The CEO Dialogue – India, the new hub of neobanks 2.0
Over the last four years, nearly 36 neobanks in India have been competing, acquiring customers, and creating a niche in the banking and financial sector. Despite the ground-breaking success, India’s significant hurdle is the lack of formal digital-only banking licenses. Profitability still proves difficult for a majority of them. Most neobanks with a sponsored banking license do not fully own customer ownership and work on revenue-sharing models with incumbents, resulting in paper-thin operating margins. Our CEO Dialogue deciphers the next stage of Indian neobanks:
- Without the formal regulatory regime, will neobanks crack the sustainability and profitability code?
- Are investors still bullish about neobanks and will continue to inject their money?
- With traditional banks responding to digital disruption, will the neobanks adopt different growth strategies?
- How do neobanks own and master customer journeys?
- How neobanks benefit from embedded finance/ BaaS?
TRANSCRIPT
Varnika Goel
Hello, everyone. Good morning or good afternoon. Thank you all for joining in. We are beginning with our immersion today, which is on my favourite topic – neobanks. We are talking about India being the new hub for the neobanks. Neobanks have not been a common phenomenon in the past five years. But recently, it has become one of the biggest talking points for the banking and financial services industry. We’ve witnessed different formats of neobanks popping up, especially in the Asia Pacific market. And now, India has shown phenomenal growth of double digits. We call it about 40% to 45%.
In terms of numbers and how neobanks are progressing, I have an amazing group of individuals joining me today to decipher this topic. And give us more insights about what the neobanking industry will look like in India. How is it going to shape up for the future? What are the takes in terms of profitability, sustainability, as well as growth strategies for neobanks?
Thank you so much for joining in. Let me welcome them. I have Vaibhav Joshi, the CEO and co-founder of Easy Pay, and Bala Parthasarathy, the CEO of Freo bank. I also have Dr Jasmin B Gupta, the CEO of LXME bank.
Let’s start the discussion. It’s a pleasure today to have you, and let’s start by having a first introductory question for the audience and then begin our discussion. Can we have the first question up on the screen, please? Please scan this QR code to join in. We will also be sending in the link to join this quiz. It’s a fun interactive version. As we move across in this discussion, there are very easy questions along the side. I’ll give two to three minutes for everybody to join in. Meanwhile, our esteemed experts, do you guys want to briefly introduce yourselves, please?
Dr Jasmin B Gupta
Okay, so yes, I have joined LXME as CEO and co-founder, and we are building India’s first bank for women. Having said that, I think my background is that I’ve been a career banker throughout my life, from HDFC Bank to Kotak Mahindra Bank to Equitas Bank, where I was heading neobanking. And I think it was like you mentioned, that neobanking is a topic very close to your heart. And it’s your favourite topic. The same applies to me; it’s my favourite topic. It’s my place where I want to, you know, create an impact. And that’s what brings me to luxury. So that’s my short introduction.
Varnika Goel
Thank you so much. Thank you. Thank you, Jasmin. Would you like to go, Bala?
Bala Parthasarathy
Sure. So my name is Bala Parthasarathy. I’m the co-founder and chairman of Freo.
Freo is probably one of the most profitable neobanks out there. And I’ve been an entrepreneur for the last 30 years. I’ve started and sold many companies in the booth in the Silicon Valley, and you might have heard of several companies, including Snapfish in India. I have also started various things, including a venture fund called Prime Ventures. And a number of FinTech companies, including EasyTap and HAPPY, which have been sold recently. And Freo is a company we started a few years ago with my co-founders, Kunal and Anuj.
We’ve been in business and have done various things, but our goal is to expand banking. And with your permission, can I take a minute to explain sort of why we’re doing this?
Varnika Goel
Yes, please.
Bala Parthasarathy
Thank you. Suppose we look at the big picture view before getting into profitability and sustainability. Well, the big picture is that we tend to focus on the immediate, the today and yesterday’s actions. But if you zoomed out 30 years ago, the country only had public sector banks. And then HDFC came in, ICICI came in, and all the other dozen private banks came in, and they completely changed the game, right?
The quality of service, the technology with ATMs and the ATM machines, just amazing stuff happened compared to what it was before. And they’re all large, profitable, well-run institutions. Especially, some of them like HDFC Bank. There is a huge amount of respect for that. But what happens every decade or so is that the entire technology of the world changes, right?
Just like how Amazon has come and completely changed what retail means, Airbnb has changed what hotels mean to us. Uber and Ola have changed what transportation means. So sometimes, it’s tough for an existing player, like, for example, Meru Cabs, which some of you might remember was doing well at that time. But it’s tough for them to say, “Okay, I’ll also build an app and become Uber, right?”
