Neobanking in India

Neobanking Market Overview

Regulations in India do not permit 100% digitized banks and hence neobanks are built over traditional banking systems. Neobanks work as enablers of business for licensed banks by building and providing the technology layer as white label solutions for their licensed partner banks. A neobank is a digital bank which does not have a physical location but can be found entirely online. Current regulations (or lack of) prevents neobanks from engaging in deposits, lending and related financial activities.

It is observed that there is a strong growth in neobanking space in North and South America, Europe, UK and APAC region. The UK had a head start due to the early introduction of common banking guidelines for the EU.

Payment Services Directive (PSD) regulated the initial neobanks in Europe. PSD2 came into effect which mandated 3rd party access to APIs of banks, thus, creating an open data sharing landscape.

The global neobanking market size is expected to cross USD 2 trillion by 2030, growing at a CAGR of 53.4% from 2022 to 2030, according to a new report by Grand View Research, Inc.

Types of Neobanks

Neobank Categories

Growth Drivers

The incredible growth opportunity for neobanking platforms is sprouted by their low-cost business model, which has resulted in high adoption by small and medium-sized enterprises, as well as businesses with variable incomes and earnings, and businesses that embrace innovative tech.

Access: Technology is enabling to serve the untapped opportunity for both MSMEs and unbanked individuals in tier 2/3 rural areas as well as digital millennials.
Convenience: Combined with a unique experience and ease of funds management, neobanks make banking operations convenient and on-the-go, leading to increased adoption rates.
Cost-effective: No requirement of a physical setup makes neobanks extremely cost-effective to run and thus provide services at a relatively lower cost to their customers as compared to traditional banks.
Transparency: Instantaneous transactions and the ability to track the money at every step makes neobanks quite transparent.
Smart reporting: Due to the ability to track money continuously, neobanks are able to provide a much more comprehensive and intelligible overview around funds and transactions.

Neobank Regulatory Landscape in India

The Indian banking sector is one of the most regulated sectors in the country. In the past few years, there has been an increased use of tech enabled solutions in the banking sector which has resulted in different models for neobanking. Neobanks currently serve as the technology layer for customer acquisition and banking services.

Businesses struggle to incorporate finance into their everyday offerings. Neobanks, by being the mediator could resolve quite a lot of challenges for business right from lending and disbursals, payment collection process, reconciliations, to user onboarding. With the use of innovative fintech solutions neobanks are providing the value addition that is helping them grow exponentially.

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.

Apart from the requirement of a partnership with a licensed entity (bank or FI) based on a value proposition that strengthens the partner entity’s existing business, outsourcing or BC guidelines may apply to neobanks in the absence of a regulatory framework. These guidelines or frameworks are indirectly applicable and imposed on fintech companies through their partner banks:

RBI’s directions on prepaid payment instruments (PPIs)
RBI’s guidelines for engaging business correspondents under Branch Authorisation circular
RBI’s framework for Outsourcing of Payment and Settlement-related activities by Payment system operators
RBI’s guidelines on managing risks and code of conduction in case of outsourcing of financial services by banks and NBFCs
RBI’s direction on digital payment security controls
SEBI guidelines on outsourcing of activities by intermediaries
IRDAI regulation on outsourcing of activities by Indian insurers

Depending on the nature of product offerings i.e. banking, investment or insurance, frameworks of RBI, SEBI or IRDAI respectively may apply.

Payments Bank License Requirements:

Rs. 100 cr paid up capital with a min. Capital Adequacy Ratio of 15% of its total risk weighted assets.
Promoter needs to qualify as per the RBI’s norms like that of a PPI co., public co., NBFCs, promoters having JVs with SCBs, etc.