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The fintech sector in India is in a burgeoning phase of growth. According to a KPMG report this month, total global fintech funding crossed $210 billion with a record 5,684 deals in 2021, up from $125 billion across 3,674 deals in 2020. India was one of the top destinations, with four out of top 10 fintech deals in the Asia-Pacific region originating from the country.
Within the fintech churn and an online payments revolution in India courtesy the Unified Payments Interface (UPI), an emerging sector with the biggest promise is neobanks—fully online banks looking to close the gaping hole between traditional banking services and an emerging digital-native generation. According to a projection by Grand View Research, globally the neobanking sector market size is expected to reach $722.6 billion by 2028 at a whopping Compound Annual Growth Rate (CAGR) of 47.7 per cent. So, what exactly are neobanks? Think of a digital bank without any physical branches, providing users with a customised, agile experience, superior engagement and and flexible multi-line product delivery systems. Neobanks cut down on a lot of friction costs incurred by the traditional banking system, and are devoid of the onerous burden of physical visits to bank branches. They can cater directly to the underserved sections of the community, with technology-driven dexterity.
There are different types of neobanks. The front-end neobanks act as technology layer for a partner traditional bank and piggyback on their balance sheet for their functionalities. Then there are the standalone digital arms of traditional banks, YONO SBI of the State Bank of India (SBI) being an example. Then there are the full-stack digital banks (Monzo, Starling being global examples) that have full regulatory approval and provide the complete array of services.
In India, the RBI is strict in its regulations. Fully digital banks are not yet recognised, and physical branches are mandated. That means most neobanks—be it Jupiter, Fi, Niyo or RazorpayX—work in partnerships with traditional banks as the consumer-facing layer.
What are the advantages and disadvantages of neobanks? As mentioned earlier, neobanks are cheaper and much more flexible and agile than traditional banks. As a study by NITI Aayog noted, neobanks had a much lower cost-to-serve and cost-to-income numbers; Per-account operation costs of traditional banks could run up to 10-20 times higher. If sufficient focus is given on building trust and relationship with customers (traditional banks rank much higher in that), the customer lifetime value (LTV) to customer acquisition cost (CAC) metric can be built up with long-term profitability in mind.
Then there are under-tapped segments of society that the neobanks can target—access to financial services continues to be a core need of retail, and micro, small and medium enterprises (MSMEs), and there are various untapped opportunities in customer segments including tier-2 and 3 cities and rural areas as well as digital millennials who receive limited attention, as per a recent study by PwC.
At this current point of time, RBI is tight-lipped about issuing full-stack digital banking licenses. The NITI Aayog study flagged the limited revenue potential for neobanks as they stand now; interchange fees (or the 'swipe fee' whenever a credit or debit card is used) is one of the few avenues. “They earn fee-based revenue wherever they act as channel partners [account opening and onboarding, investment opportunities credit], and potentially earn a fraction of interchange on payments processed through cards; but other than these two buckets, lack any other revenue sources,” according to the report. It also points out that, in the absence of a licensing framework, entry barriers for fintechs to enter neobanking space are low, offering opportunities for actors that are not fit and proper to enter the market creating consumer protection risk. In that case, trust—the premium commodity—is put under the sword.
In conversation with THE WEEK, Jitendra Gupta, founder of Jupiter neobank, describes his venture as banking services for the "smartphone generation". Gupta is a veteran in the industry, having founded Citrus Pay which was later acquired by PayU in a reported $130 million deal. Jupiter, which has tied up with Federal Bank as partner, offers real-time financial insights including spend breakdowns, autopilot savings, and a portfolio analyser. He says the industry is converging towards a 'superapp' concept, where a multitude of services are offered under one application umbrella. WeChat is one example, providing messaging, cab hailing, food delivery and other services in one interface.
Excerpts from the conversation:
How would you define a neobank?