It’s hard. Because you must change the institution, you must change the thinking, and you can’t just retrofit. And that’s what is happening right now. Now, almost every bank in the country has a digital initiative. And the finance minister has mandated that everybody should go digital. So the notion of digital banking is not new. It’s been around for like 15 years now. But what digital bank means carries different things to different people.
Usually, there’s a Chief Digital Officer and a Chief Innovation Officer, but they’re not the profit centre. They’re kind of sitting there doing something. And, yes, they do innovate. They do a lot of exciting things in that context. Because as a bank, more importantly, as a public bank, you have to report profits every quarter. Right? So, there are many requirements that they hit the constraints they come up with. That’s why start-ups exist. So when I started, you know, when we began Freo, which was considered MoneyTap at the time – many people had asked, “Why wouldn’t this bank do it?” or “Why wouldn’t that bank do it?”
They can, right? I mean, HDFC Bank could have done a Paytm, they could have done a Google Pay, they have all the ability, right? They have money, talent, and very smart bankers, but they didn’t.
The truth is, the incumbents never do it. It is not because they don’t want to, but because they can’t. And that is why neobanks exist. So if you think that India could support, you know, 20 well-run private banks, you would also think India can support 100 neobanks. And in terms of what neobanks do, I’m sure we’ll get into this in more detail later. But first, we have to look at where the world will be ten years later and not where the world is right now. And absolutely, there is no doubt that our kids are never going to walk into a bank. Banks, as they exist right now, will not exist in 10 years. So even now, we’re three years out. Well, I’m going to pause here. But that is the bigger picture. And there’s a reason why we started this; you want to be a part of the future — not tinkering with the present.
Varnika Goel
Oh, I agree with it. Yes.
Dr Jasmin B Gupta
Adding to that, Varnika, I remember my experience with Freo. So, I was on the other side of the table when we launched Freo Save, one of the first from the Freo product basket. So, Freo Save was one savings product that Freo was launching with us. And I was so happy from initiating to developing to the entire lifecycle of even launching for you. So, I think the whole cycle was an excellent experience. So Bala, yes, Freo was also very close. Because after NEO X, Freo was the second neobanks that we launched.
Bala Parthasarathy
Thank you, Jasmin. I do remember that, and we appreciate it. And we’ll talk about that later as to how neobanks will cooperate and exist within with the other banks as well. So, but that’s a great point, Jasmin, and thanks again for helping launch Freo.
Vaibhav Joshi
Hi, Varnika. Hi, everyone. I am Vaibhav Joshi, now the co-founder and CEO of Easy Pay. We are trying to create an MSME neobank stroke-embedded finance platform. I have been a banker as well. And before this, I was with Equitas Small Finance Bank as the Chief Digital Officer. I was with YES Bank, the National Head for digital banking, even before that, for nearly six years. And before that, I’ve done three start-ups of my own. One in food, one in payments and one in tech. So generally, whenever we talk about neobanks, I ask this one particular question, and I think I should point it to you, Varnika. You know, as a part of my introduction. So, Varnika, when was the last time you visited a bank vendor?
Varnika Goel
Ah, it’s been years. I will be very honest. But, yes. At least the first-hand experience of me going to the bank was one at the time of my induction when I was first starting my job. And the second was at the time of demonetisation, where we had to stand in the inns of queues, and I think after that, it completely changed the game for me.
Vaibhav Joshi
Exactly. Exactly. That is where we will go if today’s generation has not been to banks for a long time. And I’m going to amplify what Bala said earlier, the next generation.
Neobank is the banking of the future. Well, neobank is most definitely the banking of today because that’s where we are starting, but it is also the banking of the future. And at the end of the day, if we have not visited banks, then we don’t expect our customer segment to visit banks either.
We are so used to this screen that anything and everything we want has to go within that screen. So we have this format called pixel manager where every tiny, tiny bit of that particular screen is significant. And the people within, such as the product managers – they need to decide on who is going to go where. But well, that’s neobanking for you, Varnika.
Now, a little bit about Easy Pay. I helped co-found Easy Pay in 2014 with a two-decade-old friend, Nilay Patel. After that, I joined YES Bank full-time, only recently rejoining Easy Pay. It has been a quarter and three months since I joined back. What we are trying to do is we are creating MSME focused neobank. The target segment is extremely clear. Easy Pay has the text tags it has been developing with Yes Bank, Equitas Small Finance Bank, ICICI Bank and SDL for the past five to six years. We have been catering to a few million retailers and will talk more about it as we enter the immersion.
