The Indian Financial landscape being vastly different from the developed economies, has resulted in a modest pace of newer technologies absorption. The hurdles were multi-fold i.e. sheer size & scale of market, unique risk and compliance, distinctive consumer behaviour and regulatory challenges, to name a few. Pandemic disruptions came with a silver lining – fast tracking the way forward for tech absorption and digital
banking. Covid-19 served as a veritable catalyst, and customers as well as banks began to rapidly embrace digitization, there was no option. Consequently, digital transactions in India surged 30% last year.
According to a KPMG report, Fintech investments in India were $3.5 billion in 2019. Despite the recent ravages, we attracted a whopping $2.7 billion in 2020. More so, RBI governor has already referred to the ready emergence of digital banks in India.
Since there is an unrelenting tailwind for a ‘digital future’ of the banking ecosystem, it is appropriate to peek into the world of Neo Banks.
What are Neobanks?
Neobanks are new age digital banking entities that operate 100% digitally without the traditional brick and mortar branch network. Currently in the nascent stages, Neobanks are growing consistently and have already started to carve a definitive path of their own. The RBI Governor says, a segment of banking entities in future would comprise digital players acting as service providers directly to customers or through banks as their agents or associates.
Neobanks are not licensed RBI banks but they rely on their bank partners for offering bank licensed services. In India, Neobanks will broadly work in two distinct categories: One, working directly as service providers. Example – RazorpayX, Instant Pay & Open. Two, working as online entities of already established banks, for instance SBI YONO & KOTAK’s 811.
Unlike traditional banks which offer a full range of financial products, and leverage their branch network to engage with and to build the trust of customers, Neobanks use new age technologies such as Cloud, Data Analytics to target select customer segments. The focus is on cost reduction and on crunching timelines of customer acquisition: offering seamless and paperless operations, customised products & services, solving for the challenges associated with traditional banking, thus ensuring a unique customer experience. They are more agile and target niche segments such as millennials, SMEs, low salaried, which may not be the main focus of traditional banks.
What do Neobanks offer
Employing new age digital technology i.e. Cloud based storage, Artificial intelligence, Machine Learning and open APIs, Banks, NBFCs & Fintech players are able to offer:
Banking as a Service (BAAS)
Data driven approach for decisioning
Customised products
Bespoke customer experience
Open APIs
Cyber Security as well as protection against Cyber Crime
Swifter turnaround
Banking as a Service (BaaS):
BaaS is an end-to-end encryption model that allows digital banks and third parties to connect via open Application Programming Interfaces (APIs) with banking systems and offer secure open banking solutions for customers. API is an intermediary (software) that allows communication between two applications.
With the help of these APIs, banking services of mainline banks can be used by diverse stakeholders such as Fintech companies, web developers and even non financial businesses. These third parties put up a layer on the top of existing banking services and offer innovative solutions. In other words:
- Fintech company (neobank) pays to mainline banks to use BaaS
- Bank which is a BaaS platform opens up its APIs to this third party
- Fintech company integrates APIs and offer innovative financial services
Thus, a Neobank can bring on board unlimited on-the-click innovations and offers for quicker & smarter decisioning.
Holistic Customer Experience: New age digital banks employ AI and ML to provide more personalized recommendations, offers and products, thereby ensuring a pleasurable & unique customer experience. The decisioning is data-driven. The platform creates cohorts of customers based on their behaviour on the platform and offer unique solutions. They do not rely on one or two data points only.
Practical insights: Customers can access online dashboards to get insights on account & services. For example, your bank’s app could offer a Spend Analyser, a customised app that shares Saving & Investment tips basis your monthly inflows & outflows from the account. The recommendations are customised and personalised uniquely for your profile.
24X7, mobile experience: The services can be accessed round the clock as per customer preferences.
BaaS can strengthen the core of legacy banks
In the normal course of business, large Indian banks (like any gigantic organisation) are too large to bring about a swift change in their operations and procedures. Besides the years of experience in customer segmentation and nurturing long-term relationships with clients, traditional banks own huge data of merchants as well as end-customers. By offering open APIs and BaaS banks can partner with several stakeholders (Fintech as well as non financial partners) and drastically expand their basket of products & services beyond banking & lending and that too, across locations. Besides deposit accounts and lending products, neobanking will also be powered to offer innovative services for payroll management, payment gateway, invoicing, taxation, budgeting, cash management & much more.
Support to Financial Inclusion in India
It may not be profitable for a bank to set up brick & mortar branches in remote villages. However neobanking can offer a complete range of services in far-flung locations. As neobanks employ open APIs and Baas, they have 100% digital solutions. They can offer customised and affordable Saving, Investing and Credit solutions to the unbanked customers in the smallest of villages. A huge boost for financial inclusion.
Flash in the pan or next big thing?
Globally, neobanking is fast disrupting the Fintech landscape, and is expected to raise an estimated $400 bn by 2026. India too is getting its fair share of investments in this sector.
Also, India has currently the highest Fintech adoption rate and annual return on investment in the Fintech start-ups. In the long run, however, the success will largely depend on the level of customer awareness, cyber security, protection from cyber crime, API integration and customer ease & seamless experience.
Looking ahead, a hybrid approach involving both digital and traditional banking is the sweet spot for India, and that indeed is in the best interests of consumer services and financial inclusion.
The blog has been authored by Raj Khaosla, Founder and MD, MyMoneyMantra.com
DISCLAIMER: The views expressed are solely of the author and ETBFSI.com does not necessarily subscribe to it. ETBFSI.com shall not be responsible for any damage caused to any person/organisation directly or indirectly.
Financial Express is now on Telegram.