The Evolution of Neobanks in India - 1
The Evolution of Neobanks in India - 1
The Evolution of Neobanks in India - 1
neobanks in India
Impact on the financial ecosystem
September 2021
Message from PwC
Vivek Belgavi
Partner, FinTech, and Alliances
and Ecosystem Leader
PwC India
Neobanks have evolved and grown significantly worldwide as well as in India despite their relatively recent entry into
the larger FinTech segment. The definition of neobanks has changed as they are differentiating themselves from online
banking services and moving away from being centred only around digital banking to focus on providing a superior
customer experience.
Technological advancements, innovative models and niche customer-focused approach have helped neobanks in
creating novel, technology-based platforms and agile business models, and delivering innovative financial services.
Such advancements are providing neobanks with the ability to reach unserved and underserved segments of society and
provide them with customised portfolios of services that are targeted to meet their financial needs, both across retail as
well as business segments.
Neobanks and most of their product offerings are not directly regulated in India. However, they are subject to indirect
regulations (through their partnerships with regulated entities), ensuring that their product offerings are in adherence to the
regulatory norms. It is critical that regulations evolve gradually in line with the advancement of the sector to ensure that the
sector matures further. As the neobanking space becomes more stabilised with the introduction of new business models/
products, the segment may require standalone regulations which will monitor the market.
This report aims to provide incumbent banks, new-age neobanks, regulators and other stakeholders with a comprehensive
view of India’s neobanking landscape and will help to identify key focus segments, business models, drivers and enablers
of the ecosystem. I would like to thank the Internet and Mobile Association of India (IAMAI) for taking the initiative of
conducting relevant research to prepare this report and inviting PwC India to be a knowledge partner to share our point of
view on this emerging sector which is expected to play a critical role in achieving greater financial independence across
the country.
Jitendra Gupta
Chairman, Neobanking Committee,
Fintech Convergence Council (FCC),
and Founder and CEO, Jupiter Money
The Indian financial services sector, especially banking, is on a transformational path with the advent of the increasing
number of neobanks in the country in the past couple of years. The constant challenges pertaining to last-mile connectivity,
bringing millennials in the ambit of the banking domain, facilitating branchless banking, providing seamless banking
experiences, etc., faced by the Indian banking sector are soon turning out to be a thing of the past as the core business
model of neobanks addresses these issues right at the outset. With the tie-ups between financial institutions and neobanks
proliferating with every passing day, a transition from a customer-led to a customer-centric financial services offering
is evident. It is heartening to witness this shift and how financial institutions are seamlessly adapting to the evolving
technological and digital needs of customers by collaborating with neobanks.
The disruptive and innovative technologies, digital-only presence, conducive regulatory environment, etc., are some of
the apparent contributors to the growth story of neobanks in India which syncs with their global growth as well. With the
current momentum, neobanks are likely to leapfrog in the coming years and become a financial services behemoth, and
have a positive impact on the overall growth of the financial services sector in India. And while this evolution takes place,
it will be interesting to see how the roles and approaches of various stakeholders will evolve and shape the future of
neobanks in India.
On the one hand, with neobanks not being directly regulated currently for some of their activities, the regulators will have
to keep up with the pace of innovations and operations of the former to assess the right time to holistically regulate them.
On the other hand, neobanks will have to continually navigate the critical requirements such as data privacy, cyber security
and regulatory compliances to gain confidence of the regulators. Amidst these developments, financial institutions will
have to ensure that they strike a fair balance between growth, compliance, customer services and their overall ethos.
Through this report, we intend to enable the incumbent and aspiring neobanks to comprehend the global and Indian
neobanking landscape from a business and regulatory standpoint, and also engage with regulators and other stakeholders
on the proposed regulatory regime for neobanks in the country.
I would like to thank PwC and my co-members of FCC’s Neobanking Committee such as Open, RazorpayX, NiYo, Fi, One
Card, and InstantPay for their contribution to this report.
4. Way forward................................................................................................................................................... 29
This definition has evolved as neobanks have tried to differentiate themselves from online
banking services offered by incumbents and shifted from being centred only around digital
banking to focusing on providing a superior customer experience.
This shift is not new or unique to the neobank subsegment. The larger FinTech industry has
always focused on digital technologies and customer delight as its two key cornerstone
policies. However, there has been a subtle shift in neobanking policies. For example, \alternative
lenders now tend to focus on embedded finance and use-case centred lending as opposed to
only pure-play lending platforms and marketplaces. The same strategy has emerged in other
FinTech segments as well, as players look to seamlessly integrate financial services within larger
customer needs to develop more sustainable demand and product innovation. Digitisation of
the whole banking and transactions journey, upgrading legacy systems and ways of serving
customers, and being the enablers of transactions at source are leading to the large-scale
development and adoption of embedded finance. Banking is evolving rapidly as a part of
embedded finance to focus on customer delight.