But the idea is we feel that MSME as a segment is highly neglected by banks and financial institutions alike since the focus for them is always on corporates, multinational corporates and consumers. And that is where we feel we can create a niche for ourselves with this product we are releasing. And yeah, so that’s my introduction for you, Varnika.
Varnika Goel
Great, thank you. And thank you so much, guys, for spending a few minutes explaining the concept and what you are doing, which is exemplary. So let’s dive in. Let’s take the first question for the audience.
Can we start the quiz, please? Great.
So a very simple question today is, “How many neobanks are currently active in India?” Are there 24? Are there 18? Are there 36? Or are there 32? So, I’ll repeat. “How many neobanks are currently active in India?” Let’s take in the responses. I think we’ll spend a few seconds over here so that even our LinkedIn community can respond to the quiz. Any guesses from you guys? What do you think? How many neobanks are there currently active? Jasmin, if you had to pick a number…
Dr Jasmin B Gupta
I think I would pick up anything around 24. Around that, maybe? Yeah.
Varnika Goel
Okay, that’s a good bet. Cool, I think let’s … Sorry, Bala, did you say something?
Bala Parthasarathy
Well, I think there are probably more than 35. I guess.
Varnika Goel
More than 35? Let’s see.
Dr. Jasmin B Gupta
It can also be 32, by the way. If you want to guess.
Vaibhav Joshi
I think the four of us can take one answer each.
Varnika Goel
One answer each. Okay, great. Of the six respondents, three said 50% indicating that it’s 36 neobanks currently active. So, yes, there are 36 neobanks currently active. And this spans across your millennials, your GenZs and your teens. Even in your SME or MSME segments, and in fact, even in rural segments as well.
This growth is phenomenal. I believe from the last three years, when we first researched how many neobanks we have, the answer came about to a total of 15. And today, we are at 36 neobanks. So you can see that within two years, neobanks have grown exponentially.
However, what I believe India is lacking today is a formal regulatory regime to govern and manage these digital banks. As a result, there are grey spaces in which we perform, and much of it depends upon a traditional banking licensing framework.
Which brings me to this very big question – How do we sustain the growth of neobanks in the long term?
We’ve seen a growth of these neobanks. With many coming in across various customer segments. But what does the future look like? How will it be in terms of their sustainability? And it also raises the profitability question. Because right now, we work on shared profitability measures spread across our traditional banking partners, our embedded finance ecosystem partners, and between customers, if you’re talking about b2b. So what do you think, guys?
Let’s start with Jasmin first, and then we’ll hear from Bala and Vaibhav. Where do you think is the silver lining for neobanks?
Dr Jasmin B Gupta
So, Varnika, as of right now, we don’t have a regulatory licensing regime. I believe that in the last month, NITI Aayog put up another proposal. I believe it was put up in November and now again in July, wherein an entire framework of how RBI can regulate digital banks has been proposed. And I think it’s a wonderful proposal, in that you should start with a restricted banking license. It should also come with a requirement of a minimum paid-up capital requirement of 20 crores.
This restricted license should allow FinTech to work in the regulatory sandbox. So it is in a controlled environment where they can innovate and experiment with new things to address the various problems we want to address. And then, once it is ready, it graduates to a full-fledged digital bank license, where of course, the minimum paid-up capital requirement is 200 crores. So I think it makes a lot of sense, and ETR has done a lot of homework in figuring out what is happening globally.
So while we see that Singapore, Malaysia, Hong Kong, UK have started giving digital bank licenses, we have also seen the impact on the profitability of the new banks in these regions. Starling bank is one example which has become profitable on a monthly basis. It did so within five years and to achieve that profitability was possible because it had its own license. In India, we are on the way forward to getting a digital banking license. And this is after payments banks and small finance banks as that is naturally the next step forward. So the entire industry is hopeful that we will get there.
Even though we don’t have those licenses yet, I think neobanks are still profitable. But, again, neobanks have a profitability model that works on a sharing basis because partnering with a licensed bank is the only way to go about it. And right now, that’s the only model that exists for us. So again, there are a lot of opportunities wherein neobanks can differentiate and ensure that profitability.
When you look at profitability from a banking balance sheet, you get the net interest margin out of assets and liabilities. That same logic exists for third-party products, and the same logic exists even when it comes to neobanking, except for the fact that it gets half or less than 30% to 50% in that range. Hence, the margin gets reduced on both sides of the balance sheet. But of course, the income is something they can look forward to making up in terms of profitability.
With that in mind, while these are the major revenue lines, what neobanks bring to the table is differentiation, target segmentation, and that entire innovation strategy, which makes them profitable. And once we go deeper into this discussion, we can discuss how neobanks can differentiate themselves in more detail. We can also discuss how that customer experience journey can help their adoption in the long run despite the regulatory hurdles we are currently facing in India.
