Disrupting the Status Quo: The Rise of Neo Banks in India's FinTech Industry

Banking and financial services industry is going through a profound transformation with technology at the heart of this disruption. From real-time payments, easy access to credit, faster disbursal of loans, transparent insurance and investment advisory to peer-to-peer lending, finance services that traditionally relied on human capital are fast becoming a part of the digital-native landscape – a process that the COVID-19 pandemic has accelerated.

Propelled by emerging digital technologies such as the metaverse, artificial intelligence (AI), big data, forward-looking policies, and the government's push for a digital economy, the consumption of digital and fintech services by end-users including Gen Z, millennials, and businesses, has significantly increased with a notable uptick in digital transactions.

With digital platforms providing a seamless experience, the gaps in traditional banking are bridged and age-old complex banking processes are simplified. As consumers opt to share data for a personalized and optimized journey – experience monetization is the focus.

Neo banks and fintech enterprises have been quick to comprehend and take advantage of this trend, allowing large established financial institutions to enhance their digital offering. They differentiate themselves by offering an enhanced experience, improved onboarding processes, and superior ecosystems.

In a similar vein, super apps and metaverse are a few trends that are raising the bar for traditional banking experience. Therefore, it is imperative for banks to evolve their offerings to address the changing consumer’s needs and emerging threat, to maintain their dominant position of consumer trust.

Emerging Growth Drivers

Rising above uncertainties, the proportion of digital technology in India has been increasing year after year. From only around 26-28% in FY2020, to outstripping over 32-34% in FY2023, the digital tech adoption is increasing, as per Indian non-governmental trade association and advocacy group report. To posit, at present, globally, there are 187 Fintech unicorns of which 21 unicorns are in India.

To monetize data and user base, most of the emerging fintech platforms are bundling a variety of financial products and services under an umbrella to make it easier for people to use, i.e., cross-sell different financial products and services.

For example,

• A primary point of sale (POS)/payment gateway firm has now expanded into merchant value-added services, rewards, and loyalty programmes, neo banking, and merchant lending.
• Similarly, an integrated digital banking platform offered by an Indian public sector bank has expanded its services to include pre-approved consumer loans, insurance, and online shopping.

As we look towards the future, several factors are driving disruption with customer at the forefront. This year will see further growth with the introduction of 5G and the deployment of technologies like AI, machine learning, Web 3.0, and Metaverse.

Each of these tailwinds denotes a paradigm shift in the way financial services or products are designed and consumed by Indian consumers. According to an internal analysis done by Tech Mahindra, by 2030 the Indian fintech industry is expected to grow 15 - 20 %.

Neo Bank Landscape in India

The surge in the adoption of FinTech in India has attracted in-house and global neo-banking players in play. Being entirely digital (running on cloud), neo banks bridge the gap between new-age tech focused customers and what traditional banks offer.

From creating customized financial options (digital onboarding, collateral free and straight through processes, loans, BNPL, money transfers) within minutes by analyzing the data collected from a myriad of sources to creating a deep impact on the MSME segment by providing built-in merchant services and tools is what make neo banks so appealing.

For instance, by integrating neo bank technology capability in business workflow, MSMEs can automate accounting and book keeping, GST invoicing, real-time cashflow monitoring, payroll management and vendor management solutions which were previously available to large business institutions only.

Since neo banks in India aren’t yet regularized, they are collaborating with established traditional banks to grow in India. For instance, a credit card company collaborates with several RBI approved banks and financial institutions to provide an exquisitely designed metallic credit card.

Significantly, the partnership allows regional banks to expand its products and services (grow loans, deposits, and non-interest income), provide innovative and tech-driven financial products to its customers and improve the bank’s ability to integrate with third party service providers.

While in-parallel, the collaboration enables neo banks to amplify their offering, tap a huge customer base of banks and effectively embed financial products and services by creating hyper-focused products.

The entire fintech ecosystem is striving for success in terms of ease of use and customer satisfaction. In India, along with the digitalization of traditional bank players, we have niche-specific neo-banks that offer specific banking solutions, including digitizing the last mile cash collection system, opening digital current accounts for businesses, and providing rewarding personalized services to salaried professionals, students.

Financial Opportunities Abound with Innovation

The provision of financial services has shifted from being transaction-based to being customer-centric. Recognizing the business benefits of digital transformation and customer experience focus, some of India's oldest banking institutions are redefining the structure to provide the best possible digital customer experience.

From a broader perspective, the financial services market is undergoing a significant transformation as key players leverage new and cutting-edge technologies such as blockchain, AI, ML, and cloud infrastructures to effectively synchronize the entire business.

To improve experience and efficiency, services such as payments, claims processing, and savings marketplaces are turning to AI-driven processes. The adoption of big data and analytics allows for the personalization of products and services and drives lower operating costs, resulting in different new revenue streams. Likewise, businesses are reducing costs by implementing intelligent robotic process automation (IRPA).

The Road Ahead

The fintech ecosystem in India has grown rapidly, but still faces challenges in achieving sustained profitability. Neo banking can potentially solve some of the challenges of financial inclusion by bundling banking services with other financial services.

To achieve impactful innovation, sustained growth, and provide seamless customer experiences, collaboration between fintechs, financial institutions, regulators, and the government is necessary.

With the focus on financial inclusion coupled with accelerated adoption of technologies to serve the financial needs of customers, the industry is on the cusp of breakout. Both regulators and financial institutions will need to collaborate to establish strong regulatory foundations while enhancing the customer experience.