We credit the Telecom reforms to Mr. Sam Pitroda erstwhile adviser to the Prime Minister of India Shri Rajiv Gandhi. During the UPA 1.0 headed by Dr Manmohan Singh, the Economist PM invited Infosys Co-founder Mr. Nandan Nilekani to Lead and Architect the Unique Identity Project – Aadhar. On the basis of UIDAI, Indian Financial ecosystem has witnessed massive disruptive transformations. The first wave of disruption in financial services was led by digital payment startups, followed by digital lending, wealth management, and Insurance technology startups. As we enter the second wave of disruption in FinTech 2.0, it is led by Neobanks ( Digital Only, over-the-top banks without actual RBI Banking License leveraging on the license of a Traditional Bank) that aim to redefine customer-centric consumer and business banking experiences.
What do the NeoBanks do ?
They offer fully digitized account opening, free debit cards, instant payments, personal finance advisory, cash flow analysis & projections, GST-compliant invoicing, and accounting integration.
How are NeoBanks Different from Licensed Digital Only Banks ?
In case of Licensed Digital Only Banks they have obtained full fledged RBI Banking License (Capital Requirements runs in Hundreds of Millions of Dollars), it enables them to offer products & services, raise capital, and lend on their own. Lower operating costs help them offer better interest rates to customers. Partnerships with FinTechs and even other banks are common in this model, and some offer marketplaces.
However, in case of NeoBanks the offering is either niche products or a bouquet of products in partnerships with FIs, banks, and FinTech firms but at a cost quite lower than that of traditional banks. Highly tech-driven and an overlay over licensed banks, they differentiate themselves by offering unique features/VAS and better banking experiences. There are around 12 NeoBanks either operational or ready to takeoff in India.
What about Digital only Brands like DBS Digibank / Kotak 811 ?
These are stand-alone, digital only brands created by traditional incumbent banks. Backed by cutting edge Technology and operationally separate from the parent entity. Focus of them is on the Millennial segment. This has been a reasonably successful model in India since era of demonetisation in 2016.
In their efforts to become a part of the next wave of FinTech innovation, venture capital & private equity investors have started to invest heavily in Neobanking startups. So far around $250 million has been invested. With the Fintech 2.0 revolution taking off, will neo banks succeed in the exteremely price sensitive cut throuat banking sector of India ?