Submission for The Centre for Social & Economic Progress (CSEP)
Megha Anand
BA (Economics and Mathematics)
Miranda House, Delhi University
Email: [email protected]
Phone: +91 76370 02011
Surge of Neo Banks in the Indian Economy
What are Neo Banks? What caused the rise of something purely digital in a country that not many years
ago barely used physical banking services on a regular basis? The evolution of India from a
technologically lacking economy to one where neo banks prosper.
What are Neo Banks?
Neo banks, also called challenger banks, are banks with only a digital presence and no physical
branches. These banks leverage technology and Artificial Intelligence to provide personalised services to
their customers and minimise operating costs. While these banks don’t have a bank license of their own,
they count on bank partners to provide bank licensed services.
In the U.S., these fintechs are more commonly referred to as neobanks1. The term “challenger bank” was
first popularized in the U.K. to refer to a number of fintech banking startups that emerged in the wake of
the 2007-2009 financial crisis. The “challenger” moniker is apt. These companies are often compared to
digital disruptors in other industries. Today, these fintechs are transforming the banking sector in a similar
way as Airbnb revolutionized the hospitality industry.
Neo Banks and India
According to UN reports, India has one of the largest youth populations. Quite naturally, the economy is
influenced by the quick lifestyle of the Gen-Z and the millennials. What youth also lacks is financial
education and familiarity in the demographic. All factors push towards an economy drawn to the quick
account creation, friendly user interface, one click transaction reports and seamless international
transactions features of neo banks2.
1
What Is A Neobank?, Forbes, 24/06/2021
2
India has world's largest youth population: UN report, The Economic Times, 18/09/2014
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Source: PwC India
In India, roughly, three operating models can be observed in the functioning of these neo banks.
● Non-licensed: FinTech firms that collaborate with conventional banks to have a mobile/Web
platform and a wrapper around their partner banks’ products.
● Evolving banks: Traditional banks that are undertaking their digital initiatives.
● Licensed neo-banks: The ones with digital banking licences in those countries that allow it.
Why the growth?
From the very products marketed between advertisement breaks of Kaun Banega Crorepati to the
unanimous idea of a comfortable tech savvy life being the goal, the shift of finance towards technology
was expected. What is noteworthy is the pace. Some credit the after effects and policies of
demonetisation, while others the increasing accessibility of technology for this change. What everyone
seems to agree on is the importance of this very shift. With over 2000 fintech players in the country, digital
payments are embraced at such a large scale. Customers are moving away from physical banks and
physical cash, and more towards online banking and wallets. More and more people are getting
comfortable making online payments through Google Pay, Paytm, PhonePe, and more, now more than
ever. If we think about these numbers, we can see the potential neo banks have in the country.
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Moreover, Indians love discounts and the sharp slash in customer fees is yet another light for the moths.
Neobanks are customer-centric, they provide personalized services to their customers that are fired up
via technology. Data-driven decisions3 drive the decision-making process of a neobank. Since their
platforms are also very modernized, it becomes easier for them to collect and analyze data and
understand how their customers behave in the neobanking ecosystem. Based on these observations,
they create cohorts of customers taking their action into account rather than merely sticking to one or two
data points.
FinTechs create specialised offerings that concentrate on the under-served demands of blue-collar
employees and MSMEs, which is the path forward. Neo banks have changed the business model of
traditional banking.
According to Zion Market Research, worldwide, the neo-bank sector was worth $18.6 billion in 2018 and
was projected to grow at a CAGR (compounded annual growth rate) of 46.5 percent between 2019 and
2026, generating about $394 billion by 2026. The major players in this segment are InstantPay, Niyo,
Open, and RazorpayX.
Challenges
While the surge and shift in dynamic has been faster than anticipated, neo banking continues to face
major pains in terms of functionality and smooth operations. Some of the major hurdles are:
● Complex IT legacy
● Inadequate data architecture
● Higher cost management
● Lacking advanced technology
● Organisational resistance
Apart from these hurdles, an additional problem faced is the absence of provision of virtual banking
licenses in India4. Although foreign banks are providing digital-only products through their Indian
subsidiaries, the Reserve Bank of India recently strengthened the criteria for providers of digital banking
services, giving priority to physical presence.
Given the shift in dynamics in the Indian economy, it is expected for people to develop a sense of trust,
which is crucial for the long term dependability of these neo banks. There are 10 neo banks in India
currently, and a couple of more are in the process of entering the market. ICICI Bank took the lead in the
segment and partnered with three neo banks: Free, Instant Pay, and Yelo. The profit margins of neo
banks are slim, and the regulators are encouraging more entrants and competition. There is no room for
anyone now, and rivals have started to merge. More M&A activity is expected as the neo sector matures.
Neo banks are expected to see higher growth in the SME market.
3
What is a Neobank? Everything You Should Know, Razorpay, 15/03/2021
4
Neo bank — the new disruptor on the block, The Hindu Business Line, 17/03/2021
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All in all, Neo banks are the future of not just the Indian but the international economy. With time and
advancement, the shift towards digital banking is inevitable. The reaping benefits and slashed prices in
consumer fees of neo banks are popular incentives to the Indian masses and while a huge chunk of
doubts and hurdles exist, by virtue of demand and supply determinants of lifestyle and technology, the
solidification of the neo bank sector is determined.
Sources:
1. https://www.forbes.com/advisor/banking/what-is-a-neobank/
2. https://m.economictimes.com/wealth/save/5-things-to-know-about-the-neo-banks/articleshow/844
99225.cms
3. https://razorpay.com/blog/what-is-a-neobank/
4. https://www.thehindubusinessline.com/opinion/neo-bank-the-new-disruptor-on-the-block/article34
093484.ece
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