Industry Insights

Understanding Neo Banking In India

We keep hearing about Neo Banks these days. Here is a small write on what they do and their current landscape.

Neo Bank is a new type of digital bank that exists without any branches. They are primarily fintech firms providing digital and mobile-first financial solutions services to modern tech-savvy customers. These include payments and money transfers as well as lending through online platforms and apps. Neo banks are reinventing the practices and processes associated with traditional banking.

This new-age banking emerged about 5 years ago, namely in the UK through FinTech players such as Monzo and Atom Bank.

Neobanks don’t have a bank license of their own but count on bank partners to provide bank licensed services. For example – Niyo solution tied up with Yes Bank.

Difference between Digital Bank vs Neo Banks

Digital banking usually refers to a bigger player in the banking industry providing financial services in a traditional way. Neo banks are 100% digital and do not relate to any traditional banking names, big or small.

Advantages of Neobank:-

  1. Easy account creation
  2. Seamless international payments
  3. Customer friendly interface
  4. Value added services like bookkeeping, financial management etc

Challenges faced by the Neobank:-

  1. Targeting customer segments
  2. Arriving at best market-fit product for the customer segment
  3. Partnership with traditional bank
  4. Technology challenges – core banking systems used by most banks do not meet some of the expectations for modern digital services

Regulatory norms for Neobank: –

In India, RBI is still not granting Banking licenses to virtual banks. Currently, Neo Banks are outsourcing their banking responsibilities to those with licencesiecreating strategic partnerships with traditional banks.

Focus Business Segment for Neo Banks in India: –

Neo Banks main focus are especially young generation who are digitally savvy consumers and who don’t want to deal with traditional banks due to lack of flexibility. This generation wants to compare online loans, submit their application with a few clicks, and receive approval in a matter of minutes. And this is exactly what neo-banks offer them: speed, friendly customer support, and relevant services. Neo-banks are all about convenience and respect for the customer’s time. Some of the players are available in both B2B and B2C segments.  In terms of customer base Niyo – one of the leading Neo bank has ~ 1 Million customers and B2B leading player Open has ~ 0.4 Million customers. Below are the details of some B2B and B2C players.

B2B companies Product feature offering

Retail companies Product Feature Offering

Funding Details of Indian Neo Banks: –

During the period of Q1’20, India fintech companies has raised $421 M. New-born Neo Bank – Jupiter which is founded by Citrus pay co-founder raised $ 2 M on Apr-20. Below are the more details of Neo Banks funding: –

Neo Banks and their Banking Partners

Neo-Banking Future Prospects: –

Credit to GDP Ratio in India is 50% where as it is north of 100% for developed countries. Credit reach definitely needs to improve in India. More bank licenses is surely one way but a thought on giving a systematic push towards digital channels of fulfilling the credit need of the country may go a long way. Moreover, the recent Covid situation has underscored the imperative of quickly scaling banking and credit services to consumers and small businesses.

According to a report published by Allied Market Research, the global neo bank market is growing at a CAGR of 50.6% during the period 2017-2020. Thus, e can confidently say that they are here to stay and grow the pie of the borrowing customers.

Solutions to the Challenges faced by MSMEs: COVID times and way forward

With a very large number of MSMEs struggling with cash flows, due to delayed payments, reduced customer demand and a general slow-down in the economy, it is important to focus on getting demand back as soon as possible. The best way would be to incentivise accelerated spending over the next 6 months.

  1. Revenue – the cash flow challenges

Over the past few weeks, MSMEs across the world have been facing unprecedented challenges. For MSMEs in consumer businesses such as hotels, restaurants, salons, gyms, movie theatres, distribution firms, and other non-essential retail, revenues are down to near zero.

Firms operating in the B2B space have also seen revenues dip substantially. We have heard of multiple instances of large customers canceling long term contracts and enterprise customers delaying payments. Cash collections have slowed down or completely stopped.

Most of the MSME founders are in a state of shock and there is a total lack of clarity on when customers will return. The rare few who don’t face this problem should consider themselves lucky.

  1. Expenses – how do you pay?

On the other hand, the firms have to continue to pay for certain necessary expenses, such as employee salaries, utility payments, rentals, etc. With the lack of cash collections, many of these payments are being delayed or reduced. Firms are resorting to reduced salaries and asking landlords to delay rental payments. Supplier payments are being delayed.

