India, the new hub of neobanks

By providing people with the right incentive structure and behavioural nudges, we can help get customers ready to adopt digital financial services. -Nilesh Agarwal, co-founder CEO, Yelo

Regulatory initiatives

Introduction

Reserve Bank of India’s guidelines does not allow a 100% digitalisation of banks. In India, neobanks are not granted their banking licences. The neobanks provide financial services by partnering with licensed banks. For example, Digibank, a neobank launched by DBS bank in 2016 received approval from RBI to operate as a wholly-owned subsidiary of DBS. Digibank is DBS bank’s digital spin-off and operates as an independent neobank.

Payments bank

A type of bank gaining recognition in India is the Payments bank. Payments banks offer their services completely online. They are recognised as payments banks under Section 22 of the Banking Regulation Act, 1949. While these banks can accept deposits i.e., current deposits, and saving banks deposits (up to INR 1,00,000), issue ATM or debit cards, and offer retail banking and intra-banking transactions services, they cannot issue loans or credit cards to their users.

However, in 2019, Paytm payments bank in collaboration with CITI Bank launched India’s first unlimited cashback credit card which is offered to limited customers based on their digital behaviour. Moreover, to access the services provided by payments banks, the customer must have an existing bank account with a traditional bank. Thus, we classify payments bank under the digital platform category of neobanks. To further read about the type of neobanks, read the article Neo banking 2.0: The new face of banking in the Asia Pacific

On tap licensing framework

Moreover, in December 2019, RBI issued guidelines for on-tap licensing of small finance banks (SFBs) in the private sector, which allow the creation of banks specifically targeting the unserved and underserved small business units, small and marginal farmers, and micro and small industries. These guidelines enable payments banks, such as Fino payments bank, Airtel payments bank, and Paytm payments bank, microfinance banks and non-banking financial institutions (NBFCs) to apply for the licence. The entities must have a track record of conducting business for 5 years in addition to a minimum paid-up capital of INR 200 crore to convert into small finance banks.

Snapshot of India’s neobanks

Table 1: Profile of India’s neobanks

Table 2: Learning list of India’s neobanks funding capital

In-depth neobank analysis on the 5-building block framework

Customer centricity:

• Every established neobank in India exemplifies a superior experience for their customer and fulfils at least one parameter under customer-centricity.

Figure 1: India’s neobanks represent all customer centricity parameters

Customer reach:

Out of the 27 neobanks in India:

• InstantPay serves over 50 million across all 3 customer segments- SME, rural, and Millennials.
• Revolut serves the 500,000+ businesses (SME) and 15 million+ people (millennial) globally.
• 67% of the neobanks exclusively serve the millennial segment.

Figure 2: Customer segment and total number of customers

Product stack:

• 8 of the 27 neobanks in India offer their customers with unique payments options such as virtual debit cards, split payments, and credit cards.
• Digital platforms Razorpay X, InstantPay, NiYo, Walrus, and Slice have unique accounts such as multi-currency, and teen and kids’ account.
• Digibank, SBI YONO and InstantPay provide business/personal overdraft facilities in addition to offering basic loan services.

Methodology: Each neobank’s product stack is a representation of 4 key parameters across 11 product types

1. Unavailable: Does not have a product type in their stack
2. Testing: The product is currently in the pilot-testing phase, not live to all customers
3. Established: The product is a part of their stack and fully available for customers
4. Unique: A unique offering within a product type which is exclusively provided by the neobank

Figure 3: Representation of each neobank’s product stack

Partnership ecosystem:

• Since RBI does not allow the 100% digitalisation of banks, the neo banks in India collaborate with traditional banking institutions to offer financial services. The major banking partners are State Bank of India (SBI), ICICI Bank, Kotak Mahindra Bank, IDFC First Bank, Yes Bank, HDFC Bank, RBL Bank, Federal Bank and Lakshmi Vilas Bank.
• The leading network/payment provider in the Indian neo banking arena are Rupay, Mastercard and Visa.
• Top insurance partners for Indian neobanks include Bharati AXA, Tata AIA, Aviva, Birla Sun Life, Punjab National Bank, Kotak Life Insurance, ICICI Prudential Life Insurance, and Bajaj Allianz.

Figure 4: Partnership ecosystem of India’s neobanks

Open Banking:

• The open banking ecosystem in India has grown tremendously with the advent of Unified Payments Interface (UPI), thus enabling consumers to make real-time payments with ease. Several banks have taken the initiative to build their own Open Banking ecosystems such as API gateways, API stack players, account aggregators and so on.

Table 3: API Developers for India’s neobanks

Indian neobanks’ outlook

1. A high mobile and internet penetration rate in addition to the largely unbanked population proves that India is a market ripe for neo banking.
2. The new recommendations made by the Indian inter-ministerial panel on fintech to the Department of Financial Services and RBI to test new fintech innovations in a restricted ecosystem and to examine the benefits of granting full banking licences to banks while allowing them to operate completely online will boost the financial inclusion thrust in India.
3. The sudden surge of neobanks in the Indian banking sector indicates that the market is lucrative for technology-based platforms, thus enabling superior user experience with the secondary infrastructure of a traditional bank to mitigate risk.
4. Two scenarios will exist as the future of neobanks
   1. Firstly, neobanks will become the primary interface and a daily transactional bank for customers. Whereas traditional banks form the secondary interface and a long-term saving bank.
   2. Secondly, India will witness a consolidation of multiple small neobanks in a single super application with a targeted approach to each customer segment (Gen Z, millennials, businesses, rural, and agriculture).

Annexure:

Table 4: List of Indian neobanks’ investors

End notes

We have sourced information pertaining to the funding value, round, customer base, revenue, and product information from Crunchbase, Owler, respective company’s annual reports, and their websites.

Akshita Maruthavanan, Research Intern, contributed to this research by assisting in writing, conducting preliminary analysis and conceptualising the topic.