A new breed of privately-owned banking startups, catering to both consumers and SMEs, have lately become an epicentre for fintech deal activity, as investors continue to pour in millions into the new-age firms. Termed ‘neobanks’, these startups operate unlike traditional banks, with digitally managed bank accounts and without a brick-and-mortar presence.
According to a recent report by management consulting firm RedSeer, neobanks including the likes of Razorpay, Open, Fi, Freo, Niyo, Flobiz, Zolve and others have raised close to $900 million in funding in CY2021, which is a 7.5x growth compared to 2020. Even in the year 2020, despite uncertainty from Covid-19 disruption, neobanks raised around $120 million in financing.
With an addressable market opportunity of more than 120 million potential users, analysts and consultants such as RedSeer expect neobanks to disrupt the personal banking experience for consumers, as well as the business accounting and banking experience for SMEs.
Currently, the consumer-focused neobanks work on a strict partnership model with private licensed banks, to offer a collection of banking and financial products mostly centred around savings, lending and long-term investments such FDs and mutual funds. The only differentiation is superior user interface (UI) and user experience (UX), along with a faster, paperless onboarding experience.
Sujith Narayanan, CEO and co-founder of consumer-focused neobank Fi, indicated that historically the banking segment’s products such as insurance, lending and investment use-cases have been carved out as separate businesses by several startups. With neobanks, startups like Fi are attempting to offer a new system of a savings bank account with benefits such as lower banking and transaction fees, superior customer service, and consolidated lending products.
“Globally, neobanks have addressed underserved categories especially focused on blue-collared workers and businesses. In India, however, we’re seeing a mix of both categories but with more focused approach on millennials and prime users who are looking out for a vastly superior banking experience,” added Narayanan.
Bengaluru-based neobank Fi, which has raised around $75 million in funding from investors like B Capital, Ribbit Capital, Sequoia Capital and others, was last valued at $350 million in a funding round in November 2021. Fi claims to have crossed 1 million active users currently on the app, with 25 monthly transactions per user, and serves users across 19,000 PIN codes in India.
Fi charges minimal banking and transactions fees compared to traditional banks, and has also forgone fees such as account maintenance charges. This is mostly possible as neobanks do not invest a large amount of capex in brick and mortar branches, and hence spend a lower amount in compliance costs as well; this benefit is transferred directly to consumers through lower banking and transaction fees.
Kunal Varma, CEO and co-founder of consumer-focused neobank Freo, told FE in an interaction that neobanks usually target consumers in the regular middle and upper middle class spending segment, in urban and semi-urban areas.
“Our customers’ age demographic would be anywhere from mid-20s to mid-40s. These are all individuals who are quite comfortable using smartphones, and they already access other online services, whether it is content or hyperlocal deliveries, booking tickets, and so on. So they’re comfortable using apps and are individuals who have regular income. Most of them are salaried,” Varma added.
Freo, which originally began as an app-based credit line product named MoneyTap, recently pivoted into the neobank segment. In the last six years of its existence, Freo disbursed over Rs 4,000 crore in credit to more than 11 million users. Freo launched its savings bank account only this week on June 21 with an attractive interest rate of up to 7% per annum. Varma said that that ever since its savings bank launch this week, it has received more than 100,000 customers and is onboarding more than 100 customers every day organically.
However, startups like Open, which offer banking and accounting services to SMEs and other business, have far larger monetisation options in comparison to consumer-focused neobanks that makes revenue mostly from lending operations. Anish Achuthan, co-founder & CEO of SME-focused neobank Open, said that the startup has multiple revenue streams such as a subscription fee that it charges customer for accounting software products, transactions fee accrued from users, as well as commission and interchange revenue from its banking partners.
“With their customer-focused digital products in commercial and small-to-medium enterprise banking, transfers, bank transactions, bill payments and personal finance, neobanks are now upending the banking sector. High customer adoption levels are the outcome of this, giving the end user a unique experience. Leading neobanks have investors’ attention, as evidenced by their high valuations,” said Ankur Bansal, co-founder and director of alternate investment fund BlackSoil, which has investments in new-age banking firms.
