15/10/2024, 12:42 Neobanks and the next banking revolution - PwC India
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Neobanks and the next banking revolution
The business of banking is changing rapidly. Products and services rendered and built
on disruptive technologies are increasingly being placed in the hands of end customers,
and the behaviours of banks are changing in terms of customer convenience,
transparency, pricing and customer service. As costumers’ behaviours and
expectations change, so do the business and operational models.
Every part of the banking value chain – from what consumers can avail and expect in
terms of banking services – can now be accessed by a non-banking service provider
through its technological prowess and agile and lean business models. Under these
models, retail and small and medium enterprises (SME) banking services are primarily
delivered through the internet or other forms of electronic channels instead of physical
branches. These non-banking service providers are called neobanks and they are
challenging the present status of traditional banks, by offering lower cost models and
hyper-distinctive customer-centric service and experiences. Unlike their traditional
counterparts, neobanks aren’t constrained by legacy systems, tightly integrated value
chains, complex administrative structures and lofty regulatory requirements. Though
neobanks don’t have their own bank licences in India yet, they use partners to offer
bank-licensed services.
Convenience of opening and operating accounts, seamless payments, transfer and
remittance solutions and alternative methods for assessing creditworthiness are some
of the features that are attractive to micro and small companies and underbanked or
unbanked customers such as freelancers and gig economy employees. Neobanks have
provided these segments access to financial services and products, which were either
scarcely available or came with heavy fees and stringent agreements.
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Digital banks vs neobanks
A digital bank and a neobank aren’t quite the
same, even though they appear to be based on
Case study
the mobile-first approach and emphasis on A private sector bank in India has partnered
digital operating models. While the terms are with a Fintech start-up – a neobank – to
sometimes used mutually, digital banks are transform the employee benefits
often the online-only subsidiary of an ecosystem. This neobank provides an
established and regulated player in the banking integrated solution, comprising a multi-pock
sector, A neobank, on the other hand, exists card, a mobile app and a digital account with
solely online — without any physical branches multiple payments wallets. Under this
and independently or in partnership with partnership, the private sector bank and
traditional banks. This enables them to neobank have rolled out a benefits card, whi
navigate and comply with the regulatory makes it easier for organisations to give
environment. employee benefits and for employees to clai
them. The solution leverages state-of-the-art
in-mobile technologies and has been built on
the IndiaStack principles, including e-KYC b
Unique Identification Authority of India (UIDA
and Unified Payments Interface (UPI), launch
by the National Payment Council of India in
2016.1
Neobanks: Fertile ground for opportunities
The global neobank market was worth USD 18.6 billion in 2018 and is expected to
accelerate at a compounded annual growth rate (CAGR) of around 46.5% between
2019 and 2026, generating around USD 394.6 billion by 2026.2
The substantial growth potential for neobanks is driven by their low-cost model for end
consumers with no or very low monthly fees on banking services such as minimum
balance maintenance, deposits and withdrawals. Adoption by millennials, micro, small
and medium enterprises (MSMEs), and those having sporadic incomes and earnings,
embracement of innovative technologies and rising consumerism are some of the
catalysts for the success for neobanks. The high adoption rates and successful
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business models of neobanks has piqued the interest of investors, venture capitalists
and corporates, who contributed USD 586.7 million of the total funding of USD 3.49
billion received by FinTechs globally in March 2018.3
In 2018, the business sector accounted for majority of the global market revenue of
neobanks4, due to growing acceptance of digital payments in both multinational
companies and organisations in their nascent stages. MSMEs received services such
as accounting, budgeting, taxation, analytics from neobanks at fractional costs. Such
services were earlier accessible only to larger establishments, owing to the costs
involved.
Pioneers of neobank adoption
As discussed above, neobanks are digital-only
banks providing heightened user experiences
and easy-to-integrate plug-and-play solutions
for accounting, payments and tax via open
application programming interfaces (APIs). But
for neobanks to be adopted on a larger scale,
greater penetration of smartphones and the
internet is crucial, along with user comfort with
digital applications and elementary knowledge
of financial products and services.