Access
• Access to financial services continues to be a core need of retail and micro, small and medium enterprise (MSME)
customers alike. Neobanks have found untapped opportunities in various customer segments, including tier-2 and
3 rural areas as well as digital millennials. While banks in India are mandated by regulatory bodies to focus on the
unbanked/underbanked population (about 58.4%)1 and do so primarily in tier-2 and 3 rural segments, millennials who
also constitute a large part of the unbanked/underbanked population receive limited attention. Neobanks play a pivotal
role in addressing their needs as they are digitally savvy and have showed interest in accessing financial products in
the recent past.
• A majority of MSMEs in India still rely on informal financial services for accessing credit. MSMEs owe a total of
INR 69.3 lakh crore in debt of which INR 58.4 lakh crore2 is from informal sources.
• The overreliance on informal credit sources is perpetuated by the rigidities and inefficiencies of traditional bank
distribution models with higher acquisition costs that make certain customer segments unviable for traditional banks.
• Such product innovations require dynamic technology and delivery solutions that enable start-ups to effectively
manage unit economics flexibly while offering a variety of products in terms of quantum and pricing (e.g. micro
ticket-size loans/investments and short-tenure credit). Traditional banking models are usually unable to offer such
flexible financial products given the rigid cost structures they operate under.
Convenience
• Customers today can experience superior facilities across different service lines – from commerce and purchasing
to logistics and travel – and these have led to similar expectations of convenience from financial services.
• Core service tenets of instant access to information, easier capture of data and requests, and customised points of
service delivery (e.g. credit line at point of sale [POS] terminals) have become more commonplace and are expected
from financial services delivery channels as well.
1 https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=924#CH2
2 https://www.ifc.org/wps/wcm/connect/dcf9d09d-68ad-4e54-b9b7-614c143735fb/
Financing+India%E2%80%99s+MSMEs+-+Estimation+of+Debt+Requirement+of+MSMEs+in+India.
pdf?MOD=AJPERES&CVID=my3Cmzl
https://www.ifc.org/wps/wcm/connect/dcf9d09d-68ad-4e54-b9b7-614c143735fb/
Financing+India%E2%80%99s+MSMEs+-+Estimation+of+Debt+Requirement+of+MSMEs+in+India.
pdf?MOD=AJPERES&CVID=my3Cmzl
• Service needs such as e-commerce, individual tax and personal finance management (PFM) services, digital
commerce platforms, GST filing, accounts receivable (AR)/accounts payable (AP) tracking and reporting services
for MSME customers are requirements that have elements of financial services embedded within a larger need.
These customer needs and the gap in current traditional banking services are the primary drivers for sustained growth
of neobanks as they have been able to operate in this gap to capture the market and carve out revenue streams.
BaaS helps FinTechs to use application programming interfaces (APIs) to connect with banks, enabling them to build
their financial services on top of the regulated infrastructure. Neobanks use the BaaS APIs to provide customer-initiated
onboarding, account funding and other banking activities.
Banks can opt to deliver banking services (focus on risk management and build financial infrastructure) and allow
distribution and customer interaction to be managed by other parties, i.e., FinTech companies, software-as-a-service
(SaaS) players and marketplaces.
Ease of use is of significant appeal for customers. For example, a small business can get open bank account using its
accounting software or avail loans directly on a logistics platform.
Today, organisations of all types with varied levels of maturity, including marketplaces, BigTechs and software companies,
and logistics firms are offering embedded financial services to serve retail customers and small businesses.
Distribution enablers Digital acquisition – D2C Digital acquisition – B2B and B2B2C
Back-end
Bank A Bank B Bank C
licensed banks
• Pure-play neobanks – players that are primarily digital in terms of their operations and customer-interaction models,
and offer core banking (liabilities products) and relevant value-added services.
• Incumbent digital subsidiaries – existing traditional banks that started off with a brick-and-mortar approach and have
significantly redesigned their complementary digital offerings for end consumers.
• Enabling adjacency – players that are not yet in the banking space but have either:
— been able to develop a strong customer base, are strong distribution enablers for existing banks and neobanks,
and are poised to pivot into a neobanking model, or
— developed capabilities and offerings that are strong capability enablers and would significantly expand the core
offerings of banks.
The UK has had a head start in neobanking due to the early introduction of common banking guidelines for the entire
European Union (EU). FinTechs used APIs for developing open banking platforms that are tailor-made to form partnerships
with banks to serve niche customer segments. This propelled the growth of neobanks in the UK and they went on an
acquiring spree while complying with the regulations.
The first set of neobanks emerged from Europe. They were regulated by the original Payment Services Directive (PSD),
an EU directive to regulate payments services and service providers, which helped increase industry transparency and
provided easier access to new entrants. This was followed by PSD2 which mandated third-party access to the APIs of
banks. This open data-sharing landscape resulted in the growth of neobanking FinTech firms as they were able to securely
access customer account data and build digital-only banks. The US, Canada and several EU countries followed suit,
leading to the prominence of neobanking players with a few having presence across multiple jurisdictions.