Firms are looking to mitigate cash flow pressures, through the RBI provided a temporary moratorium on existing borrowings and the set-off benefits on GST and TDS payments provided by the government, though these come at a cost.

  1. Can one turn to the bank for help?

The firms can look to the banks for loans to help with cash flows, but given the uncertainty over the business, banks are also reluctant to lend till there is more clarity. Remember, the bank can lend only if they are confident of collecting the principal and interest. If there is a material risk for the loan to be repaid, it is not in the best interest of the bank to provide the loan – else the bank runs a high risk of default on the loan.

Given the triple pressures of Low or No Cash Collections (Revenues), necessary payments to be made and limited borrowing opportunities, the MSMEs are using whatever little cash cushion to manage, but if the weak demand continues for slightly longer, then the situation looks dire for a large number of MSMEs. The Risk of bankruptcies is very high.

  1. What are MSMEs doing

In this situation, MSMEs are first focussing on evaluating if customers will get back and planning accordingly. Wherever possible, they are reducing costs and new initiatives are being shelved. In conversations, many promoters have mentioned that they have set aside some additional capital to take care of the expenses over the next few months and if the business does not get back to profitable mode, they may have to start taking hard calls.

  1. The challenges for the government

There is much clamor for the government to provide a large stimulus, but this is a complicated path. Already the fiscal deficit has been under strain and the COVID related lockdown has further exacerbated this problem, with tax collections already down and guaranteed to go down even more. Any increase in tax rates will delay an already fragile economic recovery. And just providing increased liquidity, can only help the MSMEs to some extent, as the money will go down the drain if customers don’t return soon.

  1. What support do MSMEs need from the government

For the entire economy, this is a complicated challenge. At the root of the problem is delayed customer demand. Enterprise businesses are going into a cash conservation mode and delaying spending, as they prepare for the uncertain times ahead. Individuals are also conserving their cash as they are uncertain about their future.

In this scenario, it is imperative to get demand back as early as possible. In order to do this, firms and individuals who have sufficient cash reserves and cash flows should be incentivised to start their spending early. This will ensure the MSMEs (and also larger businesses) get back to normalcy sooner. There are precedents on how the government has addressed this in the past:

  • For businesses, allow for say 100% depreciation as an expense on Capex done before September 2020
  • Provide discounted GST rates on consumption done before Sept 2020 for both businesses and individuals. In the past, we have seen reduced excise and service tax for limited periods

This will get the economy back on its feet sooner, save jobs, reduce bankruptcies,  reduce bad loans for banks, and get the MSME engine moving. The government will also benefit, as demand recovers and the tax lost out on the depreciation benefit will just be delayed. Jobs saved will lead to higher income tax collections and the increased consumption will lead to improved GST collections.

As they say, teach a man to fish….

“Work” in the post Covid world

When the Corona led lockdowns started in the middle of March, not only in India but across various parts of the world, the business world was stunned. Most believed the world would not be able to function and work will come to a standstill. 6 weeks later, the on-ground experience has been very different. While many sectors directly affected, such as travel, hospitality, consumer-facing services like salons, malls, etc have completely come to a standstill, various other areas of work like IT Services, FMCG, Banking, etc continue to function smoothly (given the circumstance, smoothly is probably the best word).

Many people, who are part of the functioning world, claim they are actually working far more than they were in the pre-Covid world. Some say, efficiency levels have actually gone up.  A strong data infrastructure, data on the cloud, video conferencing, digital payments, and a host of digital applications have made this a reality. It would be fair to say, the lock-down would have caused far more disruption if it had happened a few years back when such infrastructure was not available.

Given the rapid spread of Covid, the importance of flattening the curve, and no real cure in sight, it is quite likely the world will never return to the old ways of working. Many offices will have to (or choose to) be prepared for ‘social distancing’ as a norm, but at a reduced level of severity than what we have seen so far.

Companies that adapt to the new world will survive and thrive in the post-Covid world. Companies that resist change will struggle a lot. We believe the following trends are firmly in place.

