Neobanks. Applications to apps: A new banking era

Ritesh Batra is not a new-to-bank customer. An experienced financial industry professional, Batra has been using ICICI Bank’s savings account and credit card for several years now. But, when Batra wanted a new bank account and a credit card to exclusively manage his utility payments, he didn’t approach any of the traditional banks.

Instead, he used the neobanking app, Fi, to open an account with Federal Bank, and OneCard app to get IDFC First Bank’s credit card. “I wanted to check if it’s really possible to open a bank account and get a credit card without any hassle and paperwork. I am quite impressed by the outcome,” he said.

Batra is not alone. With a rise in online consumerism and demand for personalised experience, several digital millennials, Gen Z users, teenagers and first-time-to-bank consumers, gig economy and blue-collar workers are increasingly turning towards neobanks for banking and financial needs.

“Today, many banks focus just on transactional stuff like account opening, lending, deposits, etc. There is no personal connection in the digital age,” said Sumit Gwalani, co-founder of Fi. “At Fi, we add value beyond transactions by helping customers understand finances, address their questions and help them save more,” he added.

Gaining traction

Neobanks, which are online-only fintechs without any physical presence, have been gaining traction across the globe over the recent years. While traditional banks also offer digital banking solutions, neobanks address a particular aspect of banking like account opening, savings or investments by providing superior customer experience through product innovations and by leveraging technology.

For instance, Fi not only provides a seamless account opening experience, but also demystifies financial jargons. A user can simply use a digital financial assistant ‘Ask.Fi’ to know how much he spent on ordering food this month, or with the help of auto-bot, FIT, set rules to save money automatically for pre-defined conditions.

Tracing Niyo’s journey

Likewise, digital banking fintech Niyo started with just one product — an employee benefit card — in 2016. Today, it has four major business lines: NiyoX (bank accounts in partnership with Equitas Small Finance Bank), Niyo Money (wealth management), Niyo Bharat (prepaid cards for blue collar employees) and Niyo Global (zero markup forex card for international travel). It serves about 2.3 million customers and over 7,000 corporates through these products.

“We launched NiyoX in March-April this year and have already opened a million accounts so far,” said Swapnil Bhaskar, Head of Strategy, Niyo.

NiyoX offers ‘007 banking’ feature which refers to zero per cent commission on mutual funds investment, ‘zero’ account maintenance charges, and up to seven per cent interest on account balances. The company plans to on-board two million customers by the end of 2021.

Through its partnership with Equitas Bank, NiyoX also promises account opening in 100 seconds. Such agility and product innovations also help traditional banks improve their customer base and generate more revenues.

In its latest report on Federal Bank, Emkay Global said, “The bank is gradually transforming itself into a next gen private bank to attract digital natives and millennials via its neobanking offerings. This should help it compete and thrive while also driving better fees and revenues.”

Similarly, in case of Equitas Small Finance Bank, Emkay Global said its CASA now stands at a historic high of 45 per cent on the back of strong customer acquisition via branches and neobanking tie-ups. “Currently, about 60 per cent of savings accounts are estimated to be opened online. We foresee that about 80 to 90 per cent will happen in the next two to three years,” Bhaskar said.

Challenges

Although neobanks cover a wide range of financial products, they also face several challenges, the major one being the lack of a license or regulatory backing. There are over a dozen neobanks in the country, including RazorpayX, Open Financial, Niyo, FPL Technologies (operates One Card), EpiFi Technologies (operates Fi), Jupiter, Instantpay India, Freo, among others. While some focus on the consumer side, others target the MSME segment.

The absence of a licence also prevents them from accepting deposits or undertaking lending, thereby precluding them from higher revenue opportunities. Fees, commission and other transactional charges remain their sources of revenue.

“Their operational model is yet to show sustained profitability,” PwC said in a recent report on neobanks.

“Ultimately in the financial world, you make money only through lending. You make small money by selling insurance or investment products but the maximum revenue comes only from lending through loans, cards or buy-now, pay later products and we are a pioneer in this space,” said Anuj Kacker, co-founder of Freo.

Started as MoneyTap in 2016, Freo is India’s first credit-led neobank. The fintech, which is backed by a licensed NBFC MoneyTap, also partners with banks and other NBFCs to offer products including credit line, credit cards, EMI cards, deposits & savings, BNPL products etc.

“We have done close to ₹6,000 crore disbursement over the last five to six years. Our customers have grown 2X in the last six months while the transaction volumes/disbursals have also grown 2x in the 12 months cycle,” Kacker said.

What’s in store?

Following the recommendation of an RBI working group to regulate digital banking, the Niti Aayog recently proposed setting up of ‘full-stack digital banks’. Such a move, if allowed, will permit neobanks to provide lending, deposits and other banking services to MSMEs. “In the absence of a licensing regime, fintechs offering the neobank proposition in India have improvised and adopted the front-end neobanks model,” the discussion paper said.

Industry players say the paper is a first step in addressing the regulatory vacuum. “The recent Niti Aayog paper is a great start as it talks about neobanks as a separate category,” Gwalani said, adding, “The RBI has always been at the forefront of forward-looking policies and we do expect opening of potential digital banks as an upgrade for neobanks.”