The funding received by neobanks and the number of deals closed in this segment reflect the increased interest in this
sector. Neobanks witnessed consistent deal activity throughout 2020 despite the pandemic and in some cases, buoyed
by the pandemic. Investors realised the potential that neobanks bring to the larger financial services industry.
The figure below analyses the global venture capital (VC) backed banking financing trends for Q4 FY19–20.
55
53 52
2,554
2,255 2,440
1,856 1,933
Source: CB Insights
Incumbent K Bank
BBVA Mettle Mox
digital banks Simplii Financial
Launch year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
It would be interesting to look at the different strategies adopted by financial services players for entering the
neobanking space.
One such strategy is to start with a gateway financial service to attract customers and then provide additional services.
For example, a leading UK-based neobank started off as a money transfer and exchange platform before expanding
into a global, multiproduct player. Another example would be the CEO and co-founder of a leading Brazilian neobank
describing how it launched credit cards as its first offering when entering into a new market to let customers get
accustomed to digital-only banking, before offering other debit products.
An equally interesting strategy is the emergence of several non-financial services players with established customer
bases who are venturing into the neobanking space. This is particularly evident from the neobank licences that have been
issued to players recently, particularly in the APAC region. Telecom players, ride-hailing and delivery apps, e-commerce
platforms, and social media messaging and digital entertainment players have entered into the neobanking space. There is
a clear and visible trend of organisations with large consumer bases identifying strong monetisation opportunities through
financial services pivots.
Regardless of the strategy adopted to enter the neobanking space, players must utilise digital channels and innovative
incentive strategies to develop a strong customer base before offering diversified financial services.
• Apart from deposit accounts, reduced transaction fees and waived ATM withdrawal charges, some global players build
on spends analytics offerings to help users plan their goals and expenses.
• A UK-based neobank has combined its spend analytics offerings with special sub-accounts to help users develop
customised and automated savings plans and behaviours. It also caters to children through special accounts and
prepaid cards.
• A US-based neobank specifically targets new-to-credit customers and allows them to develop their credit history
through special credit cards that are initially backed by cash deposits. It reports the transactional behaviour to credit
bureaus, thereby helping customers build their credit history.
• A Singapore-based neobank specifically focuses on young travellers and millennials by offering a multi-currency
travel wallet.
• Some neobanks have expanded to allow investment options for their customers. A popular product is the ‘round-
up’ service that rounds up transaction amounts to the nearest 10/100 and deposits the extra value into a savings/
investment account. A leading neobank also allows its customers to invest in various asset classes, including gold,
cryptocurrency, commodities and shares.
• A leading global neobank provides tailored insurance products such as customised travel insurance, car rental
insurance, mobility insurance for shared vehicles, phone insurance and winter sports insurance to its consumers.
• The super app approach is another strategy being adopted by neobanks worldwide. A leading Russian neobank offers
a host of mobile apps that can be used for paying traffic fines and taxes other than usual banking activities. It also
facilitates e-commerce purchases as well as booking flight, rail and movie tickets.
• Other neobanks have looked at helping with business incorporation and set-up as a value-added service.
• From an acquisition perspective, some neobanks are leveraging digitised supply chains for faster customer access.
A leading Chinese neobank has tapped into the 5,000-strong distributor ecosystem of a Chinese food manufacturing
company to provide banking services.
• Some players have developed personal finance management and credit scoring offerings that can be utilised by
traditional banks to provide their end retail customers with value-added services.
• A few players offer credit assessment modules and loan portfolio management capabilities for banks to access
and consume.
3 PwC analysis
4 Total funding to this segment stood at USD 163 million as of Q1 2021 with some traction being witnessed in the initial months
of 2021.
Particulars Global model – licensed digital banks Indian model – partnerships with licensed banks
Regulated The financial regulators of some Indian neobanks are FinTech companies which are
countries, especially developed not directly regulated by the Reserve Bank of India
nations, issue licences to neobanks (RBI). They partner with licensed banks, NBFCs
and regulate them. and other financial institutions to provide financial
services through their digital platforms.
Branches Globally, neobanks usually do not Neobanks in India do not have a physical presence
operate as traditional banks and hence given the nature of their business model and the
have zero or minimal physical branches absence of regulatory requirements. They primarily
as required by the prevailing laws. interact with customers through digital platforms.
However, customers can still access physical
branches of partner banks/financial institutions.
Scope of The primary role of neobanks globally Neobanks provide a range of financial services in
services is to deliver banking services through partnerships with other regulated entities. These
the internet or other electronic channels services include:
instead of physical branches. The more • opening of bank accounts
mature neobanks provide the whole
• loan/credit facilities
gamut of financial services.
• prepaid card services
• investment advisory services
• insurance services, etc.
Permissibility The digital banking business model is These types of partnership business models are
regulatorily permissible across the UK, prevalent in India with no specific restrictions on
US, Canada, Singapore and Hong Kong. operations.
