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The COVID-19 pandemic has brought with it a constant fear of disease exposure in people who wish to venture outside their homes for any work, whether essential or trivial. Because of this, several key sectors of our economy have shifted their operations online. The banking sector, too, has not been left unaffected by this paradigm shift. The ever-evolving concept of online banking has given rise to the novel phenomenon of ‘Neobanks’. Also called ‘challenger banks’, neobanks are just like traditional banks in terms of monetary transactions such as deposits, withdrawals, loans and the like.

However, these institutions differ from banks significantly as they offer internet-only financial services and do not have physical branches. Though neobanks, every banking service that a consumer expects to receive at any step of the banking value chain can now be availed at our doorsteps via non- banking service providers, courtesy of modern technological advancements and flexible business models. The concept of neobanks may seem synonymous with digital banking at the first glance and as a result, the two are often mistakenly used as interchangeable terms; however, both deal with completely different aspects of the banking sector. Digital banks refer to the online extensions of organisations which have already established a stronghold in the conventional banking sphere, while on the contrary, neobanks exist solely on the Internet – with no physical branches whatsoever – as independent ventures, only seldom collaborating with pre-existing banks.

The very ideology behind the creation of neobanks has been a part of the international banking sector for quite a while, finding its roots in the United Kingdom following the 2008 financial crisis. However, this concept has begun to gain popularity only recently – especially in our country – and it is expected to keep rising. In India, this sector raised $90 million in the previous year and by 2026, it is expected to raise a whopping amount of $394 billion as per the estimates of Zion Market Research.

In India, various institutions are coming up in this sector; for example, by the usage of neobanking mechanism, RazorPayX, which was initiated in Nov 2018, now has over 8000 businesses as its customers, who avail services like payment, current account, cheque book, credit cards, along with managerial services related to customer relationship, payroll, IT and Compliance. RazorPay has also taken over companies like Opfin. NiYO Solutions is also a competent institution in this sector, and is continuously scaling up its operations. Since this sector is still in its budding stage, sometimes startups do collaborate with big players in the market to become a chartered bank. This collaboration also helps them in gaining funds which they could use for lending purposes.

Neobanks require low maintenance costs and are cheaper than traditional banks due to the presence of fewer regulations (although RBI is looking into the regulatory consideration for this sector) and a minimalized credit risk. They even ensure better security in comparison to their counterparts, thus making them the need of the hour. The emergence of neobanks presents numerous potential benefits to the underbanked sector of micro, small and medium enterprises (MSMEs), which, despite making up a large segment of the consumer population, are usually are not catered to by the larger banks. This is evident because only about 11% of the 63 million MSMEs have access to formal credit services. They are generally overlooked in part because of the inability of conventional banking institutions to expand their ambit to such small-scale, peripheral organisations due to distribution cost constraints, and also because these setups are not considered highly creditworthy by the banks. Also, MSMEs have very specific requirements, for instance, smaller loans, shorter repayment times, and a quick funding access, all of which the banks find difficult to customize as per each setup. As a consequence, our traditional banking system leans more towards the bigger businesses, which they find more creditworthy and profitable. These MSMEs, along with several other members of the lower salaried creed and technologically aware millennials of the day with ideas of ambitious start-ups, i.e., the crowd which banks do not consider as favourable investments, can now avail the services of the neobanks. These neobanks have a wider range of distribution due to lower operational costs and the use of cloud technology, with the added advantage of lower charges, making their services more affordable to the common public.

Add to the above special services like budget, receivables and spend management – the result is a marvellous platform for the small business for monetary assistance. These broadening horizons of neobanks – and the consequential bridging of gaps between consumers and banks can be further aided by the agency of Open Credit Enablement Network (OCEN). It is an infrastructural protocol which provides an efficient two-way connection between the borrowers and the lenders. On one hand, it enables the lending service providers and bankers to access verified information regarding SMEs through various data sources, hence proving their creditworthiness; at the same time, it provides an ecosystem with a wide coverage which includes these setups in their ambit and gives them access to numerous banking platforms with affordable credit. Through collaboration with OCEN, neobanks can increase their range of distribution and customer acquisition. At the same time, it will also help increase the scope of utility of OCEN platforms by increasing the number of lenders in the supply chain. Furthermore, many pivotal OCEN portals can also increase their reach by themselves becoming key players of the neobanking sector.

Some such promising candidates include platforms like Rupifi and Sahay. Bangalore-based Rupifi Technologies, which became operational in 2020, is a software-as-a-service (SaaS) provider for SMEs, and has collaborated with several companies on both the supply side and demand side. Rupifi provides them with the required technological connectivity so that the credit needs of affiliated small businesses can be addressed. A similar platform is Sahay, which is currently in affiliation with several banks like SBI and HDFC, and provides merchants an easy access portal for quick loan procurement on provision of their GST identification number and required bank details. These portals have immense potential for the revolutionization of not only the banking sector, but also for the development of the desired utopia termed ‘Digital India’.

By Anuja Guglani


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