Varnika Goel
However, we have heard from a regulatory standpoint. Even after NITI Aayog’s revised proposal, we don’t see the RBI or the regulatory environment being bullish about this concept – per se to bring in a formal structure. In contrast, it has been widely receptive in terms of establishing digital banking units or payment banks or from the standpoint of small finance banks. Yet, regarding digital-only banks with a standalone identity and a governing structure, I believe that RBI does not have a very favourable point of view. What do you guys think about that?
Dr. Jasmin B Gupta
I think rightly so, Varnika. Because RBI needs to be very sure that it can regulate the entire FinTech industry, I think it will be a cautious approach from the regulator and require a step-by-step approach to get there. But I think the digital lending guidelines we saw recently (last week) were a positive step forward, and we are looking at many steps coming in and leading up to it.
Bala Parthasarathy
If I add to that, firstly, Jasmin has already covered most of the important points regarding the regulation. So, that is how broadly the industry feels. But allow me to try to address the sustainability part of it, and tie it into regulation.
Let us step back and take note of what a bank does in the context of at least consumer banking. I can’t speak for SMEs since that is not my area of expertise. But when it comes to consumers, on a broader level, banks do 3 things.
First is savings, such as taking your deposits. In other words, the bank is taking in your money. The second is spending, be it credit cards, UPI, etc. And the third is lending. So that’s where you’re lending your money to various people.
They do more stuff like remittances, Forex, etc. So, in short, I am oversimplifying what a bank does for the reason of the example. But these are the three big things. So when most people think of neobanks, they think of savings since it’s important. And reiterating what Jasmin said earlier, one should be cautious, right? Because if you move very fast and let start-ups do whatever they want, it will result in two things; either promising start-ups or scammers.
We have seen that in the Chinese lending app scam in the last two years, where they have completely undermined the public’s trust. And if the public doesn’t believe in banks, you will step the whole country back by 10 years. Why? Because they will crack down, and then nobody will fund it. Nobody will use it, not even the consumers. Businesses will steer clear from it. Why? Again, you’re putting your money into lending, which is a different story. But at least you’re getting money. Well, imagine your deposits, you don’t have trust, and people are disappearing. Not a good sign, I would say. Hence, the cautious approach is the way to go.
Coming back to these three, and more importantly, addressing the question. On the sustainability aspect, they don’t necessarily need to solve regulations to be sustainable. But obviously, you have to be sustainable. Otherwise, there is no business. So the regulation will evolve at its own pace. And I think it should evolve at its own pace. You should get into a sandbox, and you should work. Have experience working with an existing bank and show some track record before accepting public money. As for deposits, as we’ve seen in other banks and even in our banks, when there is a customer run on the bank, the trust in the whole system comes down. As a result, the RBI has to step in and save the situation, leading to a moral hazard.
Moving on, what should a neobank do as compared to what an existing bank does not do? What is the existing bank known for? It’s a branch line. When you open up a branch in the main street, people walk in, and you can provide for the customer immediately. This includes providing them a savings account, selling a mutual fund, and other services you can accomplish before they walk out of the bank. That has been the model which banks have followed for the last 100 years.
With a digital neobank, we don’t have that luxury. There is no “main street”. Our main street is on the Play Store or App Store. It’s much different from a customer walking to a physical bank. There are like 10,000 other apps we have to compete for to get their attention. The neobanks must solve the same problems – savings, spending and lending. And you also need to innovate to continue existing. HDFC will innovate, and Equitas will innovate too. So, you need to bring something to the table as well — something that is faster, better, cheaper, more efficient, more user-friendly, etc. The role of the neobank is to perform these functions as efficiently as possible.
Returning to regulation, we understand that most lending is already regulated. And BFC as a whole is this new digital lending system that they just announced, making it, so no more regulation is needed for lending. On the other hand, spending is different. When it comes to spending the VSL, it can cause the PPI to overinflate, meaning that there is still that flux. It’s an issue because most banks don’t issue credit cards unless they’re a bank loan. So there is still regulation on spending, PPI, etc.
There is no revenue model for any of the new banks or the existing banks and savings. But, banks still need to have a deposit base to lend. That’s what the banks do, right? You take a deposit base and then leverage that amount by six to ten times to borrow money and lend. And it’s alright for neobanks like us to do so. It’s thanks to Jasmin for helping us with the launch of Freo Save and our partnership with Equitas. Regarding the user experience, it’s Freo Save, but the bank is powered by Equitas, leading to an excellent customer experience. I am a Freo Save user, and it is enough to cover all my basics regarding savings.