Neobanks, or 'challenger' banks, are platforms like ours who partner with a traditional bank and take a very customer-centric approach in providing banking services. The platforms have a very segmented approach, focusing on millennials, teens, NRIs, senior citizens [and so on].
A little bit about Jupiter.
If you look at Jupiter, the idea is to provide banking services to the smartphone population in a very personalised and contextual manner. We believe banking is moving more and more to digital side. [Most] banking apps primarily revolve around bank accounts. For Jupiter, bank accounts are [just] one part of [the experience]; we are a finance app effectively. So, we help you make better decisions and become more financially savvy.
In the US, neobanks like Chime address specific use-cases like instant payment. What would be the use-case in Indian scenario, where the traditional banking sector is largely technologically in sync?
It is difficult to compare India to outside markets. Payments is a solved problem in India. To create a neobank, we have to address a problem statement focused on India. Banks are doing a good job here. But there is a gap evolving in terms of consumer expectations. On one side, they [the young customers] see Swiggy, Zomato, Amazon on phone, and then they see [banking apps like] ICICI and HDFC. They see a stark difference—in terms of navigation experience, service. What banks did is when it came to apps, they put a [bank] branch experience on mobile. So, there are like menus, counters, and you [have to] pick up and choose; in terms of financial service, there is a wait time of 48 to 72 hours. I don't think today's customer world operates that way. They want everything recommended and contextual. A customer isn’t able to answer a question of which is the best bank [to hold an] account currently, but if you ask them which is the best taxi app or food delivery service, they will have answer. They don't have the answer for the bank account question because they don't perceive a difference [between two bank services]; everything is the same.
What do you see as the future of traditional banks? How can banks compete with the modular flexibility afforded for a neobank? Will it need a core infrastructure revamp?
The problem is not with infrastructure. The problem is mindset and talent. I think they need to think and operate differently. I think they need isolated teams working on this problem statement. But, a bank is structurally not geared towards this. That is the biggest problem. Structurally, every department in the bank wants to push everything together.
If it is a not a question of resource scarcity, is it a question of misplaced priority?
That is true. It is a mindset issue.
What we saw until recently was an unbundling of financial sector. A kind of rebundling is happening in the space now. What kind of shapes do you see the sector take up in the next couple of years?
It is not just India. Across the world, there is a realisation that there is no choice but to become a multi-line business. Otherwise, CAC to LTV does not add up. The same customer anyway consumes all services. Why not capture the value of the customer, and make the customer more sticky with the product or platform? Second, I think the relationship in banking is very different for the customer. The trust level is very different. When it comes to payment, to lending, the customer makes a call, and optimises [choice of the platform] for the transaction. When it comes to banking, stickiness or retention works very differently. You don't decide that you will use this bank today and that bank tomorrow. Your behaviour is set, and that is the key difference which everybody is realising and sort of converging towards. Going forward, I expect everybody to converge to a superapp concept. I don’t see why everybody would not do that.
People like to use the aphorism ‘banks vs neobanks’. Is that a wrong lens, considering the general trend of convergence towards superapps?
The convergence will happen, but the platform which will have dominance will be one that focuses on personalisation.
How do you address question marks on revenue growth and profitability in the sector?
The answer is very simple. A bank fundamentally does three things: accept deposits, lend money, and optimise returns for customer's money. 80 per cent of revenues come from lending. The reason lending happens effectively in the banks is because of the relationship formed with the customer. I think monetisation will still happen through lending. I don't think interchange will form more than 25-30 per cent of revenue. So, almost 70 per cent of revenue still comes through the net interest margins.
Will neobanks have to go vertical at least in the mid-term? In the West, you see a focus on neobanks catering directly [and sometimes exclusively] to niche sections like musicians, entrepreneurs and freelancers; in India's case, teenagers and SMEs.
You are right. Entities operating in this space will have to remain focused. Investment, product department, customer experiences all are diametrically opposite if you take [say] the consumer and SME sides. It is very clear. They need to have mid-term focus on a segmented approach, or it will be very difficult to gain scale.
