The rise of Neo-Banking in India

By: Anand Sankar

The past few years witnessed a significant number of fintech companies popping up in the Indian start-up ecosystem. Neo-banks comprising significant numbers in the fintech coming up in the recent disrupting the traditional banking system of India. These banks are totally tech-based that is bridging the gap between the user and the banks which exists in conventional banking. The major attribute to their growth in the recent years is mostly because of rise in the internet usage and also the coverage expanding beyond the earlier perimeter set. Today the mass has option of a smartphone and internet at their fingertip.?

What are Neo-Banks?

• Neo-Banks are financial institutions with online presence only. They do not operate via offline branch. They are totally tech enabled and operate via applications.
• They offer all the services like conventional banking through their online platform.
• Their target customer is the tech-savvy generation who prefer the online route for basic transactions like payments and lending without visiting the offline branches.

The main element that differentiates conventional banks and Neo-Banks is that the Neo-Banks do not have a Banking license to operate rather they rely on the banking partners who offer them banking products.

As per the Banking laws in India, RBI does not permit 100% digital banks service, so they cannot opt for the full banking license.

Their expertise lies in Artificial Intelligence and technology to offer personalise financial services and products together.

The major player in India are Fi Money, Jupiter, RazorPayX, Niyo etc.

The Rise:

According to the Inc42 report, “Neo-banking in India is a $48 Billion market opportunity in 2022 and is set to increase by 281% to reach $183 Billion by 2030”.

Neobanks are estimated to account for 9% of India’s total fintech market size by 2030, which is estimated to reach $2.1 Trillion.

According to Inc42’s ‘State of Indian Fintech Report, Q3 2022. InFocus: Neobanks’, Indian neo banking startups raised $869 Mn across 48 deals between 2014 and H1 2022.

India from its inception in the banking economy has been a underbanked nation. With the growth of the economy mainly internet economy, that is app based banking and then the neo-banks the demand for the finance has skyrocketed.

Demonetisation 2016 and the fast adoption of UPI by the masses have skyrocketed the demand for formal finanace in the economy. UPI has proved to be a huge success and has accounted for 116 Billion transaction worth of $2.4 Trillion as of August,2022.

Along with Bnaking and payments, digital lending has also turned out to be a lucrative opportunity for both B2B and B2C Neo-Banks. The total loan amount disbursed by the Neo-Banks stood at $123 Billion while the total retail laon in the country stood at $963 Billion, as per the RBI Reports.

RBI is planning to come up with new set of rules for the digital lending which would steer the Indian Neo-Bnaks ecosystem in the right direction making possible the Neo-Banks to come uo with new revenue options.

The Road Ahead:

The Neo-Banks have a favourite option for the investors to invest in, increasing competition, decade old banking rules and regulations are proving to be barrier in the growth of Neo-Banks in India.

Since, there is no regulations for the Neo-banks by the RBI, the development of business models by the existing Neo-Banks might seem to be objectionable by the RBI. Neo-Banks are the evolving part within the banking system of India which have continued to exist over for the last few decades. With proper regulations achieving the mark of $183 Billion market size by 2030 seems to be a high possibility.