So, I don’t think it is a big deal, is what I’m saying. Start-ups and others have worked well with existing banks, particularly ones that are a little more forward-thinking in solving the customer problem. Neobanks need to solve the customer problem and do it efficiently. In short, even with a regulatory framework that is evolving and should evolve slowly, one can and should build sustainable models. Sustainability doesn’t come from savings; it comes from lending.
Spending also doesn’t have any money in it, right? There is no interchange. There is no money there. So to be sustainable, you need to solve lending. And that takes years. It’s not easy to go in and start lending money and get it back. So anyway, that’s kind of my take. Vaibhav, I’d be very curious to know what you think.
Vaibhav Joshi
Sure. Thanks, Bala. So, Varnika, let me tackle this question from a banker’s point of view. Because in my previous avatar, I was a banker.
Now, if you look at banks, banks are heavily regulated entities. Whatever product the bank takes into the market, you know a plethora of regulations follows that product. And when a new product gets created, in this case, selling. Even if a variety of savings accounts or our current accounts get created, there are 50 committees through which that particular product note goes through. People have to sign it off. Then there are so many compliance and risk conditions put in. Then, those are coded into the bank systems to ensure that the product fits within that regulatory framework.
Varnika Goel
Right.
Vaibhav Joshi
And I’m talking about the most straightforward product here: a savings or a current account. Now, when a regulator implements a regulatory framework and a governance framework to govern those particular regulations.
Varnika Goel
Understood. Please proceed.
Vaibhav Joshi
India has a very well-defined system for banks for all the products. Imagine if we suddenly say that all fintechs will get regulated tomorrow. Then, where is that system in place? Where is the framework in place? Where are those guidelines in place? It has to happen eventually and slowly. Because being within that regulatory circle is not a simple thing. You have to be extremely careful of the minutest things because ultimately, banking functions on one word, T-R-U-S-T, trust.
It is the customer who trusts you with the money. At the end of the day, if the customer has entrusted you with money, it is now your responsibility that you don’t play around with it. That is why the regulations exist in the first place. Neobanking today is truly taking banking to the next level. In truth, there are only a few other banks that we can actually count on our fingers. A lot of banks are still focusing on the traditional brick-and-mortar model. For them, digital is a channel. For them, digital is not a way of business. This applies to whatever banks I used to work for in the past. I used to run a profit centre, whether Equitas or Yes Bank.
So digital banking, we used to run a P&L., and that is why we launch what we launch. If we talk about 70% of the FinTech ecosystems in the country to Equitas, we do not talk about the Neo X, Freo Save, or Google Pay banks which opens up the world for growth. But generally, what happens is that there are very few banks that help create or bring their technology. And let me emphasise here, bring their technology to a level within regulatory compliance. Yet, it has been extended in a manner that FinTechs can integrate into their system. From then on, whatever transaction happens, whatever onboarding happens, everything is within that governance framework.
Now neobanks function in India and globally as well. There are four key ways – Sale, Pay, Lend, and Invest. Those are your fundamentals when you talk about a neobank or a FinTech, for that matter. Payments took off very early as we had very early adoption of payments with UPI coming in. And, you know, we have seen where UPI has gone today. Fortunately, it’s payments, where you can just pay from any account to any account. There are still limited regulations. And overall, fintechs have beautifully integrated that sense of balance into the system.
There are multiple models – deep integration, TPP, and so on. MoneyTap has been one of the pioneers since 2015, doing PPIs with RBL and other banks. Excusing the small disruptions we saw recently, PPIs have also taken off. So yes, innovations also keep coming in, and the regulatory says, “Hey, we know you’re innovating, but stop. This is not permitted.”. It’s like when you’re driving a car. You have your acceleration pedal and your brake pedal. Both plates are on rolls, and both are extremely important. Knowing when you should accelerate and brake is a function on its own.
And then coming to the third and fourth ones are Lend and Invest, probably two areas where the money is made. So, these are the two places where sustainability and profitability will come from. And both of these lines of products are heavily regulated. RBI heavily regulates lending, while the invest aspect is heavily regulated by SMEs as well. So, neobanks as a whole should have the regulators removed with a licensing regime.
And as Jasmin rightly pointed out, NITI Aayog has been trying to get the regulators to re-look at the proposal with some renewed clauses. We are hoping that proceeds through because, at the end of the day, the agility and the nimble footedness of some distribution of digital disruption can only be done by neobanks. This is because banks do not have that kind of infrastructure. They just cannot go ahead and do that. Well, they may have the physical infrastructure, but at the end of the day, that agility cannot be broken because of the same point we are discussing. They are a regulatorily-heavy institution, and you need agility at the distribution node.