  1. Work-From-Home :

Firms will look to mix employees into 3 buckets (WFO: Work full time from the office. WPT: Work part-time from office. WFH: Work from home full time). All work roles could be bucketed into one of these categories. This will bring down overall administrative costs for firms. The cost savings can be directly transferred to customers leading to significant competitive advantage in the market place. Some firms may need to create distributed work environments, so that some employees who don’t have an option to work from their homes, can use these work environments close to their homes. Over time, one can reasonably expect the WPT and WFH employees to move away from the large cities to smaller towns, where lifestyle will be much better and with options to work effectively from home.

  1. Data and communication infrastructure :

With efficient video conferencing, VPN, digital work processes, etc, the post-COVID world will see a far more efficient set of work processes. One does not have to wait for a week to get a senior management meeting. More meetings can be scheduled and completed in a week, a far more efficient process than in the physical world. Firms need to invest in Data infrastructure, Data Security,  Measuring productivity.

  1. Dismantle well-entrenched processes :

What surprised many people, over the past 6 weeks, is that many processes which historically needed a physical employee presence, would be managed remotely as people figured ways to find workarounds. Firms that focus on dismantling these processes and reducing the need for physical presence should be able to work far more effectively in the new world. The lawyers, accountants, etc will have to find way around in the new world. Imagine a day when the courts, doctors, etc can work digitally.

  1. 9-5 working :

The idea of the 8 hour a day work culture, which is nearly 135 years old, is based on employees coming into office. Once you take this requirement out of the equation and define work packets for the flexible work environment, it allows companies to hire people for the work required. It will also allow many part-timers to come into the mainstream workforce – women who need to balance time between work & home, retired folks who have specialized skills, other part-timers, etc. It will land up unleashing a massive amount of talent leading to huge productivity improvements.

  1. Business Travel :

Many businesses have figured a way to work without having to travel during this lockdown. Conferences have been happening in the digital world quite seamlessly – with the same level of effectiveness, but far more efficiently. With travel and hotels facing some uncertain times, many business travelers will get used to the new world doing of business with their clients without having to travel. Once this culture is firmly entrenched, it will be difficult to change. Next time when you ask a client for a meeting, chances are the client would prefer a video-call.

  1. Digital Culture :

Finally, every organization has a culture and it is easier to create a common culture in the physical world. Employee level engagement is possible and the coffee machine conversations really make the firm. In the new world, many of these need to shift to the digital world. I already see several firms taking huge strides in this direction. Keep an eye open in this direction and you will see a plethora of options available for you to create a common culture.

All the best in your endeavor to re-engineer your firm in the new world. Stay safe. The world on the other side will most likely be a far more beautiful world.

 

Focus On High ROI

Leave the data collection to us. Focus on getting a High ROI.

Think about this for a moment.

A typical credit analysis (Bank/ B2B credit) requires analysis of information provided by the borrower, corroboration of that information from public domain sources as well as market intelligence. As a result- the person responsible ends up spending hours gathering data from various websites, before he can even get to the all-important task of analyzing the financial soundness of the borrower and the credit-risk involved.

In fact, just putting together this data on the prospective customer takes away 25% of his precious time, which could otherwise have been spent on analyzing the merits and demerits of the credit-decision. Not the best use of his time, wouldn’t you say?

It makes one wonder if there is a better way to approach this.

Patrick Campbell, CEO of a US -based pricing strategy platform, calls it – High ROI Thinking – a culture that an organization needs to embrace at all levels. ‘It is very important to evaluate each and every task and keep what adds the most value to the business- focusing on high impact work while outsourcing, optimizing, automating all scalable work’, he explains in one of his B2B podcast.

And this is exactly where Probe42 comes in. Probe42 collects, cleans and curates public domain data (from verified sources) on companies and converts it into insightful information that help a lender evaluate the creditworthiness of a borrower.

In fact, using Probe42 takes away most of the low impact, grunt work of the Analyst so that he can focus on credit appraisal, which in turn means a high ROI for the lender.

With a staggering 94% reduction in total time taken to gather company information using regular sources versus using Probe42, you can empower your Credit Analysts to make better credit decisions.

Probe42, is helping scores of Credit Analysts in many large private and public sector banks in India, like ICICI, HDFC, SBI and others, to name a few, improve their turnaround times and quality of analysis – making it a high ROI prospect, not just for the lending community, but the entire Indian Banking Sector.