Neobanks Crawl Into Banking Domain As New-Age Challengers
It’s the name of new-age banking. Aligned with the dynamics of the electronic era, the concept of neobanking takes root in online operation with zero physical location. It is a kind of direct bank sans existence of traditional financial institutions. It’s a current-day emergence, providing digital, mobile apps-driven and website-based financial solutions for payments, money transfers, lending, et al.
Fresh Approach
Neobanking may take baby steps into the banking sector but it is a perfect choice for the net-savvy millennials and the Gen Zee it seems, who prefer fast-paced services and comfortable products with flexible functions. Electronic payment rails, bill clearances in real time and direct deposits are some of the activities that neobanks are involved with.
Neobanking as a concept has been around for some time now in India and many new entities are being seen to emerge in the banking sector. “These are digital banks that serve both consumers and merchants. Good news is that they operate under the regulation of the Reserve Bank of India (RBI) as a more controlled, secure and legal body,” states Vivek Agrawal, senior vice president and head of enterprise business at Comviva, a global mobility solution provider and a wholly-owned subsidiary of Tech Mahindra.
This new model ensures safety of consumers’ money while the latter gets a superior digital experience. Some examples of neobanks in India are Open, RazorPay, Airtel Payments Bank, Jupiter, Niyo and Paytm Payments. Some of these banks focus on consumers while the rest concentrates on SMEs.
Benefits in Personal and Corporate Finance
Neobanking accords ample advantages to both consumers of personal finance and businesses in corporate finance. “Neobanks offer a suite of user-friendly interfaces, convenient access to financial services via mobile apps and set up customer accounts quite quickly. They charge lower fees and competitive exchange rates for international transactions, and provide cutting-edge budgeting and savings tools that users leverage to better manage their money,” informs Parry Singh, founder and CEO, Red Fort Capital, an RBI-registered NBFC (Non-Banking Financial Company) that specialises in giving micro, small and medium enterprises (MSME) rapid business credits in less than a week.
On the corporate finance front, neobanks restructure business banking capabilities. They deliver useful features, such as easy expense tracking, multi-user access and integration with accounting software, making financial management well-organized. “Neobanks also enable speedier and more translucent cross-border trade, ironing out creases and reining in the costs linked with conventional banking methods,” he highlights further.
Cushion Against Forex Woes
One wonders how neobanking financial technology is gainful in cross-border commerce wherein FERA or Foreign Exchange Regulation Act (now replaced by FEMA of Foreign Exchange Management Act) laws are stringent and currency volatility is rampant. Neobanking's technology simplifies cross-border commerce by doling out competitive forex rates, reasonable fees and prompt transaction processing. “Its trailblazing tools for tracking and managing foreign currency translations help businesses navigate adverse currency movement. Additionally, neobanks flaunt the expertise to steer clear of complicated rules, ensuring compliance with the foreign exchange laws and facilitating smoother global dealings,” avers Singh.
Safety Issue
There are multiple payment aggregators like GPay, PhonePe, BharatPe, Razorpay, Paytm, BHIM, RuPay, et al to execute e-banking. Even most physical financial institutions have over the years launched their respective in-house payment app facilities and netbanking gateways to ease payment processes for their customers. While Unified Payments Interface (UPI) forms a single window through which money can be transferred seamlessly from one bank account to another, questions still revolve around retaining security and privacy. Can neobanking result in security breach, creating a hotbed of hackers?
Any given digital system endures a certain amount of risk and neobanks’ security measures top their priority agenda to protect customer information. “They employ encryption, progressive fraud-detection systems and multi-factor authentication to safeguard sensitive user data,” cautions Singh.
Succour for the Elderly and the Differently Abled
It is often asked whether neobanks will emerge as the best service providers for senior citizens and people with special needs who find it more convenient to avail of services in the comforts of their home without facing the trouble of traveling to the nearest bank. Neobanks can undeniably serve the aged lot and the differently-abled individuals by presenting accessible and frictionless interfaces as well as services that can be easily tapped from their households.
“The ease of managing finances without the need to be physically present on the spot spurs demand for such demographics. However, it is imperative for the technology to remain inclusive, bearing in mind the accessibility features for those with some difficulties and offering customer support to those who aren’t well-acquainted with the digital interfaces,” Singh establishes his point.
Fate of FDI
Given the market size of neobanks in India, can it attract more FDIs (Foreign Direct Investment) to expand the external trade and strengthen the forex market within the country?
According to Statista, the transaction value in the neobanking market is anticipated to touch $77 billion by 2023-end, witnessing a CAGR of 19.21% during the 2023-2027 forecast period. The market value is projected to reach $156 billion by 2027. “Neobanking's acceleration can certainly woo more FDI by exhibiting India's flourishing fintech ecosystem. As neobanks pave the way for unhindered cross-border transactions and forex management, they can add to a more vibrant forex market by streamlining processes and enticing international investors. However, the extent of this impact would rely on diverse economic and regulatory factors,” argues Singh.
As per INC42 (a leading Indian media and information platform, known for its end-to-end coverage of the Indian startup ecosystem), the domestic neobanking market was worth $48 billion in 2022 and is projected to surge 281%, reaching a value of $183 billion by 2030.
UK-based neobanks Tide and Revolut are earmarking $138 million and $45 million, respectively, for investment in India, underscoring the alluring market prospects for reputed foreign neobanks in the region.