Varnika Goel
I completely agree because traditional infrastructure always gets into this dilemma. A dilemma in the sense that you buy versus build, coming down to how much can I buy or how much can I build?
There is a lot of inflexibility in their environment to make these decisions. Neobanks don’t have this issue. Neobanks at this nimble level can have the flexibility and scalability to take it to that next level and compete in global markets. Bringing that concept to India has also been a big area of play for investors, and we see a lot of influx happening in terms of funding. And the key reason why it has happened is that certain market drivers drive the overall neobanking industry. That brings me to my second question to the audience.
First, if we can have the screen up, everybody can start logging in again to the quiz. In the leaderboards, we have Rach. I think that’s Rachel who won for the previous question and then Vansh followed by Akshi. Congratulations, guys. Still, I think we have a few more questions for Ted and Jake.
The second question is ‘Which of the following are market drivers for neobanks in India?’. Is it;
Financial inclusion?
Non-traditional competitors coming in, like the start-ups in the FinTech environment now entering into a core banking play?
Data monetisation, which also stems from Open Banking technology and has now become a phenomenon we broadly classify as embedded finance?
Cloud technology that has built the foundational aspects for neobank, and the availability of high-end technology across the players of AWS MAP, Azure and Google Cloud that has enabled various banks to create a very nimble infrastructure?
Or is it all of the above?
I’ll repeat my question. Which of the following are the market drivers for neobanks in India? Let’s hear it from you guys. I think we’ve lost Bala. So while everybody’s answering, he can rejoin.
Vaibhav Joshi
To answer your question, Varnika, it is all of the above and a few more as well. When we think of India, it is such a varied country with a varied population…
Varnika Goel
Everybody got it right. Let’s see the leaderboard, guys. The catch is that once we finish all the questions, the top people will get a free copy of our latest report, which is the revised version of ‘India, the new hub of neobanks’. So that is the incentive. So please continue with us throughout the end. We have three more questions to go before we close the day. So yes, please go ahead, Vaibhav. Sorry.
Vaibhav Joshi
Yes, I was just saying that India is a varied country with a diverse population. And, geographically speaking, we are extremely populated as well. Understanding that explains how India can stem into many opportunity areas. And that is why it can be a financial inclusion for perhaps Uttar Pradesh.
But when we talk about a metro structure, or something akin to it, it may be data monetisation or cross-sell. When we talk about a certain segment, such as the Northeast, especially in the far areas, banking is still traditional there. They probably experience the updates of mobile phones and apps, and something fancy comes in now and then. But then, if we talk about a segment such as women, it changes. For instance, that adjustment that LXME is trying to build on can be key, such as ‘Invest’ or ‘Save’.
Because, as you know, women are the best in investing and saving, unlike guys, which you would better explain in terms of ‘Spend’ and ‘Pay’. In short, there are a lot of drivers that drive neobanking.
Varnika Goel
Continuing on that point, these drivers have become a launchpad for many investors to decide why they would consider investing in a particular neobank. It has also become a hotspot for investors over some time. You have noticed that in the last five to seven years, the investment activity in these neobanks has increased, and a regular cycle of investing from a Series A to a Series F flow has built in from the investor. So why do you think that is there? And do you think that will continue being that bullish market for them?
Vaibhav Joshi
Yeah, so definitely Varnika. I do see that happening. The reason is that when any fund or any investor wants to invest in a particular FinTech or company, they are looking at value creation, and they are looking at X revenue multiples. Okay, these are the two basic things that they’re looking at.
With agility, a new bank or Fintech can 10x the reach that a bank has or maybe 100x the reach that the bank has in a traditional manner. And they will still be able to extract the customer’s value and service. They can make him prime. Yes, I’m using the word ‘prime’. Prime for up-sell and cross-sell. If they can do that, why would investors not be interested?
I will give you an example of Freo Save and its savings since Bala has rejoined us. For instance, a savings account can get digitally created within two minutes. All you need to do is download the app and put in the appropriate data. Then, certain EPS gets pulled at the backend, creating a savings account. And then, it is ready to be presented to you for use with minimum limits for its operations.
Now, when you go to a brick-and-mortar setup, it is much different. By itself, it is a half-day process to do something similar to what I had explained earlier. So, it is clear that there is value creation in neobanks. And now when we talk about something, a process as rudimentary as the creation of an account being disrupted digitally and being able to do it into two minutes. And how you can scale it up to probably 5 million or 10 million accounts in a matter of minutes. Then, we are not just talking about value creation and scale but also monetisation. Those are the revenue multiples that I’m talking about. That is what investors are looking at. And once you have said customer as a neobank or a FinTech, the customer is within your grasp. The customer is using one of your products, so imagine the type of data you can pull from the customer. And imagine the type of cross-selling you can do to the customer. If you can rightly provide him with the products, he will be your customer for life and never leave your ecosystem.
