Episode 11 – Fintech – Of Neobanks and the attraction it holds for everyone – Banks, Consumers and Investors
Everyone wants to be a Neobank. Almost all fintechs and some traditional bank as well.
Just a few days back, Neobanking Startup Chqbook rasied INR 40 Cr From Aavishkaar, Rajiv Dadlani Group. Chqbook a neobank to small shop owners primarily, sole proprietorships such as Kirana stores, retail shops, hardware stores, chemists, small restaurants, etc has about 1.2 Mn downloads, over 650K transacting customers catering to over 6 Cr SMB owners in 500+ cities.
Chqbook offers a a full-stack mobile platform in regional languages, re-bundles financial services giving access to current accounts, a bookkeeping service for cash transactions, lending, and insurance and an in-house gamified reward program.
Combined with FamPay’s $38 mn Series A raise, it looks like Indian Neo Bank market is set to explode!
The global neobanking market is valued to reach $350 Bn by 2026, and Chqbook is one of the few neobanking apps creating a buzz in the market. Besides Chqbook, more than half a dozen neobanks are currently operational in India looking to disrupt the BFSI sector, including key players such as Open, NiYO, Hylo, PayZello, InstaDApp, YeLo, Jupiter, FamPay, Walrus, epiFi, Finin and RazorPay X among others.
Let’s dig deeper now!
So, what exactly is a Neo Bank?
Neo Banks are diversified financial services platforms that are digital at core and provide banking or bank-like services. A Neo bank may be a licensed bank or might be partnering another bank. Among leading Neo Banks, Nu Bank (Brazil), Varo (US), Tinkoff (Russia), Monzo (UK) & Kakao (South Korea) have a banking license, whereas Chime & Sofi (US) partner with banks; Revolut started with partnership model; recently it got banking license in EU & applied in UK. Despite divergent structures, Revolut, Nu Bank, Chime & KakaoBank are valued at $25-33bn in recent funding rounds. This echoes that strength lies in quality of platform, growth opportunities, economics of yields/fees in markets & execution. Top-20 Neo Banks in the world have ~180m customers that might be small in overall context, but growing fast.
Indian Neo Banks operate a digital-only bank-like platform in partnership with 1-3 mainstream banks. This allows them to create a front end app for customers and ability to offer banking products like deposits (Casa & term), full gamut of payment & remittances, financial product distribution and lending among others. Please see the table below to understand range of offering by Indian Neo Banks -
Source : Abhishek Kumar
Key features of a Neobank
Following describes key features of a NeoBank pretty well -
Source : RBI, Abhishek Kumar, Jefferies
So effectively, anything which increases convenience for consumers that the traditional banks are lacking, is being picked up by Neobanks. Traditional banks are being used as a regulatory cover - Whatever needs RBI approvals, is being handled by the banking partners. Rest everything, by the new age banks.
For now, it’s a win win for both.
Traditional Banks relationship with Neo Banks
Private banks have been forging partnership with Neo Banks to on-board new-to-bank customers. Mid-sized private banks and select SFBs have been active here. Still, larger banks are able to extract better deals with rights to cross-sell products. ICICI Bank partnered with few SME focussed Neo Banks (Chqbook) and I see partnerships by other banks too (some launched, some in progress). HDFC Bank might also announce partnerships once the embargo on new-digital initiatives are lifted. Among mid-sized banks, IndusInd, Federal Bank, Equitas, IDFC First Bank have built multiple partnerships.
Source : Abhishek Kumar, Banking Firms
How will Neo Banks monetize their offerings?
Monetisation prospects for Neo Banks. Neo Banks in India currently focus either on Millennials or SME segments. Millennial (or individual customer) focussed Neo Banks offer a superior app-experience, ecommerce partnerships, reward/loyalty programs & loan/BNPL products. The challenge here is that payment fees are negligible in India, BNPL is still small & mostly gets non-prime clients. Quality of relationship and leveraging of partnerships for cross-sell will drive success. On the other hand, SME-focused Neo Banks are building engagement with business clients through their ability to provide solutions like automated invoicing, collections/payments, accounting, inventory and sales mgt., taxes and in some cases interest on current deposits as well (banks can't pay interest). This may help to ramp up and upfront their monetisation prospects.
