Digital Banking involves the transformation of traditional banking services which are available in brick-and-mortar banking branches. These activities involve Account opening, lending, wealth management, customer service, etc. With the pandemic making people unable to visit branches physically, there is an urgent need to offer them banking services through other channels. To make this happen, it is vital to build a Digital Strategy, which is aligned with the Business Strategy. In order to help people familiarize themselves with the banking digital ecosystem and the technology players helping enable its growth, The Digital Fifth has created a representation of the Digital Banking ecosystem of the Country
Impact of The NITI Aayog’s Discussion Paper ‘Digital Banks: A Proposal for Licensing & Regulatory Regime for India’
The NITI Aayog released a Discussion Paper ‘Digital Banks: A Proposal for Licensing & Regulatory Regime for India’ which highlighted the challenges inherent to the existing neobanking partnership model that has emerged in India due to a regulatory vacuum and the absence of a Digital Banking license. The implications of this report will be:
- 10+ Digital Business Bank Licenses (or Retail or Hybrid Digital Banks) may be issued in the next 18 months. Neobanks, Payment players, Lending Fintechs would be the prime candidates for this
- $1 B+ of newer investment in ”Potential Digital Banks” in the next 18 months
- Traditional banks would build ”Digital Banks” aggressively / partner with Neobanks
- Newer revenue opportunity for BaaS players / Neobanks to Whitelabel their platforms
- New age underwriting platforms will scale
- Potential Opening of Value Added Services (invoicing, tax management, accounting, non banking services) to the entirety of banking
- The existing Revenue Model in the industry would undergo transformation
- Cloud will become central to the Banking Ecosystem
- New Core Banking Platforms would emerge
- Job creation at industry level and country level
RETAIL NEOBANKS TRENDS AND INNOVATION TRENDS
The banking ecosystem of India has undergone rapid changes in the past 5 years, moving from a traditional product-centric, inside-out approach to a consumption-based, outside-in approach. With the evolution of open banking, pioneered by BFSI players like Yes Bank, Kotak, RBL, etc, the ecosystem has now grown to include NBFC and other tech players who have created partnerships within the system. Open banking has now become a part of their organizational culture. The ecosystem has also seen the emergence of players in the segment of API Validation and data-driven solutions, enabling it to grow into perhaps what can be called the most comprehensive and holistic open banking ecosystem in the world.
In 2021, we had predicted a different journey for Retail and SME Neobanks in India. Retail NeoBanks would move from primarily “Youth and Mass focused” to more differentiated segments. Many of these new initiatives would close down due to a lack of differentiation and monetization opportunities. They would find it challenging to build a business as they would compete with larger Super Apps (PayTM, PhonePe) as well as Digital Banks (like Kotak and DBS).
The last year witnessed smaller neobanks (and a few non-differentiated ones) go through challenges:
- Yelobank, Finin have been acquired by Avail Finance and Open respectively.
- Many others have closed their businesses or pivoted to newer segments like Crypto
We believe that this year, Non-differentiated & Smaller Neobanks will cease to exist due to the massive need for funds in this tough market.
We had predicted that Larger Retail Neobanks with massive funding will do well. This can be attributed to the leadership quality, access to larger funds and ability to sustain growth. Over the past year, larger startups like Jupiter, NiyoX and Epifi have raised funds and/ or gained decent traction in the market. They are receiving acceptance from the customer base as trusted platforms. They will continue to scale at a rapid pace and may achieve Unicorn status soon. With Digital Bank Licenses expected to come in the next 24 months, they would be in line for becoming regulated entities.
Newer Neobanks have now come up with a sharper focus on
- Older customer base (approximately 50+)
- Specific Regions
These startups have a higher possibility of success as they will possess a deeper understanding of the customer segment, wider product offerings, and lower competition.
Some of the differentiated startups which have been launched and/or scaled are:
- Zolve: Zolve is a cross-border fintech that enables fair access to global financial products
- Mahila.money: A woman-focused neobank
- Fampay: A teen-focused neobank We expect many more differentiated Neobanks to come up and expand the market.
These entities would be a great fit for acquisition as larger ones look to widen their footprint.
We also believe that Retail Neo-banking as a term will not be used for platforms that simply offer a ‘Decent App on Prepaid’. Overall, the Retail Neobank segment will have just 5 large players and 5 to 10 differentiated players doing well in the next 24 to 36 months. This segment would see at least 3 unicorns during this period.
Innovation Will Move from the Front-end to the Back-end
What we had shared in our trends for 2021: A lot of early-stage innovation in India was focused on better customer experience during Sales & Onboarding. This created space for investment in frontend apps with subpar delivery through archaic back- office processes. We believe that during this year, the focus will shift to strong and flexible backend platforms with integration capabilities & cloud readiness.
This would mean heavy investment in:
- Core Banking Platforms
- Open Banking Systems
- Digital Banking Systems
- Digital Lending Platforms
- Open Insurance Platforms
- Payments Infrastructure
We believe that investments in startups focusing on these platforms will soar.
The following developments took place over the course of the past year:
- Zeta Suite has started building a full- stack banking platform
- Industry veterans C N Ram, Manmath Kulkarni have launched FYNDNA TechCorp Pvt. Ltd- a new age Digital Focused core banking platform
- Hyperface is getting the market ready for new age credit card stack
- Open Banking Platform / Payment Infrastructure market received massive funding and scale with Zwitch, M2P Fintech, Cashfree Payments , JUSPAY, Setu, Decentro, CARD91 leading the way
- Digital Banking platforms are making inroads with newer customer engagement platforms getting built
We predict that $1 B+ of funding will go into building this infrastructure layer. Banks will begin looking for alternate core platforms to power their digital business, including for Current Accounts, Savings Accounts, BNPL, Credit Card and Prepaid lending business.
Additionally, a few end-to-end Fintechs with limited funding would pivot to the infra layer as this requires more business engagements and less marketing dollars.