Varnika Goel
What I believe is that many start-ups create a dormant pool of customers to show in terms of the volume that they bring into their digital banking app. In terms of transactional value, in which the customer regularly engages with the app and conducts or services various journeys, I think that is not happening. So, in that case, that disconnect brings in the money, which is then used to build those capabilities. But it is not actually actively servicing a particular customer, which I believe has become a big challenge in the new banking ecosystem.
Dr. Jasmin B Gupta
Yeah, and I think that’s why neobanks focus a lot on engagement and retention. So while customer acquisition is the easiest thing to do, especially for neobanks with their own digital acquisition model. You can acquire 10x the customers, similar to traditional banks. The only difference is that you can do it much shorter than the traditional bank, which would take 5-10 years to acquire. So, in short, the acquisition is very easy.
The most challenging thing to do is maintain retention. How do you get customers hooked on your products? How do you make them keep coming to your app again and again? How do you provide those value-added services and products that make it worthwhile for them to keep using your products?
Some differentiators show that neobanks are very good compared to traditional banks. For example, with neobanks, we see a community approach. When you have a community, which is a closed and safe group of people, an identical set of people, and you give them a platform to share their views and opinions. It results in a very safe space, which people want to look up to. That is where many gaps, opportunities, and the problem statement you as a neobank are trying to solve get addressed. For example, financial literacy is a core problem. And if you look at even the regulators, they insist at a policy level that the neobanks should start participating in this direction.
So if you have a community, and this is what LXME does for its women community, we have boot camps, workshops and money coaches. There aren’t any specific questions that women ask about the community because every woman is a target segment. It has different personas within that target segment. We have housewives, self-employed women, and mothers; there are a lot of personas with very unique financial requirements. Financial literacy is one value which they definitely look forward to. They want to learn about finance and then start their financial journey. And when you have offered the products of saving, payments, investments and lending, that’s where you’ll find that there is a large scope of engagement. It’s not just the products you just stick around with and offer. That doesn’t make it a platform. Instead, you should ask, “What is the differentiation that you are bringing in the products?” If mothers are a key segment, you need to be able to curate a child’s education portfolio for them, making their life very easy when it comes to investing in the child’s future education. I am giving them something very goal-specific, something that they need.
With this, you create a chain effect. Then, they will want to do savings and monitor and want to know what is happening in their child’s education portfolio. Is it growing or not growing? What do I need to do next? I have my money coach, who will buddy up with me and help me resolve these questions. These are very important engagement tools. And I think that is where neobanks wildly differentiate compared to the traditional banks. And I think this differentiation and the gamification aspect, wherein financial literacy can also be gamified, makes neobanks different.
As you know, we have Housie, Wordle and all of the new gamified learning techniques to ensure that people love coming on the app. But not only that, we make sure that people love learning on the app. And most importantly, we make people love investing in the app. We make investing very easy out of 400 mutual fund schemes. I mean, can you expect a woman to research all those? It’s impossible for any woman to understand and make sense of it. And that’s where the curated portfolios make it very simple and easy for them to understand.
So I think a lot goes into this process – the community, the target segmentation, the customised approach, the persona-based artificial intelligence and analytics-based product offerings. I think these are a lot of engagement tools that can ensure that customers keep coming to your platform. They won’t be the kind of customers you show on paper for investor purposes. They will be genuine customers who keep coming in and would love to keep coming to you again and again.
Varnika Goel
Great, thank you. Thank you, that was a great understanding. And just to help Bala give a perspective since he dropped off for a minute, what we are discussing now is a result of the question I showed earlier. The question is that there are multiple market drivers in India. And considering the demographic and the overall geographic spread, India brings in many customer personas and needs. Many of which neobanks are servicing. Because of this, it has also become a hotspot for investors. So we have seen their initial influx to their end influx from series A-F, their entry point venture, like seed capital, and so forth. However, globally, we’ve also seen that many neobanks are now correcting their valuation. And the money currently is not at that level or its previous scale.
So, will India still be a bullish market? Especially in that case, as Jasmine rightly pointed out, they’re doing a lot to ensure that our customers engage continuously and retain that loyalty with the bank.
