The Neobank & Open Banking Revolution

From simple coins to digital wallets where all kinds of currencies can be stored, the payments industry has evolved rapidly over the ages. However, the reality is that for it to get to this point, we have witnessed a wide range of changes in the way we treat monetary assets.

Let’s view a simple timeline of the evolution of payment systems from way back in history up until now:

?Evolution in Payments?

• From Times Unknown until 3000 BC: The barter system prevailed; People exchanged goods for other goods, with the value of each good pre-determined.
• 3000BC Onwards: Barley was introduced as token money; the payment system now works with commodity money rather than simple barter exchange.
• Around 700 BC: The minting of Coins has begun; Payment is now made with distinct coins that have a pre-defined value.
• Early 17th Century: Coins started becoming a menace due to heaviness; Bank notes were introduced, and this is the plain hard cash we still use today.
• Late 17th Century: Drawn Notes (Cheques) introduced by bankers in London, a first for the economy
• 20th Century: Visa, the company we all know today, introduces the credit card terminal. Even though the whole credit card system has been changing dramatically, Visa’s PoS (Point of Sale) is still the most prevalent processing machine for credit cards today.
• Late 20th Century: The internet has arrived, and digital payments are along with it. Payments without physical cash or cheques are now made possible. The system now recognizes you and the value of the cash you own.
• 21st Century: Digital Payment solutions have evolved at lightning-fast speeds. Escrow payments, e-wallets, one-click payments, and cryptocurrencies are a few of the numerous new concepts of payment. Nevertheless, payments with cash, credit cards, and cheques continue to dominate daily-basis operations.

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Rise of Digital Payments

Over the last few years, fintech solutions have driven the majority of digital payments product innovation in our country. There has been exponential growth and increased adoption of various payment services, partly due to the pandemic as the need for contactless payments skyrocketed, but also by the rapid developments in payment technology and product offerings.

The recent pandemic has brought the various benefits of digital payments into the limelight, in a time where contact between individuals has been minimized. Digital payment solutions have another key strength that is they are capable of reaching a wider audience than regular financial products which are delivered in a brick-and-mortar model. This has been possible thanks to the much lower customer acquisition costs of fintech platforms compared to banks, and the use of advanced technology to develop targeted customer acquisition tools and solutions.

With almost every person being equipped with a mobile phone and decent internet connectivity, digital payment solutions now have a wider reach compared to traditional financial solutions, and many more people can now transact and access their funds wherever they are in the world, thanks to easily accessible fintech products and solutions.

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What Is Open Banking?

Open Banking, a revolutionary banking system for our generation, is the kind of banking system where a particular bank allows access and control of its customers’ financial and personal data to third-party service providers, usually Fintech businesses. Customers must first give their consent to let the bank allow such a level of access to these third-party vendors.

Once the consent is provided, the third-party providers’ APIs can use the shared data of the customers. These third-party providers can then use this data to do certain tasks such as comparing accounts and viewing transaction history, aggregating financial data across different financial institutions, creating marketing profiles, or even making new transactions or account changes on behalf of the customer.

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Few Usecases of The Open Banking System

1. Open banking can enable lenders, through the use of networked accounts, to get a more accurate picture of their customer’s financial standing and risk level in order to offer appropriate loans. It can also help consumers understand their own finances better, before taking on debt of any kind.

2. Through an open banking app, customers who want to buy a home can automatically calculate what they can afford through all the information from their accounts, providing an even more reliable picture than current mortgage lending guidelines.

3. Small businesses can save time and effort through online accounting using Open banking apps. These apps can also help fraud detection companies better monitor and regulate a customer’s account and any issues that may arise.

4. Open banking apps can also be developed to better help visually impaired customers understand their finances through the use of accessibility features such as voice commands.

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Well, What’s Neo Banking?

Neobanks are Fintech companies that provide several financial services without having any physical presence. In simple terms, they are banks that have an online-only presence. Fintech companies are quite strong at technology and always place the highest importance to provide their users with an excellent experience through their digital platforms, which is just what the users of this new age are now expecting of their banks and financial institutions.

Neobanks essentially beseech today’s tech-savvy customers. They can also be called fintech firms that provide digital payment solutions such as money transfers, lending, and more but on a mobile-first platform. Neobanks do not have their own bank licenses, and so rely on their bank partners (usually nationalized banks) to provide licensed banking services.

Due to the rapid shift in the financial landscape towards ultimate customer experience and satisfaction, there is now a gap between what traditional banks offer and what new-age customers expect. And so, Neobanks are here to attempt and fill in that gap.

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Emerging Neobanks in India

1. Niyo:

Founded in 2015 by Vinay Bagri and Virender Bisht, Niyo is one of the most popular neobanks of today. They offer digital savings accounts and other financial services in partnership with multiple banks.

They currently serve over 4 million customers across their banking and financial management portfolio, and process daily transactions worth over $3 billion. They also issue travel and forex cards in partnership with SBM (India) & DCB Bank and also provide zero-balance prepaid cards for domestic use.

