Do Neobanks Have A Future?

Several Founders, Co-Founders, CXO Bankers, CXO Fintech professional & people who participated in the ePanel discussions:

Mr. Dhruv Shankar, Head-Digital, Standard Chartered Bank
Ms. Aishwarya Jaishankar, former SVP – Digital Products & Platforms, HSBC
Ms. Monica Jasuja, former Head of Digital & Emerging Partnerships, Mastercard
Mr. Ravi Shankar, Co-Founder, and CEO, Active Intelligence Pte Ltd
Mr. Kamonasish Aayush Mazumdar, Founder & CEO at Foodieverse
Mr. Harveer Singh, former Head- Digital Solutions for India & South Asia, Mastercard
Mr. Probir Roy, Co-founder, Paymate
Mr. Ajay B Panicker, CEO & Founder, NetPay Limited
Mr. Sandeep Todi, Co-Founder & CBO, Remitr
Mr. Taron Mohan, CEO & Promoter, NextGen Telesolutions Pvt Ltd
Mr. Shirsha Ghosh, Co-Founder Torit Innovations
Mr. Arun Tanksali, Co-founder & CTO, Nearex
Mr. Hemal Shah, former Technical Product Manager, Mastercard
Mr. Abhishek Mody, former Associate Director-Payment & Digital Initiatives, IDFC FIRST Bank
Mr. Vikas R Panditrao, Co-Founder, Forum of Industry and Academic Knowledge Sharing (FIAKS)
Many other CEO/CXO Bankers & Fintech professionals on FIAKS Forum requested to remain anonymous

FIAKS community discussions rolled around the future of neo banks. Earlier also, the FIAKS community had several debates around this topic. Now here’s something interesting to look at, arranged below in chronological order, if you look at this news may be one can see the future of Neo banks!

April 2020- FIAKS Bespoke: Neobanks Disrupting Mainstream Banks: A Far-Fetched Plan https://bit.ly/2VKA8fB

August 2020-The Sad Demise of Europe’s Neobanks https://bit.ly/3lcDPpd

Feb 2021- Neobank movement fizzes and flops as NAB prepares to swallow upstart 86 400. Less than two years after earning its unrestricted banking license, challenger bank 86 400 is about to disappear into a puff of smoke. http://bit.ly/39zlNty

Well, looks like Neo bank has no future and PE/VC/Angel investors need to be careful about their investments here, isn’t it?

Now here are some divergent views regarding the future of neobanks;

There’s a game-changing role that neobanks can play but unfortunately what one sees is a lack of creativity in designing the service which is sought to be masked by the creativity in marketing and rewards which are usually nothing more than a smokescreen.
The banking ecosystem in Europe/US/Asia is fundamentally very different from each other. While Europe and UK specifically took the lead in open banking, it’s only natural that the most amount of innovation was seen coming from there, and consequently successful or failed models will also make their first appearance in Europe.
That does not become a proxy for the future of neobanks because of the precise reason that open banking-neobanks models in other parts of the world. Also, it’s important that Europe has probably been overtly aggressive in controlling both regulation and pricing, and neobanks sprung up there in spite of this.
The (non-existent) open banking infra in the rest of the world, and different approached to the pricing of banking services by the regulator or Government certainly points that no one solution fits all and there is an opportunity to innovate and make a difference.

A debate on Banks v/s UPI:

Wallets & payment banks were the in-things a year ago and were meant to aid financial inclusion & digital transactions. Fast forward to 2021, no one is talking of Paytm or payment banks. UPI has taken over completely which is pretty much a big boost for the incumbent banks.
The counter-argument that followed this was, “Banks have boosted UPI. With no incentive to commercialize and maintain UPI, UPI isn’t a booster but a deterrent to P&L.”
Banks provided the handle. But only payment apps boosted the adoption. That’s why there’s no bank in the top 3 UPI transaction lists. Though, in reality, it’s become a tool for the banks to flex their muscles and remain relevant, in their fight against wallets/neobanks. That is a big incentive in itself to boost UPI further.
Banks doing digital-friendly things, like app-based payments, do not make them neobanks. A neobank is one that creates a service portfolio and customer engagement model that’s based on today’s generation of new users. The existing banks implicitly cannot do that – for a wholesale change could alienate their existing base and incremental changes can take a decade. An example of a neobank here that seems to be trying to do things very differently could perhaps be Jupiter. Paytm could have been that, but the brand has been overloaded with too many associations making it trickier for them.
Without the banks to support them, apps have no leg to stand on. This makes the incumbent banks extremely relevant, even if it’s the app that is customer-facing.
Well, it’s an ecosystem game. Without NPCI handle, banks also are irrelevant! If tomorrow NPCI allows UPI handle for apps, then with the huge number of customers, apps do not require any bank to rely on.
A member stated, “my view is that ‘open banking’ APIs and auxiliary services like UPI (& probably other new ones by upcoming umbrella entities) will give teeth to banks in their fight against wallets/neo banks, by providing services to their existing customers that can be availed using their existing bank accounts, rather than start a separate wallet or new bank account, just because a “neo bank” is giving a better UI/UX. Google pay is a fairly good example of that. New interface, new experience, old bank account! It’s like getting the best of both worlds, because most people would trust an old bank like SBI with their money, but hate their app or net banking.”
Eventually, when open banking is open enough, it would be very easy for any 3rd party app (like Google pay/Phonepe) to replicate all the features of the best bank app you can think of, and allow you to use it with your SBI bank account. Then, what strong use case would a “neo bank” or Paytm wallet/payment bank has, in such an ecosystem?

We can’t write away neobanks yet, but the premise of banking is broken;

A member mentions, “I think there are a lot of interesting solutions coming up, while simply a ‘better bank’ for millennials might not click, segment focused solutions, especially ones which banks don’t look at/serve like blue-collar or women have a role for sure. In fact, I was recently impressed with a medical solution-focused neobank which comes with medi claim, hospital deals, etc. Thanks to huge regulatory push we are way ahead in concepts like real-time funds transfer or universal banking id, etc, etc. And banks themselves have made decent tech investments.”
If not neobanks, unbundling of banking services is definitely happening. Look at the growth of wealth tech, that’s one segment poised to grow, millennials are already trusting their banks very little for insurance/ investments.
It all goes back to the basic question: how do banks make money? With payments being a (near) zero-fee service, the only other avenues for making money are lending (traditionally this is how the banks made money … NIM!), asset management, or the sale of assorted financial products. In the latter, what makes the most money for the bank may not always be right for the consumer – and hence a big trust deficit that the neobanks may or may not choose to ford.

What are the hurdles faced by neo banks from succeeding?