Compliances Digital banks must comply with the Neobanks in India are not directly subjected
relevant frameworks and regulations to complying with the RBI due to the absence
issued by the regulatory authorities. of a prevailing licensing regime. Typically, the
partnerships with regulated entities are governed
by the RBI’s Outsourcing Regulations, Business
Correspondent Guidelines and Master Directions
on Digital Payment Security Controls, and
applicable to the partnering regulated entities. The
applicability of these guidelines is driven by the
nature of services offered by neobanks.
Indian neobanks have adopted strategies similar to their global counterparts in terms of customer segment focus and
services. As there is no official licensing route for such players yet, the primary strategy for providing core banking services
has been achieved by partnering with incumbent banks. This has in turn defined the service offerings and strategic levers
that Indian neobanks focus on.
Strategy Levers
• Understanding a specific
strategy of a neobank would
Customer require understanding
Customer Customer
segment how uniquely it is applying
Customer targeting
acquisition experience
specific levers
Global and Indian neobanks are evolving rapidly along the lines of these strategies and levers that are influenced by
market dynamics and opportunities. Global and Indian neobank archetypes are compared in the table in the following
pages using the above framework.
Customer • Global neobanks continue to focus • Similarly, Indian neobanks are focusing
segment on both individuals and MSMEs. on retail and MSME segments.
targeting
• Focus on niche segments such as • There is an increased focus on
teenagers, families and millennials providing services to the underserved
is rising significantly. segments such as teenagers, gig
economy workers, blue-collar workers
• There is an upsurge in the number and SMEs.
of neobanks across the US and
Europe that are focusing on • Multiple neobanks are coming up with
customers in the age group of service offerings targeted towards
10–20 years. small businesses by providing them
with a portfolio of financial services.
— a Bengaluru-based neobank
is providing teenager-focused
services
Customer • Agile and innovative best practices Neobanks are focusing significantly on
experience are followed in terms of flexibility, customer experience as they cannot
self-service capabilities, customer serve them directly due to the absence
needs and personalisation. of standalone licences. Hence, they
are looking to provide integrated
financial services.
Process and • Digital is the primary channel for • Indian neobanks continue to use
channel most global neobanks. an offline + online model based on
customer segments.
The different models and strategies adopted by Indian neobanks are analysed in detail in the following section.
The number of Indian retail neobanks has grown significantly over the last few years, with each of them coming up with
their own version of product offerings catering to niche retail segments.
For example, a Bengaluru-based neobank launched in December 2020 is providing front-end banking solutions
to migrants moving from India to the US and vice versa. The company aims to expand its services to remittances,
loyalty-based solutions, cryptocurrency, insurance and credit through partnership networks in the future.
Another neobank launched in October 2020 focuses on children under the age of 18 and lets them make digital and
physical purchases. It allows parents to control smart cards through an app wherein they can create in-app chore lists
and tie them with perks.
The following are some key customer segments and focus areas that retail neobanks are targeting:
1. Blue- and grey-collar workers: This segment accounts for approximately 250 million5 of India’s population and is
significantly underserved by traditional banking players due to their low ticket size and volume of transactions. Neobanks
are targeting these segments via a combination of online and offline models, and providing services such as savings
accounts, sachet loans, insurance and payments.
2. Gig economy workers: Gig economy workers, including people who work on short-term and on-demand contracts,
account for nearly 15 million6 of India’s population. Neobanks can tap into this segment for providing financial services.
The recent surge in organisations adopting gig-tech models for certain tasks has provided an opportunity for formalising
this customer segment and digitising their relevant transactional data that can be utilised by financial services players for
providing customised products.
3. Teenager-focused neobanks: India is home to over 250 million7 teenagers and this large number is becoming a strong
base for the financial services ecosystem. This segment presents neobanks with a significant untapped opportunity as
teenagers are growing up in an on-demand world with preferences for digital transactions and e-commerce. As per a
survey conducted by a neobank exclusively for Indian teenagers, 84%8 of them shop online for both big-ticket (gadgets)
and small-ticket items (food, clothes and digital subscriptions). Multiple neobanks are providing account services that are
focused on this segment, including PFM, imparting financial knowledge and payments services.
4. Digital millennials: Millennials comprise the largest age group in India’s population (approximately 400 million).9
They could be a huge potential customer base for neobanks. These digitally connected individuals are driving the
growth of many digitally driven consumer-facing businesses.
Overall, retail neobanks exhibit several characteristics that allow them to carve out a niche space for themselves:
• Seamless account opening: Neobanks provide simplified online processes for opening accounts and onboarding
customers, thus addressing a major pain point for incumbents.
• Convenient interface: Some neobanks provide a 360-degree view to their customers with unified dashboards which
are easy to understand and provide key insights such as expenses incurred, due bills and bank statements.
• Transparent service fees/charges: Most neobanks have a transparent fees and charges policy as a differentiator and
do not impose hidden fees/charges on their customers.
