Indian Open Banking / Neo Banking Ecosystem
The Indian Open Banking Ecosystem has grown at a rapid pace over the last three years, with leading banks like Yes Bank & RBL Bank taking a leadership position from the initial days. Since then, many Banks and NBFCs have taken steps to partner with the ecosystem through a substantial investment in technology and change in their internal culture. These banks are looking at Open Banking as a Business Model and are creating Banking As A Service Units with separate P&L.
There has also been an emergence of newer players like NeoBanks, API Gateways & API Stack Players which are simplifying life for customers. We have created an Open Banking & Neo Banking Ecosystem Map to bring clarity on potentially the most innovative Open Banking Ecosystem in the world.
Banks and NBFCs form the base of the open banking based business model and offer their business products and services in the form of API packages. These APIs range from Payments APIs (Penny Drop, IMPS, UPI, AEPS, NEFT, etc.), Collection APIs (NACH, UPI Collect, Direct Mandates), Lending APIs (Full-stack for specific loans like personal loan, education loan etc.) and other banking services.
Many NBFCs like DMI & Northern Arc are also focusing on a partnership based digital lending model by providing a set of open APIs.
Technology Layer Enablers at Banks:
Core Banking Platforms
Core Banking platforms handle the complete life cycle of customers across liabilities and asset products. Many of these platforms are now getting API ready. We believe that there is space in India for a completely API powered Core Banking Platform which could propel a new segment for banks.
API Gateway Players
An API gateway enables access of the bank’s APIs to partners in a secure way, while handling user & partner authentication, routing, controls, API monetization, as well as monitoring and analytics.As of now, there are a limited set of international players in this segment and there is space for a flexible Indian player to create an impact.
These technology-focused startups help in the development of APIs on API Gateways while handling the bank’s internal APIs. These niche players have attained a level of expertise in banking services and are helping in making banks agile.
Payment networks in India provide payment railroads to everyone through products like Debit Cards, UPI, Credit Cards, IMPS, etc. NPCI has played a huge role in India through multiple innovations like IMPS, UPI and more.
Third-Party API Layer:
API Stack Players
API Stack Players work with multiple banks and provide simplified access of banks to Fintechs. They have become the first port of call for banking services like prepaid, collections, credit etc. Internationally, bigger players like Plaid & Tink have emerged.
This segment is likely to see intense action in the next 3 – 5 years, with multiple Unicorns coming into the picture as well. There is limited competition in this space, and enough space for more than ten strong players given the need and width of services.
NBFC Account Aggregators
RBI has issued licenses to NBFC Account Aggregators who will help the customers in getting a single view of their entire financial status as well as in sharing (with their consent) this information through APIs for various purposes like credit, wealth management etc. These NBFCs are still working with banks and other financial institutions for aggregating the data and would be able to create an impact in the next 6 to 18 months.
India has recently seen the arrival of Retail Neobanks, which are focused on the comprehensive needs of retail customers like savings, payments, lending & wealth. While a lot of current large UPI-based platform players almost appear like Retail Neobanks, many new players, with deep pockets, are still attempting to enter this space. We believe that there would be cut-throat competition in this segment, and that it is the most challenging segment to win.
SME needs have always been different to those of the retail and corporate segments. However, most banks have always treated SMEs as a part of them. The real needs of SME customers, like invoicing, collections & credit have never been catered to by banks. SME Neobanks have focused on the overall needs of the SME customers and have built robust solutions for their identified segments. Bank Open has led the way, and many new fintechs like Ezo & Instantpay are entering this segment. We believe that this segment is large enough to allow for the coexistence of more than five valuable SME Neobanks.
Digitally savvy banks like Kotak, SBI and DBS have taken an aggressive approach to new age banking and have built their Retail Digital banks (Kotak811, Yono and Digibank respectively) which are at par with Fintechs. They have acquired a substantial customer base over the last couple of years and are continuously improving their products & services. We believe that these banks will have long term advantages and may impact potential opportunities for Neobanks.
Many banks are building their own digital banks. However, due to the lack of digital culture/technology, these initiatives have not moved at the right pace. Many of these banks would take their Digital Bank to production this year to reduce the impact of COVID-19 on them.
We expect at least a couple of Digital Banks to be built for MSMEs in the next 12 months, given the sheer monetary size of this opportunity.
Amazon, Google and other big tech players have been at the forefront of launching their UPI enabled platforms for payments. These players are continuously progressing and are offering a slew of credit products. We believe that these players would make a long-lasting impact on the Open Banking Ecosystem with their tech prowess as well as a large customer base. They may also buy out multiple Fintechs and API stack players.
Enabling Layer: Data Providers / India Stack:
KYC / AML / Risk Management Players / Credit Bureau
This is a critical layer for enabling Open Banking and is a standard layer used by Banks, NBFCs, Fintechs, Neobanks etc. These players help in simplifying customer onboarding and management through KYC checks / Fraud checks, Credit checks, AML checks and regulatory reporting.
IndiaStack is a set of APIs that allows governments, businesses, startups and developers to utilise a unique digital Infrastructure to solve India’s hard problems towards presence-less, paperless, and cashless service delivery (source – India Stack website). This stack has accelerated innovation in financial services, and multiple countries have replicated this model.
We believe that there are multiple newer areas like credit, collections and more where universal APIs would be required.
Investors have nudged innovation along by investing across all layers. We believe that COVID-19 will accelerate the growth of Open banking & Neo Banking in India and potentially 40% of the overall investment will flow into these segments.