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 Neo banks in India. Retail Neo Banks 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 like PayTM, PhonePe , GooglePe as well as Digital Banks like Kotak and DBS which are quite popular and established apps.
The last year witnessed smaller neo banks (and a few non-differentiated ones) go through challenges:
- Open acquired Finin (a consumer neo-banking platform) in a deal worth $10M dollar
- Avail Finance acquired YeLo (platform which offered loans to blue collared workers) for an undisclosed amount
- Before being acquired by Avail Finance, Yelo laid off all its employees and shut its activities in July, 2021 due to mismatch in product-market fit
- Many others have closed their businesses or pivoted to newer segments like Crypto
We believe that this year, Non-differentiated & Smaller Neo banks will cease to exist due to the massive need for funds in this tough and ruthless market
We had predicted that Larger Retail Neo banks 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 , EpiFi , Freo 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 with more people switching to the retail neo banks and may achieve Unicorn status soon because of massive amount of funding these neo banks are getting from large investors. With Digital Bank Licenses expected to come in the next 24 months, these neo banks would be in line for becoming regulated entities.
Newer and upcoming neo banks are coming up with a sharper and a detailed focus on unique and differentiated customer segments like:
- Dairy Unions
- Working Professionals
- Global Citizens
- Blue Collared Workers
- Older customer base
- Specific Regions
These startups have a higher possibility of success as they will focus on a particular segment and hence understand the segment deeply along with offering wider product offerings and decreasing competition in the particular segment. The startups coming to target this segment also use improved technology, better customer acquisition strategies and a variety of products to fulfil customer’s needs and expectations.
There have been many differentiated startups launched lately which have scaled up quickly by focusing on a particular segment like:
- Mahila Money: A neo bank which focuses on providing financial services and financial independence to women in India to give them a platform to achieve financial goals
- Zolve: A neo bank that offers cross border financial services and access to global financial products to immigrants settling in other country
- FamPay: A neo bank exclusively for teenagers that helps them to make payments, online and offline through the FamCard
- DGV: A neo bank focused towards providing financial services and products to dairy farmers in India
- Kosh: A neo bank for blue collared workers in India which provides loans to them in groups
- epiFi: A neo bank focused towards serving millennials in India
We expect many more differentiated Neo banks 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 front end to 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 development took place over the course of last year:
- Zeta Suite has started building a full stack banking platform
- Chennai based fintech solutions company Hypto which provides companies with APIs that they can use to integrate financial products into their platform raised $3 Mn in a seed funding round led by Stellaris Venture Partners . The startup’s first stack supporting payment infrastructure already saw transactions worth over $15 billion
- Industry veterans C N Ram, Manmath Kulkarni have launched FYNDNA TechCorp Pvt. Ltd – a new age Digital Focused core banking platform
- Neobanking Startup Open launched No Code DIY Finance Platform Zwitch which is a DIY (Do it Yourself) fintech service platform which offers fintechs with drag and drop interface to commence fintech services
- Hyperface is getting the market ready for new age credit card stack
- EV Financing Startup RevFin , a digital consumer lending platform which deals in providing loans to underserved segments, claiming to rely less on numbers, and more on a psychometric and biometric assessment , raised $4 Mn through both Debt & Equity
- Open Banking platform / Payment Infrastructure market received massive funding and scale with Zwitch , M2P Fintech , Cashfree Payments , JUSPAY , Decentro , Setu , CARD91 leading the way CARD91 leading the way
- Fintech Startup Easebuzz , a payments infrastructure startup that develops API-based solutions to help businesses process digital collections and payments raised $4 Mn as part of its seed round to expand Payments API Play
- Digital Banking platforms are making inroads with newer customer engagement platforms being built
We predict that $1B+ 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.