Through their wide range of digital banking and other financial services, they have not only simplified and enriched the experience of users but have also given them a glimpse into the future of a new age of banking.

2. Fi Money:

Set up by Google Pay co-founders Sujith Narayanan and Sumit Gwalani, Fi Money targets salaried millennials who may not have the time to schedule bank visits but be able to avail all the services provided by traditional banks.

Through their partner Federal Bank, Fi offers an attractive 5.1% annual interest rate on its smart savings account, and also provides an AI-based feature called FIT rules that lets its users automate their savings by setting up certain checks or triggers based on popular events (Eg. Cricket matches) If these checks are triggered, an amount pre-defined by the user gets transferred to the savings account.

Fi allows its users to also create multiple savings accounts for any kind of goal the user has planned. If users prematurely withdraw from the said account, then they only charge 1% interest on the account. Along with all these benefits, each user is also issued a VISA debit card corresponding to their account.

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3. Jupiter:

Started by Fintech veteran Jitendra Gupta, Jupiter allows users to create bank accounts at the speed of light. Users also are able to track in real-time their account insights, along with a comprehensive breakdown of their spending.

With a zero-balance account facility, Jupiter extends instant support to all its users if and when any problem arises. They also help users gain rewards on each transaction (1%) on their debit card or UPI spends. Both Fi Money and Jupiter are partnered with Federal Bank, and so an individual can only open an account with one of the neobanks. However, there is a facility to switch over from one neobank to the other.

4. Mahila Money:

Created by Sairee Chahal, the creator of a female-only social media website “Sheroes”, Mahila Money is a revolutionary neobank that caters only to female entrepreneurs from suburban and urban settings. This neobank was started with the purpose of providing female entrepreneurs an opportunity to start their own business, even if they didn’t have any micro-financial support.

Through some of its community-based features, the platform allows its users to interact and share their experiences for the benefit of new entrants to the realm of enterprise activities. Through its partnership with an NBFC called Capital Trade Links Ltd., Mahila Money provides all its users with loans and also prepaid cards.

5. PayZollo:

PayZollo is yet another neobank that is thriving in the Indian Financial market. Directed toward millennials, it is a digital-only platform that aims to build a new way of banking where people can discuss and understand various financial topics. In short, it acts as an intelligence hub of sorts where people or even businesses can enlighten themselves as well as give advice for others’ growth.

PayZollo provides its users with an exhaustive expense management system that can track expenditures and investments of users to effectively enable savings. They also leverage AI and APIs to provide their users with the best and most convenient digital banking experiences.

NeoBank & Open Banking: Working Hand–in–Hand

Alright, it’s time to recount whatever we have understood so far. We already have a good idea about how neobanks are becoming mainstream due to the various digital solutions they offer. We also have a firm notion of Open Banking and what usecases are possible. Well, now you must be wondering how Open Banking helps neobanks achieve their goal. Let’s find out.

Open banking encourages financial transformation through neobanks, all the way from account aggregation to better management of finances. This is done in a regulated fashion, ensuring compliance with the revised Payment Services Directive (PSD2) and General Data Protection Regulation (GDPR).

Neobanks have also found a way through the Open Banking system to bring tailored solutions to a lethargic financial market, where traditional banks were the only beneficiaries. As such, neobanks and open banking work together, hand-in-hand, to the benefit of customers and also to promote innovative financial solutions. The ball is now in the park of the traditional banks. It is up to them to either embrace open banking or to remain behind with the old methods.

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Are We a Step Closer to The Future of Financial Services?

In this golden age of technology, we are embracing the increasing technological innovation in the digital world. Be it the way we order food online, apply for jobs or partake in financial transactions, our lives are becoming even more influenced by these digital innovations. Long ago people would wait in a queue at a bank to either withdraw or deposit cash.

However, all this has since changed, and people now want to save their time in any way possible. This paradigm shift is all thanks to the numerous technological disruptions in fintech, insurtech and regtech solutions.

Neobanks are considered to be the latest and greatest technological disruption in the banking sector, exclusively digital banks that work on an online-only basis. Heralded as the future of banking, the outbreak of the recent global pandemic has driven further the adoption of neobanks. They continue to challenge conventional banks and the way they serve their customers.

With the government providing active support, the Indian Open Banking ecosystem continues to thrive and grow in the market. India has also become a global role model for open banking thanks to the launch of Account Aggregators, Neobanks, API readiness of banks and NBFCs, and intense funding. With the power of Open Banking already showing its potential and being actively used in India through UPI and Aadhar Enabled Payment System (AEPS), the sky's the limit for further innovation in Open Banking, and adoption of such innovative solutions will likely be frictionless.

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Article written by:?Sean Pinto?@ Incubate Hub

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Incubate Hub?is Asia's largest open innovation & corporate venturing platform to drive Digital Transformation & Sustainable solutions working with Startups, Students & Professionals. We also help Startups engage with our 52+ clients including Mondelez, Faurecia, P&G, Accenture, Tata, DCB Bank, Fidelity, ITC Infotech, IBM, NASSCOM, Analog Device, Nasscom Foundation & Quest Global.