A dive into key players in the industry
Jupiter currently offers products to save money, bring discipline in expenses with insights, earn rewards on third party merchants and debit cards. The company’s main banking partner is Federal Bank along with NPCI and Visa. Jupiter has over 25,000 customers – mostly millenials and interestingly, it has over 100,000 people on the wait list! The customer acquisition has largely been organic till date, but the company should have some customer acquisition costs as it looks to build a larger user base. It plans to eventually include lending, credit cards, investment products; and aspires to be a full financial services app for a retail customer over the next 4-5 years. Another separate app, Bullet, is a micro-lending platform that provides interest-free credit up to Rs10,000 for UPI Payments.
Jupiter has received cumulative US$71m in funding till date, valuing it at US$300m as of Aug-21. Its investors include NuBank, Matrix Partners, Hummingbird Ventures, Sequoia Capital, Bedrock and Global Founders Capital. Mr. Jitendra Gupta is the ex-founder of Citrus Pay, and was the MD of PayU India before he founded Jupiter.
Fi is a Neo Bank targeting today’s working professionals; it offers a zero-balance savings account and Visa Debit Card to its customers, in partnership with Federal Bank and NPCI. The app offers P2P payments, fund transfers, bill payments, spend insights and investment tools. Fi is working on the mission of – (1) demystifying finance for users, (2) helping people maximize their savings – deposits, investments etc. and (3) helping people spend smartly. Fi has over 100,000 users presently.
Fi was founded in 2019 by Mr. Sujith Narayanan (Ex-Google) and Mr. Sumit Gwalani (Ex-Google). Other Members of the founding team include Mr. Arvind TP and Mr. Neeraj Bhope. Fi has raised US$25m in funding till date from investors like Sequoia Capital, Ribbit Capital and Hillhouse Capital. It was valued at US$160m in Jun-21.
Fampay offers pre-paid cards for teenagers, in partnership with IDFC First Bank. Fampay's numberless prepaid card allows minors to successfully make online and offline payments without the need to set up a bank account. The zero-balance card can be managed by the parents, allowing them to control payment limits and track their child's spends.
Fampay, founded in 2019 by Mr. Kush Taneja and Mr. Sambhav Jain, has raised US$48m in funding till date from investors like Sequoia Capital, Elevation Capital, Y Combinator and General Catalyst. It was valued at US$170m in Jun-21.
It provides co-branded products in partnership with banks to bluecollar workers, international travelers, and millennials. Its products include (1) Niyo X, an account offering Savings and Wealth Management in one App, in partnership with Equitas SFB, (2) Niyo Global, offering zero-forex mark-up, ATM Locator, live currency converter etc. – in partnership with SBM and DCB Bank, (3) Niyo Money, a wealth management app with in-built robo-advisory – in partnership with 5Paisa and Stockal, and (4) Niyo Bharat, an Open banking platform for business and salary card for employees - in partnership with YES Bank, DCB Bank and ICICI Bank. Niyo has over 2m customers, and 9,000+ corporate clients.
Niyo has raised US$55m in funding till date from investors like Horizon Ventures, Tencent, Social Capital, Prime Venture Partners and JS Capital. It was valued at US $140m in Aug-20. Niyo was founded in 2015 by Mr. Vinay Bagri (CEO) and Mr. Virender Bisht (CTO).
Freo, a credit-focused Neo bank, was founded in 2016 as MoneyTap. MoneyTap (an RBIregistered NBFC) has 11m+ users in its ecosystem and has disbursed over Rs40bn in credit, along with issuing 175,000 credit cards (in partnership with RBL Bank). MoneyTap is not transitioning to Freo, a Neo Bank focused on offering financing solutions like credit lines, Credit/ EMI cards and BNPL on its online platform to customers in India and SE Asia. It is also planning to launch a digital savings account in partnership with Equitas SFB. Other Partners include MoneyTap, HDB Financial, IDFC First, Incred, RBL Bank and Acko Insurance.
