Tag: revolut

The rise of e-commerce led to trusting digital-first options in various segments such as payments, insurance, investments. It was inevitable that this transition would be witnessed by the banking sector as well. Millennial audiences unfamiliar with brick-and-mortar services are open to digital-first banks where the need to visit a branch diminishes.

Globally, India has the 2nd largest base of internet subscribers, smartphones, and social media user base. With ~600mn digitally active customers, India offers a large market for digital banking services. This growth has been enabled by India’s public digital infrastructure and other regulations and policies.

Additionally, the COVID-19 pandemic has also accelerated the transformation of banking. It created an opportunity to innovate, and almost all traditional banks supplemented their brick-and-mortar branches with sophisticated digital versions of their services. Banks expanded their digital footprint and are using their digital channels to offer a range of services.

Taking this a step further, we now have neo-banks, which are fully operational digital-only banks with advanced features. The state of the art technology is what gave rise to neo-banks in the last few years with startups like Jupiter, Fi, and Finin, launching their services in 2019-20. Revolut, which was last valued at $33B, has recently announced its plan to roll out neo-banking services in India.

What is making Neo-banking the winner?

In the US, neo-banks like Chime allowed consumers to transfer money faster than the usual 3-4 days taken by conventional banks. On the other hand, in the UK, in addition to money transfer, neo-banks also provided borderless banking across Europe, which is a borderless economy. However, such problems do not exist in India, and the winning reasons will be different.

India is different. With an experiential layer added on top of traditional banking, neo-banking will help solve access to several financial products that are not readily available to the 600M Indians and the 65M MSMEs. Riding on the success of the India FinTech stack – Digi locker, Aadhar, UPI 2.0, Account aggregator model, neo-banks will be able to improve digital distribution channels and onboarding for customers. Through the account aggregator model, neo-banks will be able to have access to the financial health of consumers, thus being able to offer personalized financial products. It will also allow them to correctly measure the default risk of these consumers, reducing NPAs and improving ROE margins.

The global scenario for neo-banks is quite different from that in India. In India, digital banking licenses are yet to be issued. Hence the current framework does not allow them to launch full-stack banking services. Obtaining a universal banking license will allow neo-banks to operate as a bank, in addition to the tech angle for better customer experience and ability to offer a myriad of products.

Today, some banks including Kotak Mahindra Bank, Yes Bank, and Federal Bank, are willing to partner with neo-banks for offering underlying banking accounts. It is a lucrative proposition for banks since they share RoE without bearing the additional cost to acquire these customers.

Way forward for neo-banks in India?

Since Indian neo-banks are just being launched, it will be interesting to see how they will monetise as the traditional sources of revenue for a bank would be unavailable to them, i.e., taking deposits and lending those deposits. Other revenue streams like MDR fees on card transactions is decreasing with the acceleration of UPI payments (and UPI payments are not revenue-generating). This leaves the neo-banks with cross-selling of financial products (wealth management, insurance, community-led discounts, stock market investments, etc.) and account opening commissions from banks as the primary source of income.

Currently, Neo-banking in India is at a nascent stage where some positive developments have happened in the last few quarters. The business models around neo-banks in India will have to evolve beyond the MDR on card transactions in the next few years. The key to their success will depend on how innovative they will be, in creating new revenue streams and acquire users with high lifetime value. Neo-banks who eventually will acquire a large user base with sustainable revenue streams will stand a chance to get a digital or a universal bank license and they are the ones who will emerge as winners in this space.

The blog has been authored by Kiran Vasireddy, Partner at Kalaari Capital.

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.