• Value-added services: Neobanks provide several supplementary services such as budgeting, curated e-commerce,
tax filing and automated accounting which enhance customer engagement.
• Robust infrastructure: The product/service offerings of neobanks are protected by robust information technology and
security infrastructure.
5 https://www.businessinsider.in/business/startups/news/this-startup-a-linkedin-like-platform-for-indias-blue-collar-workers-
gets-more-funds-from-lightspeed-and-sequoia/articleshow/77866010.cms
6 https://www.thehindubusinessline.com/opinion/indias-gig-workforce-is-on-the-ascent/article33300755.ece
7 hhttps://www.unicef.org/india/what-we-do/adolescent-development-participation
8 https://indianexpress.com/article/parenting/events-things-to-do/how-teenagers-shop-survey-reveals-online-shopping-
patterns-in-lockdown-6757773/
9 https://www.morganstanley.com/ideas/India-millennials-growth-sectors#:~:text=India%20is%20on%20track%20to,and%20
46%25%20of%20its%20workforce.
The table below further summarises some of the core services that neobanks have focused on for some niche retail
customer segments.
Non-financial
• Money transfer • Money transfer (UPI), • Money transfer (DMT • Money transfer
Non-banking
(UPI) and mobile mobile recharges, bill and AePS) and bill (DMT and AePS),
recharges payments (BBPS) payments bill payments and
• Personal finance • Personal finance recharges
management management
Case study #1
A two-year old Bengaluru-based neobank is targeting salaried individuals aged between 25–35 years and focusing
on providing wealth creation and lending services.
Partner strategy: It is looking to combine organic and partnership-led growth to provide customers with a range of
finance management services. It has also has partnered with an upcoming bank.
Financial services: It is currently providing offerings such as savings account, lending and investment solutions and
looking to expand into mutual fund distribution and stockbroking.
Non-banking financial services: It allows customers to link all their bank accounts in a single platform and provides
a dashboard to track transactions simultaneously. It also uses an artificial intelligence (AI) driven data model to
recommend budgets based on the spending habits of customers.
As per the neobank, the Indian financial services market is at a point where digital banking is increasingly becoming
commonplace. Though digitisation is still an important aspect, strategies are being directed towards focusing
on the consumer segment and creating solutions specifically for them. Traditional banks operate with a one-app-
for-all model, providing standardised services to a broad range of customer segments. In contrast, neobanks are
looking to develop universal solutions and focusing on the consumer segment to provide the best curated and
specific experiences.
>INR
71.1% 51% 46.7 18.7%
250 crore Large
Annual turnover
INR
Medium 4.7 18.1%
75–250 crore
INR
5–75 crore Small 28.9% 49% 8.9 10.8%
<INR
5 crore Micro 4.6 8.9%
The figure below depicts why MSMEs have remained unserved/underserved by traditional banks.
MSMEs generally have With a relatively low turnover, Low digitisation of MSMEs leads
limited collateral, improper lower-rung MSMEs tend to be to high cost of servicing and
documentation, incomplete tax a low priority for banks due to cumbersome document collection
returns, inadequate accounting the high cost of acquisition. By processes for banks who find it
etc., making them ineligible providing digital onboarding even difficult to service them. Neobanks
for availing traditional asset- in remote locations, FinTechs are increasing the number of
backed loans offered by banks. have a wider market to access. channels for interacting with end
Neobanks are offering integrated They are also reaching out to the customers through alternative data
invoice generation and tax-filing lower-earning and unorganised models, smart partnerships and
services which help them provide employees of MSMEs through digital technologies.
customised cash flow based loans individual tie-ups with employers.
and invoice discounting suitable This has increased the revenue
for small enterprises. potential for neobanks.
• Intuitive customer platforms: Neobanks are offering cleaner user interfaces and creating intuitive user experiences
such as regional language support and integrations with accounting and expenses systems.
• One-tap availability: They are embedding into existing user processes by offering financial products at the point of
consumption by using alternative data such as cash flow based credit and invoice insurance.
• Transparency and data insights: Neobanks are doing away with payment penalties, limited ATM withdrawals and
account balance charges, and offering more transparent pricing to their business customers. Additionally, most
neobanks are also providing dashboards and visualisation analysis which provide useful analytics on accounting,
payments, receivables, etc., helping business owners keep track of payments/receivables outstanding, invoices
pending, spends analysis and other relevant financial activities.
• Consolidation of financial and non-financial services: MSMEs are benefiting from the convergence of financial and
non-financial services into a blended ecosystem. For example, several neobanks are providing MSMEs with digital
tools that enable them to connect with customers and suppliers via digital platforms. These players are providing
neobanks with an opportunity to embed financial services with non-financial services such as loans for purchase,
pre-shipment loans and payment gateway facilities.
Case study #2
A four-year-old Bengaluru-based neobank, having powered more than one million MSMEs and start-ups,
is focusing on providing them with tools across the four basic business verticals of banking, payments,
accounting and compliance.
