Many if’s and but’s stand in the way of this mega ambition, but neobanks have advantages that traditional banks lack.
In India, banking services have accelerated digital transformation and opened a multitude of opportunities for the financial sector. This benefits their customers, who can get their finances managed more efficiently.
Part of the reason for accelerated banking digital transformation is the advent of neobanks offering customer-centric services across retail and business banking, remittances, money transfers, utility payments and personal finance.
Neobanks, which are ‘direct financial service institutions’, operate exclusively online without a brick-and-mortar presence. According to Sanjay Dangi, Director, Authum Investment and Infrastructure Ltd.: “Neobanks are simply the evolutionary outcome of a process that has been going on for two decades. Gen Xers have adapted to it while millennials and GenZ have simply grown up with digital banking, now mostly delivered through mobile apps. Most of the latter have not set foot into a bank branch and really see no point in filling forms or writing cheques.”
Challenging the hegemony of traditional banks
According to Sanjay, many big established banks in India are either ridden with labor issues and outdated systems, or are heavily indebted or poorly governed. “If neobanks help clean up banking and restore credibility, that is progress,” he said.
The country is working towards creating a mega neobanking ecosystem to fill gaps that traditional banks have left open. Superior service at reduced rates; automated and near real-time accounting and reconciliation services for bookkeeping, balance sheets, profit and loss statements and taxation services such as GST-compliant invoicing—these and other benefits of natively-digital banking are pushing the adoption of neobanks in India.
Two critical aspects make for a lucrative market: the continuous rise of digital payments and the promise of central bank-backed digital currencies. While the younger generation in India is already paying through e-wallets and United Payments Interface-based payments, the older generations are learning the advantages of not carrying wads of cash.
Sanjay commented: “In fact, UPI has been a technological advancement in India that has truly gotten well ahead of several G8 nations. As for an RBI-backed digital currency, we have nothing to lose. We get the advantages of blockchain, the sovereign guarantee of the State, and none of the volatility of the current cryptocurrencies. Digital payments have already eased international e-commerce, so neobanking is already standing on the shoulders of giants.”
Targeting the unbanked
Despite the appeal of neobanks, if they do not reach out to the vast unbanked sector, then they will not be fulfilling their full potential.
Sanjay explained challenges specific to India: “Nationalization of banking in the 1960s was meant to bring the rural and urban poor into the banking system; six decades later it is still a work-in-progress. Neobanking, paired with mobile connectivity (that really needs to scale up) can succeed where nationalization did not. Indeed, it will be a boost to the Jan Dhan-Aadhar-Mobile strategy to deliver banking through apps. But neobanks will have to do one more thing: improve financial literacy. Not just that of the rural population, but of most people even in sophisticated metros.”
Neobanking in the Gulf
Meanwhile, a gulf exists between neobanking in India and in the Middle East.
According to Sanjay, India is a unified market with a single currency, unlike the Middle East. Hence international payments are not as frequent as in the Middle East, and that kind of sophistication is still a work-in-progress. He observed: “Another factor in the emergence of sophisticated fintech, especially in several Gulf countries, is their need to cut dependence on oil. Several are strategically diversifying their economies and emerging as a global financial hub as world economics shift away from the Atlantic. Yet, India is more technologically sophisticated with a huge base of innovative and educated people, who are already adapting themselves to the revolutions in AI, blockchain, data science and more.”
Startups too are spinning out faster, safer and easier fintech applications by the day and identifying untapped niches. “I see India establishing early dominance if it plays three aces: better education, greater transparency and less bureaucracy,” he added.