The Company has raised US$40m in funding till date and was valued at US$140m in Aug-20 (as MoneyTap). Its investors include Aquiline Technology Growth, RTP Global and Sequoia Capital India.
Instant Pay is a Neo Banking platform delivering full stack banking services to individuals and businesses of all sizes (SMEs and larger enterprises). It is also planning to launch its pay later service for retail users. Instant Pay has partnered with Axis Bank, ICICI Bank, IIB and Yes Bank for its offerings. It has 10m monthly active users.
Instant Pay was founded in 2013 by Mr. Shailendra Agarwal and has raised US$5m in total funding till date form investors like Kaleden Holdings and RB Investments.
SME Neo Banks - A Rs. 20 tn Opportunity!
SMB presents an interesting opportunity for Neo banks where the current account is with a mainstream account.
One of the most important function that a Neo Bank can serve for SMB customers are payments - both receiving and making payment. RazorpayX is doing a fantastic job here. Chqbook is helping SMBs with current accounts (Underlying is ICICI Bank) and maintaing their Khatabook. This will lead to other services later on such as lending and this is an interesting space to watch. Loads can be done with data here. Interesting space to watch.
Source : Abhishek Kumar, Broker Reports
Some of the leaders in SMB Neo Banking are Open, RazorPayX and Chqbook (Discussed initially here)
Open is a neo banking platform for businesses. Its products include (1) Open – an SME Business banking Platform, and (2) Open Book – a Digital banking platform for small & micro businesses. Open was launched in 2017, its offerings include current accounts, payment gateway, payroll management, cards, auto payouts etc. Open’s smart business cards offer separate personal/ business expenses, team spend management, expense tracking and rewards. It has partnered with multiple banks like Axis Bank, Kotak Mahindra, ICICI Bank, SBM Bank, Equitas SFB, Yes Bank and with Visa and NPCI for its card products. Open is offering its services to over 1m businesses.
Open has raised US$103m in funding till date, and was valued at US$450m in Sep-21. Its investors include Tiger Global, Tanglin Venture Partners, ICICI Bank, Trifecta Capital, 3one4 Capital, BEENEXT, Speedinvest and Unicorn India Ventures. Open was founded by Anish Achuthan (CEO), Ajeesh Achuthan (CTO), Deena Jacon (CFO) and Mabel Chacko (COO).
Interestingly, Open has also been recently selected under RBI's Regulatory sandbox programme under the theme - Cross-border payments. Its product proposes a Blockchain-based Cross border payment system, leveraging the current infrastructure and ensuring frictionless and tamperproof monitoring capabilities.
So what’s next for Neo Banks?
Before we tackle this, here’s an observation. Most fintechs start with their single key product and diversify into adjacencies over time. My conversation with fintechs indicate that most of them plan to straddle broader financial services platforms - payments, deposits, savings, lending, financial product distribution etc. This goal will eventually take them towards being Neo Banks. I see lot more activity in this space over the next 2-3 years which will be relevant even for the incumbents to watch and plan for.
Overall, most Neo Banks will either move to get a banking license (Payments?) or become distribution centers for small and medium sized full service banks. I also see a lot of partnerships failing here (IDFC, anyone?) as and when these neobanks start getting into competing products rather than being just a fringe player, as most of Banking partners view them as of now.
Overall, the space is ripe for innovation and we have to see how it evolves.
Hirings in the Fintech Industry
Open has multiple openings in their product management team as well as software development. Connect with Ajeesh here for this.
Fampay is looking for Chief of Staff, Operations Head, Branding person, Digital Marketing Head and across functions. They have close to 40 open positions. Connect with Sambhav Jain here. Exciting opportunities here.
Niyo is hiring for Online Risk Management manager and Senior software developer for node js. Connect with Vinay Bagri for this
More readings on Neo Bank
Rising challenges in the Neo banking industry in India
Fampay and the continued Neo Bank excitement
Latest happenings in the Industry
Cashbook, which helps small businesses track their income and expenses through mobile app., raises $2.3 mn in Seed round.