Partnerships: It also aims to integrate with packers and movers, travel agencies, legal services, financial services,
office security services, printing and publishing, digital marketing, public relations and event management, etc.
The platform also provides business growth tools, including a marketplace as well as a rich app store with various
business essential services required for small businesses like insurance, accounting plug-in, among others.
Evolution of neobank-related
regulations in Asia
Neobanking has witnessed increasing traction, and regulators across multiple markets have
also implemented a number of regulations specifically designed for neobanks. This practice of
regulating neobanks started with the developed markets, but a few Asian countries have also
issued licensing regulations over time to bring neobanks under regulatory frameworks. In the
recent past, regulators in developing Asian economies have started to explore ways of governing
digital and neobanks. The Monetary Authority of Singapore (MAS), Financial Supervisory
Commission Republic of China (FSC Taiwan), Bank Negara Malaysia (BNM), Bangko Sentral ng
Pilipinas and Hong Kong Monetary Authority (HKMA) are the regulators who have issued digital
banking frameworks and commenced granting digital banking licences. On the other hand, the
Bank of Thailand (BoT) has inclined towards regulating the digital banking space while Bank
Indonesia has issued the guidelines for digital banks just a few weeks ago. A few specific details
on these developments for some of the Asian countries are outlined in the following page:
FSC Taiwan
FSC Taiwan issued internet-only bank guidelines on 26 April 2018.12 The scope of business of these banks
is the same as that of a conventional commercial bank in Taiwan.
As of February 2021, FSC Taiwan issued two internet-only bank licenses.13
HKMA
The HKMA issued revised virtual bank guidelines on 30 May 2018.
The scope of a virtual bank is to primarily deliver retail banking services through the internet or other forms
of electronic channels instead of physical branches.
It has issued a total of eight virtual banking licences as of 31 December 2020.14
BNM
BNM issued a framework15 on licensing digital banks on 31 December 2020, clearly charting out the
eligibility criteria, application procedure, etc., for an applicant intending to carry on digital banking
business or Islamic digital banking business.
As of June 2021, BNM has received 29 applications, out of which only five licenses are proposed to
be granted.16
11 https://www.mas.gov.sg/news/media-releases/2020/mas-announces-successful-applicants-of-licences-to-operate-new-
digital-banks-in-singapore
12 https://www.fsc.gov.tw/en/home.jsp?id=473&parentpath=0%2C4
13 https://www.moodysanalytics.com/regulatory-news/feb-09-21-fsc-taiwan-grants-license-to-internet-only-banks-in-taiwan
14 https://www.hkma.gov.hk/eng/key-functions/banking/banking-regulatory-and-supervisory-regime/virtual-banks/
15 https://www.bnm.gov.my/documents/20124/938039/20201231_Licensing+Framework+for+Digital+Banks.pdf
16 https://www.bnm.gov.my/-/bnm-receives-29-applications-for-digital-bank-licenses
Indian neobanking
regulatory landscape
The Indian banking sector is one of the most heavily regulated sectors in the country. Banks in
India deploy considerable resources (time, manpower and money) to ensure compliance with
applicable regulations. Indian banks have also adapted to the new realities of the digital era
and adopted state-of-the-art technologies and systems to remain compliant with the constantly
changing regulatory landscape.
Over the last decade, there has been an increase in the use of cutting-edge, tech-enabled
solutions in the banking sector. These tech-enabled solutions have also given rise to neobanking
business models in the country. These neobanks have brought superior technology to financial
services and enriched customer experience while leveraging the regulatory infrastructure and
core systems of existing banks.
Business models
In countries where neobanking business models are regulated (termed as either digital banks or
neobanks), the governing regulations in such jurisdictions typically do not require such entities to
establish physical branches. As a result, these neo/digital banks completely operate on a digital-
based banking model with no physical presence. In contrast, the Indian FinTech ecosystem
has witnessed two different types of business models for catering to the banking and financial
services needs of the population through digital modes. The broad characteristics of these two
models are described in the following page.
Overview These are existing Indian banks These are usually FinTech entities that tie up with multiple
which facilitate complete digital banks and other partners to provide a wide range of financial
banking services under their services.
own brand name.
Objective They are typically established These FinTechs are naturally established with the goal
to compete with FinTechs of becoming a financial services regulated entity in the
and keep up with new-age near future.
technology in the financial
services sector.
Authorisation These entities are authorised by In India, banks/financial service providers are regulated
the RBI to undertake banking entities who co-brand/partner with FinTechs (unregulated
and financial services activities. entities) to offer various regulated products to customers.
Such co-branding/partnership is governed by regulations
on business correspondents (BCs), outsourcing and digital
payment security controls.