Based on the above-mentioned growth and
adoption factors, Europe held a substantial
share – about 40%, of the global neo and
challenger bank market in 2018.5 The United
Kingdom is expected to lead the neo-banking
market, for underlying reasons such as low
concertation of branch banking as compared to
other advanced economies like the US, rise of
thin-file customers, overall higher financial
literacy rates and the region being one of the
early adopters advocacy of digital banking.
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Progressing in adoption of neobanks
Asia-Pacific region is expected to witness notable growth in neobanking in future.
China, India and Japan will be the fastest growing countries in the regional neobank
market.6 Emerging economies like India and China are projected to exhibit healthier
economic indicators in times to come based on increasing smartphone penetration,
higher technological adoption, better financial awareness and an expanding number of
seamless, automated, convenient and cost-efficient solutions provided by neobanks.
Between, 2017 and 2018, India’s mobile
banking users increased by 13% and 92% in
value and volume terms, respectively.7 But as
per the Global Findex Database8 of 2017, 80%
of India’s population remains severely
underbanked, which reflects the untapped
potential in the country for mobile-based
neobanking services.
Neobanking in India has scope for significant
growth as MSMEs in the country can avail their
services on a large scale. MSMEs are
numbered at 36.2 million (20179) and account
for 95% of the country’s total industrial units10,
but have been either out or under-served by
traditional banks’ operational ambit, depriving
them of formal banking and credit needs. The
focus on digital economy and adoption of
mobile banking, coupled with the underserved
banking, financial and credit needs of both
MSMEs and retail segments, present
substantial market opportunities for neobanks
in India.
At present, there are four main neobanks in
India, which have received sizeable funding
from investors.11 In addition, there are global
banks, which view India as an engine of
growth. Recently, one of Singapore’s largest
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banks launched its services in India, including
savings accounts, fixed accounts, payments
solutions, transfers and investment
management. The services offered by the bank
are completely digital, without any presence of
physical branches.
Advantages and shortcomings of neobanks
Advantages of neobanks over traditional banks for MSMEs
1. Customer experience: neobanks don’t offer novel banking services. Their services
are similar to those of traditional banks, but with a hyper-enhanced and
personalised customer experience. Neobanks have significantly leaner business
models and superior technologies at their disposal compared to traditional banks,
providing ease and efficacy in services, such as seamless account creation, round-
the-clock customer service supported by chatbots, near real-time cross-border
payments, and artificial intelligence (AI) and machine learning (ML)-enabled
automated accounting, budgeting and treasury services.
2. Automated services: Apart from providing primary banking services, neobanks
offer automated and near real-time accounting and reconciliation services
for bookkeeping, balance sheets, profit and loss statements and taxation
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services such as GST-compliant invoicing, tax payments record keeping and
reconciliation, on mobile platforms for affordable costs..
3. Transparency: Neobanks are transparent and strive to provide real-time
notifications and explanations of any charges and penalties incurred by the
customer.
4. Easy-to-use APIs: Most neobanks provide easy-to-deploy and operate APIs to
integrate banking into the accounting and payment infrastructure.
5. Deep insights: Most neobanks provide dashboard solutions with highly enhanced
interfaces and easy to understand and valuable insights for services such as
payments, payables and receivables, and bank statements. It’s beneficial for
businesses with significant expenditure and appropriate number of employees, to
be provided with such insights, reduce expenditure and boost productivity and
revenue.
Case study
In India, a neobank is catering its services and solutions for SMEs and playing a leading
role in aiding small businesses in managing their finances conveniently and
comprehensively. The neobank provides a platform that helps such businesses send
and receive payments, automate their accounting and reconciliation, generate and
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track compliance of invoices with direct and indirect tax laws, and access third-party
banking and business applications from its platform, allowing multiple businesses to
simultaneously manage all their banking needs under a single platform.
Regulatory considerations for neobanks in India
In India, virtual banking licences are still not granted, though there are foreign national
banks offering digital-only products through their Indian subsidiaries. The Reserve Bank
of India (RBI) remains stern in prioritising banks’ physical presence, and lately
reinforced the requirement for digital banking service providers to have some physical
presence12.
