulatory conditions in India, neobanks in India cannot operate as standalone banks.

Reserve Bank of India (RBI) requires a bank to have physical presence in order to avail a banking license. Due to this, neo banks are required to partner with traditional banks in order to provide financial services to their customers.

However, this has not dampened the speed at which the neobanking space is growing in the country. With around 10 neobanks in operation today, India is one of the major opportunities for these Fintech firms.

Neo Banks vs Traditional Banks – A Comparison

The biggest difference between Neo Banks and Traditional Banks is their mode of operation. While traditional banks operate on either a physical or “phygital” model, neobanks are 100% digital.

Apart from this obvious difference, there are a few more important areas where the two banking systems differ –

Business Model

Now that you know about the operating model of neobanks and how they differ from traditional banks, let us delve deeper into the business model of these firms.

Primarily, the business model of neobanks can be attributed to the following three categories.

1. Non-Licensed Entities –

Fintech firms collaborating with traditional banks to offer financial services to customers come under this category. This is the primary working model used in India since neobanks in India are not given regulatory approval by RBI to function as banks.

Under this model, the Fintech firm helps traditional banks gain more customers via the neobanking channel. They typically earn through acquisition commissions, API integration charges and payment facilitation fees.

An example of such a model is InstantPay that has partnered with ICICI, Yes, IndusInd & Axis Bank for offering various services to its customers.

2. Phygital Model –

These are neobanking arms of the traditional banks. In India, banks like 811 by Kotak, Yono by SBI & Digibank by DBS fall under this category.

This is a growing segment as traditional banks are looking to enter the neobanking space. Coupled with their experience in the banking business and physical presence, this model puts them in a better position to succeed.

However, the biggest challenge faced by this model is the lack of technological expertise available with the traditional banks.

3. Licensed Entities –

These are the fully licensed neobanks that offer a full suite of banking services to the customers. This allows them to earn revenue by lending to customers, something that non-licensed neobanks are not able to do.

There are many neobanks in the global market like Revolut & N26 that operate as fully licensed digital banks. However, Indian regulations do not allow neobanks to work as standalone banks in India at the moment.

Advantages of Neobanks

With increasing penetration of digitization in all spheres of life, the idea of banking digitally is widely getting accepted. Internationally, a lot of large banking corporations are starting to reduce their physical presence and go online. There are many neobanks that are giving traditional banks a run for their money and this trend is here to stay.

Similarly, India is also witnessing a paradigm shift in banking services. Even though there is no direct competition from neobanks as they cannot operate standalone, traditional banks have realized the need to evolve and are partnering with Neo Banks for better customer services.

Some major advantages of neobanking from an India perspective are –

A. Cost Effective

The biggest advantage of neobanks is that they are cost-effective. They have a huge cost difference compared to traditional banks due to –

• No physical presence resulting in less operational expense
• Leveraging power of Artificial Intelligence (AI) & machine learning to acquire customers, thus requiring less staff which consequently results in less salary expense
• No (or minimal) credit risk involved as neo banks are primarily offering banking services and extending loans to their customers. While a few global players offer cards and business loans, their Indian counterparts have zero credit risk since they offer products in collaboration with traditional banks.

B. Highly Convenient

The biggest USP of neobanks is the convenience they offer to their customer. With seamless onboarding and real time services, they are able to cater to customers 24/7, 365 days a year.

Another major USP is the reduced turnaround time for various services that these banks offer. Backed by data science and AI, neobanks are able to offer highly efficient and fast services to the customers.

This is particularly favorable to MSMEs who require real time banking facilities for their businesses.

C. Customer Friendly

Neobanks are designed around customer-centric approach. Their focus is to make banking easy, accessible, and rewarding for the customers.

Most of the neobanks are available 24/7 for their customer queries and leverage the power of AI to solve customer issues.

These banks are in a better position to offer premium services at lesser costs due to their lower cost of operation. For instance, Niyo Bank offers a forex card with no markup fees.

Such product offerings make them more customer friendly and have the potential to attract the younger (tech-savvy) generation.

D. Smart & Technology Driven

Since neobanks rely on technology, they are smart and leverage data analytics for all their services.

This means better reporting and insights for the users as well. With highly interactive and customizable dashboards, neobanks offer a 360 degree view of your finances. This aids in managing your finances in a more efficient and informed manner.

Challenges to Neobanks

Even though neobanks are growing rapidly, all is not rosy. Globally, the banks are facing competition from established banks’ own neobanking offerings, erosion of the differentiating capabilities, and struggles with regulatory compliance among others.

In India as well, the lack of regulation regarding neobanks is creating a lag. None of the Neo Banks are fully functional banks and are only offering services through partnerships with traditional banks.

Few of the major challenges that await neobanks in India are –

A. Increased Competition

Neobanks are facing competition from both new entrants and traditional banks. With offerings like Digibank by DBS, Yono by SBI & Kotak811, traditional banks are offering neobanking services to the consumers.

This will result in a highly competitive landscape for the neobanks and will likely end with only a handful of them left standing when the dust settles.

B. Profitability Concerns

Neobanks are primarily Fintech firms offering banking services. They are well funded by VCs and have cash to burn at this stage.

However, long term profitability is a concern that is starting to show for these firms. In the absence of a banking license, neobanks cannot lend money on their own books.

This eliminates any chance of earning interest income which comprises the biggest chunk of a bank’s earnings.