Products • Bank account • Small and medium enterprise (SME) and individual banking
offerings • Remittance • Insurance
• Utility bill payments • Prepaid cards/wallets
• Credit cards • Remittance
• Insurance • Utility bill payments
• Investments • Investments
• Loans • Loans
• Value-added services
— Expense management
— Automated accounting and invoicing
— Integrated payment gateway
— White-label solutions
Regulatory framework
Currently, neobanks offer products that cut across all the three financial regulators, namely, the RBI, Securities Exchange
Board of India (SEBI) and the Insurance and Regulatory Development Authority of India (IRDAI). While some of the product
offerings require neobanks to seek a licence/approval from the concerned regulator, some others (primarily RBI governed)
– for which the applicable regulatory regime is indirect – do not.
Furthermore, in the context of the applicability of regulations and requirements to seek licences from the RBI, the
governing factor will be whether such neobanks partner with existing financial institutions (banks, non-banking financial
companies, prepaid instruments (PPI) issuers, etc.) or directly become the issuers of products, take credit risks in their
own books, etc.
Neobanks also offer investment advisory services to their customers (for investing in mutual funds, stocks, insurance
policies, fixed deposits, etc.), and in such a case, depending on the exact role of the neobanking entity, licences/approvals
from SEBI and the IRDAI may be required.
Thus, the implications of regulations flow down to neobanks contractually from their regulated partners. The legal
agreements which are executed between neobanks and regulated entities are the key governing terms for providing a wide
range of products and services. Such contracts are signed by neobanks with different regulated entities as appropriate to
their business operations.
In the event that the regulatory framework becomes directly applicable to neobanks by virtue of offering products on its
own books or the roles and responsibilities with respect to a particular product come within the ambit of the regulatory
domain, the regulations from which authorisation requirements for such typically offered products derive are listed in the
table below:
— investment in gold
Some key operational processes of the neobanking business model are discussed below.
Neobanks act as the front-end customer interface, while most of the regulatory compliance is taken care of by the
regulated entities. In the case of a conventional bank partnering with a FinTech, the customer acquisition aspect for
the purpose of opening a bank account and availing banking services is usually executed by these FinTech entities.
They assist the bank and other back-end regulated entities in complying with KYC/AML requirements. While the
documentation part or operational KYC-related aspects are supported by these neobanks, the final decision to validate
and approve/reject the KYC of any customer lies with the regulated entities. These critical KYC-related aspects are
adequately covered in extant agreements between neobanks and the regulated entity.
The neobank’s obligation is limited to providing technology support for sharing of KYC documents with the
regulated entity. Due to regulatory constraints, neobanks cannot and do not store the KYC documents of customers.
Additionally, when customers opt for a particular product from a regulated entity, neobanks make extensive disclosures
(through terms and conditions, agreements, etc.) to them regarding the regulated entity. The journey of a customer with
a neobank is analysed in the figure below.
Customer Customer
Customer’s
downloads the uploads the Regulated entity Customer’s
documents
mobile application officially valid authenticates account is
and details are
or logs in to the documents and validates the successfully
validated at the
website of the (OVDs) and KYC documents opened
back end
neobank other details
In addition to providing customers with standard options (telephone, emails, etc.) for lodging complaints, neobanks
also leverage technology and use cost-efficient customer service chatbots that assist customers round the clock.
These chatbots are seamless as they are tech-driven and capable of providing instant resolution to several queries
and concerns.
Apart from providing round-the-clock customer support through digital modes, neobanks are also required to follow
fair practices while rendering financial services to their customers.
A recent speech by the RBI Deputy Governor M. Rajeshwar Rao delivered in the context of data protection suggested
that large-scale adoption of open banking17 frameworks should ideally be preceded by strong data protection and
privacy laws.
India has already embarked upon the same with the introduction of The Personal Data Protection Bill, 2019, in the
Parliament. The bill seeks to protect individual personal data and establish a data protection authority for the same.
Neobanks will have to take into account the provisions of this bill while accessing, storing and sharing customer data
once it becomes a legislation.
17 https://m.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1107
Way forward
The Indian financial sector is primarily regulated by the RBI, SEBI and IRDAI. These regulators
have introduced various initiatives and regulations for increased, consistent, seamless and
safe accessibility to financial products through digital modes. The tremendous efforts put in
by all the regulators to make regulations commensurate with the ever-changing technological
developments and innovations in the financial ecosystem is laudable. For example, the
Regulatory Sandbox initiative that all the regulators introduced in the recent years enables
them to live test new products/services in a regulatory environment. Initiatives like Video KYC,
establishment of the Reserve Bank Innovation Hub and introduction of the Account Aggregator
framework are equally remarkable in the current context. If this dynamic approach of the
regulators continues, the already burgeoning neobanking sector is expected to grow rapidly in
the future.
As indicated above, in view of the current role played by neobanks, most of their product
offerings are not directly regulated. However, being subjected to regulations indirectly
(through their partnership with regulated entities) has ensured that their product offerings are
in adherence to the regulatory norms. This, in turn, has helped these entities gain customer
confidence and offer a host of financial products to the masses.