The significance of brick-and-mortar bank branches is to serve customers and redress
their disputes and grievances in person. In its 2014 Guidelines for Licensing of
Payments Banks, the RBI had highlighted that it does not see payment banks
becoming '"virtual" or branchless banks.13
Presently, neobanks in India are addressing the regulatory predicament by outsourcing
their banking responsibilities to those with licences, creating strategic partnerships with
traditional banks and providing amplified services on behalf of existing ones. This
model is already being used worldwide by some of the biggest names in neobanking.
As part of their business strategy and to overcome regulatory hindrances, neobanks
partner with traditional banks and offer business and consumer banking services. For
the end customer, financial and banking services are offered by the neobank, but from
a regulatory perspective, monetary transactions are managed by their partner banks.
Road ahead
Attributes and offerings like accessibility, cost-effective multiple banking and financial
functionalities under one umbrella, and personalisation are some of the driving factors
for neobanks globally. Secondly, FinTechs are building niche solutions focusing on
blue-collar workers and the underserved needs of thin-file MSMEs, which is the way
forward.
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Neobanking can work as an extension of measures undertaken to solve the challenges
of financial inclusion and bundling banking services with other financial services—for
example, services like opening of bank accounts for immigrants, facilitated through new
onboarding procedures not based on traditional documentation of identification. With
narrow targets initially, neobanks could expand by adding more functionalities and
services over time.
Although digital and neobanks are gathering momentum, most are yet to show
sustained profitability.14 Nevertheless, they have great potential to be disruptors in
banking and financial services, and the key towards becoming profitable entities
would be to convince traditional banks to invest in new-age technology and re-engineer
processes to provide seamless and swift customer experiences.
With competition mounting among traditional banks, new-age FinTechs, technology
firms and non-banking entrants, it is yet to be seen whether the market is deep enough
for neobanks to grow sustainably and equitably. How neobanks manage vital
impediments in terms of regulation and compliance, data and cyber security, seamless
API integration and expansion of products and services will be the fundamental
determinants of their success.
With inputs from Raghav Aggarwal and Avneesh Singh Narang
Sources:
1
Case Study sourced from https://www.financialexpress.com/industry/banking-
finance/yes-bank-partners-fintech-startup-niyo-eyes-5-million-customers-in-5-
years/383055/
2
Zion Market Research report “Neo and Challenger Bank Market by Type (Neo
Bank and Challenger Bank) and by Application (Personal and Business): Global
Industry Perspective, Comprehensive Analysis, and Forecast, 2018–2026”
3https://gomedici.com/march-2018-fintech-funding-lending-neo-banks-topped-charts
4https://www.globenewswire.com/news-release/2019/05/21/1832371/0/en/Global-
Neo-and-Challenger-Bank-Market-Will-Reach-to-USD-394-648-Million-By-2026-
Zion-Market-Research.html
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15/10/2024, 12:42 Neobanks and the next banking revolution - PwC India
5https://www.globenewswire.com/news-release/2019/05/21/1832371/0/en/Global-
Neo-and-Challenger-Bank-Market-Will-Reach-to-USD-394-648-Million-By-2026-
Zion-Market-Research.html
6https://www.globenewswire.com/news-release/2019/05/21/1832371/0/en/Global-
Neo-and-Challenger-Bank-Market-Will-Reach-to-USD-394-648-Million-By-2026-
Zion-Market-Research.html
7https://economictimes.indiatimes.com/wealth/personal-finance-news/mobile-
banking-catching-on-fast-heres-the- proof/articleshow/65593432.cms?from=mdr
8https://globalfindex.worldbank.org/sites/globalfindex/files/2018-
04/2017%20Findex%20full%20report_0.pdf
9https://www.statista.com/statistics/718232/india-number-of-msmes-by-type/
10https://www.ibef.org/download/SMEs-Role-in-Indian-Manufacturing.pdf
11
https://www.financialexpress.com/industry/sme/indian-startups-investors-tap-
neobanking-market-after-tiger-global-tencent-and-horizons-back-neobank-
startup/1638430/
12https://m.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=892
13https://www.rbi.org.in/scripts/PublicationsView.aspx?Id=18061
14
https://qz.com/1679197/when-will-digital-banks-like-n26-and-revolut-start-
making-money/
Contact us
Vivek Belgavi
Partner, Financial Services - Technology and FinTech Leader, PwC India
Tel: +91 22 6669 1734
Email
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