Therefore, there is a lack of revenue streams for these firms which can act as a growing concern in the time to come.

C. The “Bharat” Factor

Being fully digital, neobanks are poised for growth among the tech-savvy population. However, for them to be really scalable, penetrating into the rural market is important.

This seems to be a challenge at the moment as the rural parts of India is not as tech-savvy. The people in these regions trust the physical banks and are more inclined towards visiting branches.

This trust and awareness factor is a major challenge that the neobanks will need to answer.

D. Changing Consumer Behavior

People are used to banking in a certain way. In order for Neo Banks to become substantial, they need to change this behavior.

While the early trends show that people are reacting positively to the quality of service offered by neobanks, the sheer volume of customers is absent.

Thus, a paradigm shift in consumer behavior is vital for neobanks in order to become mainstream in India as well as globally.

Top 5 Neobanks in India

As already stated, there are close to 10 neobanks that exist in India. Let us now take a look at the top 5 of them and understand the services they offer.

1. Niyo Solutions Inc.

Niyo is one of the oldest neobanks in the country with a customer base of more than 2 million. They offer services to both retail customers and corporate via collaboration with various banks.

• Founded – 2015
• HQ – Bangalore, India
• Employees – 800+
• Customers – 2 million+
• Total Funding – US$ 49 million (source – Crunchbase)
• Bank Partnerships – Equitas Small Finance Bank, IDFC First Bank, ICICI Bank, Yes Bank & DCB Bank
• Brokerage Partnerships – 5Paisa & Stockal

Products –

• NiyoX – Smart savings accounts with higher ROI & ability to invest in commission free mutual funds.
• Niyo Money – Mutual fund and equities investment platform offering the lowest brokerage, commission free mutual funds and low AMC.
• Niyo Bharat – Lifetime zero balance prepaid card for blue collar job workers, helping them access banking services. Product is offered in 10 vernacular languages for deeper penetration into the Indian market.
• Niyo Global – A zero markup fee forex card offering cross border transaction across 160+ countries. Features include instant INR loading at current FX rate, no loading fees and NIL ATM withdrawal charges.

For a detailed review of each of their products, you can refer to our article covering Niyo Bank here.

Open Financial Technologies

Open is a neobanking platform which provides solutions to freelancers, SMEs, startups, and developers by enabling them to collect payments, make payouts, automated accounting, expense management, among others.

• Founded – 2017
• HQ – Bangalore, India
• Employees – 200-500
• Customers – 1 million + (SMEs only)
• Total Funding – ~US$ 38 million (source – Crunchbase)
• Bank Partnerships – ICICI Bank (primary) along with tie ups across major retail banks like Yes Bank, SBI, Kotak Mahindra Bank etc.

Products –

• Current Accounts
• Payment Gateways
• Automated Accounting Tool
• Payroll Management for Small Businesses

RazorPayX

RazorPayX is the business banking arm of RazorPay. They offer end to end business solutions including payments, payroll processing, invoicing, tax payments, and business loans.

• Founded – 2018
• HQ – Bangalore, India
• Employees – 500-1000
• Customers – 170k (Source Inc42)
• Total Funding – US$ 366 million (total for RazorPay)
• Bank Partnerships – RBL Bank for Current Accounts

Products –

Currently, RazorPayX offers end to end business banking hub for SME clients.

FI

Fi is a neobanking platform targeted towards the salaried millennials. Backed with intelligent features like virtual banking assistant, FiT rules, etc., Fi aims to help their customers develop a habit of saving.

• Founded – 2019
• HQ – Bangalore, India
• Employees – 51-200
• Customers – NA (Customers are currently in waitlist for availing their services)
• Total Funding – US$ 13.2 million
• Bank Partnerships – Federal Bank

Products –

• Zero Balance Savings Account
• P2P Payments, Fund Transfers
• Bill Payments
• Debit Card

InstantPay

InstantPay offers banking and insurance services to both individual & business banking customers. It is one of the few neobanks in India to offer deposit, insurance & utility payments along with basic banking services.

• Founded – 2013
• HQ – New Delhi, India
• Employees – 51-200
• Customers – 10 million (monthly active users)
• Total Funding – ~US$ 45 million
• Bank Partnerships – ICICI Bank, Axis Bank, IndusInd Bank, Yes Bank

Products –

• Accounts – Savings (soon) & Current
• Payment Services
• Cards & Business Loans
• Investment & Insurance
• Utilities Payment & Remittance

Conclusion – Future of Neobanking in India

With the changing needs of the consumer, Neobanks seem to be positioned to win. However, their success depends largely on whether RBI provides the required relaxation in the regulations to help them operate as a standalone banks.

For the time being, neobanks are working towards gaining more acceptance in the market. This is vital since the Indian consumers are at large not too tech-savvy and will take their own time getting accustomed to the new ways of banking.

The fact that so many traditional banks are partnering with Neo Banks show their trust in this new method of banking. Going forward, they are expected to be at the forefront to revolutionize the financial services space, both locally and globally.

In India, the neobanking segment has registered a CAGR of 50.6% (source – RazorPay) between the period of 2016-20. The trend is likely to continue well into the near future, with the entire APAC region offering a lucrative market for the same.

So, while the current market conditions may seem a bit out of favor, the future seems solid for the rise of Neobanking space. It is a matter of time before we see these banks as mainstream, with physical branches slowly fading away.

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