Phase 1 – necessary to update existing regulations: Currently, unlike neobanks, the regulatory regime does not
envisage a completely digital method of offering financial products. It is extremely critical that the current indirect
regulations are relooked at in light of the digital offerings of neobanks and their relationship with financial entities. For
example, the business correspondents (BCs) guidelines are quite dated and do not factor in the change in relationships
between financial institutions and their BCs as well as the manner in which the latter can operate now. The concept of
a BC has transformed from that of an entity offering financial products through purely physical channels to digital ones.
Also, the scope of the product offerings by these BCs has expanded considerably. A regulatory framework that enables
functions such as settlements and fund management to be undertaken by a regulated entity and technology interface and
user experience to be undertaken by a FinTech partner needs to be considered.
Additionally, a similar change is required in the RBI’s Branch Authorisation guidelines which currently define ‘branch’
only as full-fledged branches, specialised branches, satellite offices, mobile branch extension counters, off-site ATMs,
administrative offices, controlling offices, service branches (back office or processing centre), etc. This definition currently
does not take into account the digital set-up of neobanks. Furthermore, the mobile banking guidelines issued by the RBI
enables banks only with a physical presence to offer mobile banking services to customers.
To ensure that neobanks have a regulatory framework that is free from ambiguity, the regulators need to revisit the
relevant regulations and develop supporting regulations for the aspiring neobanking industry while ensuring customer
protection measures.
Phase 2 – niche banking licence: Based on an assessment of the way in which the neobanking space is expected to
evolve over the next few years, the RBI could carve out regulations that are niche to neobanks, similar to those created for
small finance banks and payments banks in the past. Thus, a specific regime for the establishment of digital banks needs
to be explored. The case for such a regime is made below:
• Branches no longer the pivotal point for customer handling: Existing regulations make the business branch the
pivotal point for customer handling, comprising customer onboarding, servicing and grievance redressal. The RBI
Master Circular on Customer Service in Banks dated 1 July 201518 makes this explicit. It has been suggested that
digital banks adopt the notion of virtual branches, but the compliance requirements in the RBI’s master circular are
so stringent that this would require branch managers and supporting branch teams to be in place for the bank to
remain compliant. If these represent humans, the cost savings that arise from a digital bank would be lost, and the
business model would become unviable. Instead, if there are to be virtual branch managers and branch teams, it would
become much simpler to centralise the automation of customer handling. Regulations would therefore need to protect
customer interests differently from the manner presently specified, not relying on branches.
• Implications of absence of branches for geographical dispersion: As per the RBI circular on Rationalisation of
Branch Authorisation Policy - Revision of Guidelines dated 18 May 2017,19 geographical dispersion of customers
is presently mandated by the RBI through branch locations, with six locational tiers. Tier-1 centres have a branch
strength not exceeding that of centres in all other tiers put together, with a quarter of all branches being in unbanked
locations and with incentives for expanding into underbanked locations. As a digital bank will have no business
branches, geographical dispersion would instead need to be guided by fresh regulations based on depositor locations.
18 https://m.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9862
19 https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10972&Mode=0
For instance, by working in tandem with the government, they can play a vital role in expanding
the reach of financial services, operationalising measures undertaken to solve the challenges
of financial inclusion and providing a bundled portfolio of necessary financial services. Services
ranging from opening of bank accounts for immigrants, facilitated via innovative onboarding
procedures, to providing instant credit facilities to MSMEs which are not based on traditional
methods of underwriting could assist in realising the larger financial inclusion vision.
Key attributes and offerings such as accessibility, cost-effectiveness, access to financial and
non-financial functionalities under one platform, and customer-centric approaches are some of
the factors driving the success of neobanks globally.
Moreover, neobanks are building niche solutions focused on specific groups of customers, and
this characteristic continues to make them vital in the larger financial services ecosystem.
Although neobanks are gaining momentum and have significant potential to disrupt the banking
and financial services arena, their operational model is yet to show sustained profitability.
Another revenue stream neobanks are exploring is offering banking as a service via APIs. Having already established
their own technology and offerings, these players are abstracting these solutions for use by other players as building
blocks and platforms. For example, a leading global technology player is offering digital banking APIs to players
such as FinTechs, start-ups and corporates to build their own financial solutions in the form of embedded finance or
neobanking applications.
With competition increasing among players in the financial services domain, including traditional banks, new-age FinTechs,
technology firms and non-banking entrants, it is yet to be seen whether the market is deep enough for neobanks to grow
sustainably and equitably. Addressing critical impediments such as regulation and compliance, data and cyber security,
seamless API integration and expansion of products and services will play a fundamental role in determining their success.
Contact us
IAMAI PwC
Gaurav Chopra Neha Bajaj Vivek Belgavi
Vice President Assistant Vice President Partner, FinTech, and Alliances and
[email protected] [email protected] Ecosystem Leader
PwC India
[email protected]
Authors
Sanjana Agarwal
Tanvi Vakil
Avneesh Narang