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Neobanks can very well be termed as the latest buzzword in fintech town.
But what does a neobank bring to the table? And how do they make revenue?
These questions seem quite complex, don’t they? Well, experts might help.
And this blog is all about expert advice.
The Global Fintech Fest was conducted from September 28-30, 2021. Our co-founder, Reeju Datta, joined a group of seasoned panellists to discuss all-things-neobank!
The roundtable kicked off by discussing the subject of low digital penetration in India.
However, Neobanks, relatively the “new kid on the block” can offer a solution to this issue.
But, What’s a Neobank?
Neobank can literally be translated as a ‘new way of banking’. It focuses on a more branchless, digitized kind of banking that meets ever-evolving customer expectations. In other words, a Neobank is a system built over the existing banking infrastructure of traditional banks.
Historically, traditional banks have created financial products keeping compliance and regulation into consideration. However, neobanks are inverting the dynamic.
They are creating products that meet the customer demands and then focus on making them compliant.
So, how are neobanks giving strong competition to traditional banks?
Well, here are a few pointers:
- Mobile-first approach
- Financial Inclusion; catering to all social sections
- Innovative financial products (payment links, wearable payment tech, etc.)
- Simplified reconciliation for payments
Apart from that, there are a lot of reasons for the rise of neobanks in India:
- Lower entry barriers in the market due to Open banking API in India
- Demand for banking services by niche markets
- Ease of regulation and compliance structures
- Traditional banks opening up to partnerships with fintech players.
Related Read: Banking as a Service: All You Need To Know
Since we have covered the rise of neobanks, it is only fitting to discuss their business models.
How Do Neobanks Make Revenue?
Earlier, traditional banks had a virtual monopoly over the financial industry. Things have changed as new players have entered the market.
Here are some models that depict the economics of neobanks.
Revenue Through Existing Bank Customers
Gaining from existing bank customers does not necessarily mean a drop in revenue for banks.
Yes, revenue is divided between banks and third-party entities. However, the overall revenue has also increased significantly as bank-fintech partnerships help banks tap into new markets as well.
Revenue Opportunities from Non-FS Players
In our blog on Banking as a Service, we detailed how non-financial services (FS) players are aiming to embed banking services into their eco-system.
For instance, travel agencies may want to offer one-click loans for tickets on their platform. This aids in transforming customer experience and building an ecosystem that reduces churn-offs.
Now, these non-FS players may act as new revenue sources for neobanks. With the rise of fintech APIs, more and more players are looking to embed banking services in their products.
Neobank is still a rather new concept in the market (or new kid on the block.)
As a result, most entrants have to innovate to find new revenue models and streams.
For instance, the subscription model (recurring bill) seems like a lucrative prospect. However, they may not fit the bill for SMEs.
Another model can be offering platinum services for earning revenue. For instance, Zomato Pro can be considered a platinum service. (in addition to the default Zomato services)
However, the success of these revenue models depends on the response of the Indian customer base.
Experts agree that the next 2-3 years will be formative in terms of revenue models for the neobank industry.
Possibility of Subvention Model?
Now, let’s say a neobank is working in the healthcare niche. They are aiming to provide credit to customers for their healthcare needs.
Now, a hospital may be the direct beneficiary of this business model. Experts discussed the possibility of a subvention model. Here, the third-party player (the hospital, in this case) would incentivize the neobank in some way.
After all, Neobanks create capacity for some consumption by the end-user. It will be interesting to see if subvention models are taken up as a revenue stream by neobanks in the near future.
However, as with any new fintech innovation- there are quite a few challenges for neobank players as well.
Challenges to Growth Of Neobanks
While the advantages and evolving growth models seem encouraging, there is still a lot of room for improvement.
- Need to fix operational challenges in integration with banks
- Higher cooperation from traditional banks
- Lower customer acquisition costs
- Optimized regulatory and compliance structures
It will be interesting to see how fintech players overcome these challenges. Thus, paving the path for the future of neobanks in India.
The Future of Neobanks in India: What’s Next?
The future of neobank may focus on unbundling of banking services.
For instance, banking services may be presented on a third-party app. Interestingly, this app does not have to be in the fintech space. For instance, social media platforms like Whatsapp could offer these banking services to customers.
Furthermore, a user may switch between the services of various banks and get the optimal financial product for their use case. The aim would be to achieve minimal switching cost and switching time.
Taking this into consideration, it’s safe to say that neobanks just might be the bank of the future.
What are your thoughts?
How will the bank-fintech partnerships affect the growth of neobanks? Are there any other business model focusing on neobank growth?
Let us know in the comments below!