The year 2022 is here, and a lot of anticipation comes with it. Despite the constant uncertainty that surrounds us, we hope that this year will be the year of full recovery; however, one thing is sure: 2022 will be the year of fintech, notably neobanks.

Neobanks can be classified according to the type of customer they cater to. Some neobanks offer business banking services, including business loans or working credit lines, payroll administration, and cost management software. Consumer neobanks, on the other hand, are focused on assisting consumers in better understanding their finances through savings and investment products and facilitating loan availability.

Neobank

While there is a good grasp of how the sector and its segments are shaping up, it’s a good idea to take a step back and think about what a neobank is. As per India’s Banking Regulation Act, banking is described as “accepting, for lending or investment, deposits of funds from the people, repayable on demand or otherwise”. Neobanks are akin to ‘Mobile Virtual Network Operators,’ which are telecom service providers who do not own network infrastructure but work under agreements with telcos that do.

In this setting, several neobanks collaborate with regular banks to provide savings accounts, debit cards, and fixed deposits to their customers. Others associate with NBFCs or obtain their own NBFC licence to provide loans and credit cards. However, none of them can offer a whole range of financial services without relying on partnerships without a digital banking licence. This is the regulatory vacuum in which neobanks currently operate, and it must be filled.

Global Trends

Let’s look at the global picture to see the future for the Indian neobanking business. Thanks to a favourable legal climate and early fintech acceptance, Monzo and Revolut are two thriving neobanks-turned-digital-banks in Europe. As of early 2021, the two banks had a combined user base of more than 21 million people, and they have now expanded into regions outside of Europe.

Nubank, a Brazilian bank, was launched in 2013 with a $2 million seed round. The parent company of the South American neobank raised $2.6 billion in its initial public offering in the United States earlier last month, valuing the company at $41 billion. In Asia, KakaoBank attracted more than 10 million users in its first year of operation in 2017, propelling it to a current valuation of $26 billion.

Domestic Trends

Returning to India, there’s no reason it can’t be counted among the countries that have built effective digital banks. In the year 2021 alone, at least five significant consumer neobanks were founded. In 2021, four neobanks in this area, Niyo, FamPay, Jupiter, and Fi, raised $230 million. Open was recently valued at $500 million in the commercial neobanking space, while Razorpay, already a unicorn, has launched its neobanking subsidiary, RazorpayX.

India is set to produce a slew of unicorns in the future years in this area. When YeLo was acquired by Avail Finance, another neobank and Finin was acquired by Open for $10 million; the industry experienced some consolidation.

Product And Service Innovation

Customers expect their banks to provide the most basic services, such as securing their funds, paying interest, and providing other familiar tools to engage with their finances. Where today’s banks compete for attention with interest rates and credit card offers, tomorrow’s consumer-focused banks will be hyper-personalised and virtually undetectable. Consider a bank that may serve as your financial assistant, adapting its services to your specific need. And, much as you’d expect a sidekick to be there whenever you need them (think loans and insurance), the invisible bank will be there whenever you need it.

Whether your assets are spread over numerous accounts or not, our financial buddy will keep track of everything and help you maximise your savings and investments while staying on track with your financial goals. When your sidekick can address difficulties in seconds, you won’t have to wait for a customer service staff to pick up the phone or respond to messages. Think again if this appears to be a distant, futuristic scenario.

Neobanks are already developing tools to make these products and services possible. Fi has created Ask, a digital financial assistant driven by artificial intelligence. Asking it “how much did I spend on eating out last month?” can make tracking your costs as simple as asking “how much did I spend on eating out last month?”

Neobanks offer a simple banking experience that communicates to customers in their language. With developments like the Account Aggregator (AA) framework, they will soon present customers with a holistic view of their money or net worth. Data-driven, hyper-personalised nudges toward improved financial behaviour, from savings and loans to investments and insurance, can enhance the fortunes of an entire generation.

Security And Transparency

Many of the arguments around neobanks revolve around issues of trust and security. Neobanks, on the other hand, are only the front-end layer, with the banks that power the neobank making all of the crucial choices. For example, all deposits held by neobank customers are controlled by traditional bank partners and are guaranteed by the RBI’s deposit insurance scheme. The bank partners use two-factor authentication to verify all transactions. Banks handle the Know Your Customer (KYC) verification procedure, including video KYC.

Using AI-powered tools, tech-savvy neobanks may incorporate extra checks and balances to increase security, such as risk and fraud detection measures. Beyond the basic Aadhaar-PAN card checks, liveness checks can be applied on top of the mandatory KYC process for minimum KYC accounts. Furthermore, if passed by Parliament, the Personal Data Protection Bill would increase data protection for fintech.

Regulatory Push

The Reserve Bank of India (RBI) has played a vital role in developing forward-thinking regulatory regulations that have aided fintech innovation and growth. India has become a global leader in payments because of the Unified Payment Interface (UPI), which has benefited hundreds of millions of Indian consumers and small companies. The AA framework and permission architecture are essential steps toward enabling data sharing that is both privacy-preserving and highly secure, allowing for even more innovation and economic empowerment.

The next natural step is for India to establish a regulatory framework for neobanks. Neobanks can innovate in the Indian banking space and make full use of the IndiaStack, including tools like UPI, Open Credit Enablement Network, and AA, to enable broader coverage for the unbanked and underbanked while adding 100x value to existing users, thanks to a robust digital banking licence regime in place.