The neobank market size in India has been inflating in recent years, with the estimated user base touching tens of millions. This expansion can be attributed to the increasing penetration of digital financial services and the convenience offered by neobanks.
Neobanks in India have the potential to attract FDIs by bolstering the digital financial infrastructure of the country. A robust digital banking ecosystem can lure foreign investors seeking to tap into India's burgeoning consumer base and exploit its thriving digital economy.
Springboard for Soonicorns and Unicorns
When quizzed if neobanking service aids soonicorns and unicorns in attaining financial stability, to that, Ankur Mittal, co-founder, Inflection Point Ventures (IPV), one of the biggest angel investors in India, replies: “After the shutdown of the Silicon Valley Bank by the California regulators, a group of financing entities and ecosystem partners stepped up to support the affected companies. Neobank Razorpay and revenue financing startups like GetVantage, Klub and Recur Club along with cross-border payments provider Salt.Pe offered solutions like lines of credit to help startups manage expenses. The funding provided much relief to several fledgling units to navigate their financial instability.”
While India hasn't witnessed neobanks directly lending sops to startups, there are NBFCs and banks that began meting out funds. Fintech startups offer financing options like Revenue Based Financing (RBF), invoice discounting and asset leasing to back the beginners.
AI Arm
Can AI (artificial intelligence) tools help secure customer credentials and accounts in neobanks by preventing infringement of secrecy and identity theft? “Neobanks can extensively leverage AI applications for fraud detection. By minimizing errors in identifying shams, AI expedites payment authentication, furnishes analysts with actionable insights and promptly pinpoints anomalies in real-time financial activities. This hastens counterfeit detection in banking, foiling malicious intent and averting fraudulent activities,” apprises Mittal.
Neobanks launch web and mobile-based applications for customer benefit. With this, they get access to various user-related data, such as behaviour, location, IP address, typing speed, etc. “Using this information and AI tools, neobanks create a behavioural biometric user profile that is based on how the customer uses the application. One may detect illegitimate activities, block unauthorized login, prevent hacking and much more,” speaks Tashwinder Singh, CEO and MD, Niyogin Fintech Limited., a leading neobank platform dedicated to serving MSMEs and more than 800 million rural Indians.
NRI Accounts in Indian Neobanks?
It is significant to enquire if the Indian diaspora settled abroad can have accounts in neobanks back home and borrow loans as well. Does this align with the law of the overseas land where the customer resides? “Generally, neobanks in India are not allowed to accept deposits from non-residents as they do not have a banking license and are contingent on partner banks for their services. However, some neobanks may offer other products and services to the NRIs, such as remittances, investments, insurance, etc.,” clarifies Prateek Swain, CEO, Swadesh Inc, the bank built to bridge the gap between premium US banking and Indian immigrants plus other non-US citizens.
As far as taking loans from the Indian neobanks are concerned, this may also vary depending on the eligibility criteria of the borrower and the terms and conditions of the lender. “Some neobanks may require the borrower to have an Indian bank account, a PAN card, a valid address proof and so on, while others may also impose restrictions on the amount, tenure, interest rate and the end-use of the loan. The borrower can use the loan for any purpose except for speculative or illegal activities,” elaborates Swain.
Apart from the requirements of the Indian neobanks, the customers may have to comply with the laws and regulations of the foreign country where they stay. For instance, they may need to furnish their foreign income and asset details to the tax authorities, disclose their overseas borrowings to the central bank, adhere to exchange control norms, etc. Besides, the customers could be subject to bear the currency risk and the transaction costs involved in borrowing from an Indian neobank.
MSME Matter
One may think about the ways in which neobanking can help agro-based MSME (Micro, Small & Medium Enterprises) enterprises find a firm footing in the business sector, given that the entrepreneurs might not be that tech-savvy. Also, there could be net connectivity issues in the hinterlands of India or people may not be able to afford an electronic device due to paucity of funds.
“Neobanking can immensely assist the entire nucleus of MSME enterprises, including the agro-based units. They may boast a big opportunity in netting a chunk of customers whose requirements are beyond the standard criteria that regular banks pursue. Customised solutions ranging from user interface, banking transactions to lending and hand-holding in various government initiatives can come under the purview of farming MSME as well as other MSME clusters,” summarises Sudip Bandyopadhyay, group chairman at Inditrade Capital Ltd., a leading player in the agri-commodity financing business and a well-known financial services provider in South India.
Albeit he admits the prevalence of poor net connectivity, he quickly claims that with “world-class telecom networks like Jio and Airtel reaching the remotest corners, the connectivity problem gets sorted almost everyday. In a couple of years, we feel there may not be any single site left uncovered by our mobile service providers”. He further intimates that his countryside e-commerce venture Boonbox sells consumer durable goods like mobile phones to the rural segment.
Neobanks on Credit History
Currently, the neobanks are overlooking the category of lower-income groups or those with minimal CIBIL (Credit Information Bureau India Limited) scores in dispensing credit. In fact, they are still eyeing the creamy-layer customers for their credit-granting decisions.
The Road Ahead
Many recommend shifting to neobanks from the traditional ones. However, industry watchers perceive the future of the Indian fintech industry to lie in partnership bondings. “Neobanks and traditional banks have very distinct and crucial roles to play in the system. So, instead of endorsing one over the other, I believe, they should ideally co-exist to enable the last mile delivery of financial services effectively and economically,” reasons Singh. In a nutshell, the banking fraternity expects traditional banks and neobanks to forge a symbiotic relationship on India’s future financial landscape.