Bala Parthasarathy
Sure. The answer to the question is in two parts. First, I think Jasmine elaborated and said it much better than I could about why a bank servicing a farmer to a corporate CEO cannot do a good job with everybody. So, why do SME banks or, in this case, Jasmin’s LXME perform a better job with women? It’s because that’s all they do. They think, lie, live, breathe, and die by that customer. So, they will obviously go much deeper and provide a better service for the customer. Some of them will do it well. Some of them won’t do it well, but that’s what market forces are, right? Capitalism will weed out the guys who do it well and not do it well.
I started a fund called Prime Ventures, now the leading seed tech investment fund in India with over $20 million in AUM. So, the way I would do it as an investor is to first understand that investors have a slightly longer horizon. Knowing this, we understand that some of us will do it well, while others will cut corners and get caught in the process. That is what life is, right? That is what start-ups are supposed to do.
Some will overreach, forcing RBI to come and slap them in the hand. All of that happens. But that is how market forces should play, and I would not worry too much about the detail of it. Obviously, the good investors will pick the winners, and the others won’t. But, the point is that investors have a longer horizon. They are looking back to where I started. So, they are looking at HDFC and Yes Bank and how they entered and disrupted, providing a level of service that the Bank of India could not do in the 1980s and 90s.
As we discussed, we now understand that our generation is not physically going to a bank, let alone the next generation. To them, the bank would simply mean their phones. For example, people mostly use Swiggy, Zomato, Uber and Ola. The same applies when they intend to use the bank. They want to do it through the comfort of their phones. This is the only bank for them. As I said earlier, some start-ups will do it well while others won’t. But for investors, they look at the bigger picture and say, “Do you believe that story or not? Essentially, investors are taking a bet and saying, “Yes, there might be a generation that has the level of convenience to want to walk into a branch.”
But it doesn’t make sense to have all the optics of running a mainstream bank branch because nobody wants that, especially after COVID. Nobody will go in. So the bet is at that level. The bet is: “Do you believe this, or do you believe that?” Like most of us here, we’re all running companies and believe in the digital. In fact, I think most of your listeners would agree since being digital is where the world is going. Of course, some companies will do better. They need to create a sustainable model, like we had talked about earlier, etc. But the bet is that a few people focused on very specialised segments will do much better than others in a new digital format.
Varnika Goel
I completely agree. So, I think that brings me to the final segment. We will run through the three questions with the audience, get their feedback, and declare a winner. Doing so will also summarise my final question to you guys, which is more about the customer journey and success metrics.
So let’s have the quiz up again. If anybody has not joined in and would like to, the link to the quiz is in the chat here and on LinkedIn live. Please feel free to join in. Again, Rachel is leading, with Vansh coming in close. I hope with the next three sets of questions, the entire leaderboard changes. Let’s move to the next question.
Which of the following customer segments is the main focus for new banks in India? Essentially, this question stems from understanding that most neobanks are focusing on a certain customer journey. So the question is, which one are they prioritising? However, as we learned earlier, it may be more diverse as LXME caters more to women.
Although that is a much more diverse segment, it is still a niche simultaneously. We have seen a particular trend of focusing on one journey, which is more simple in nature and has been translated. So what do you guys think? Is it the Millennials/Gen Z population? Or is it more from an SME standpoint, which is actually a pain point for India? Or is it the new rising segment of teens? Teens are going to be a long-term bet for the neobanks. They start early with them and then could own and manage their journey as they move into different horizons. So, which of the following customer segments do you guys think is the main focus?
What’s interesting for me is that in my years of research for this particular segment and with what I’ve seen now is that most neobanks are differentiating at a very niche level, similar to how LXME is doing at a women level. We’re doing it for freelancers and entrepreneurs at a different level, which is also becoming like an SME segment. We’re doing it for farmers. We’re also doing it for street vendors. So in short, there are different niche markets.
Okay, the right answer for this question is the Millennials/Gen Z population.
Out of the overall 36 banks, 55% of them focus on this particular area. Yes, it is because we are a tech-savvy and digital savvy population. But more importantly, there is a longer sense of sustainability attached to us.
Moving on to the next question. But first, Jake and Aparna have managed to catch up. So maybe the leaderboard might change after the last two questions.
Which of the following is a major challenge for the new banks in India?
And I think this brings in a very important factor that we discussed today. One is the lack of formal digital-only banking licenses. We also talked about the long-run profitability. Another thing that Jasmin brought up was digital illiteracy. It is extremely important to teach the community what we’re trying to achieve and how we can help across the consumer journey. Be it end-to-end or running in terms of a gamified manner. Or if we can run certain types of knowledge cohorts, whether in terms of coaching them or making them understand what kinds of facilities they can avail themselves in.
So, what do you think is becoming a major challenge? And how is this being turned around by the leaders? Are they using them to overcome these challenges and foreground strengths? Well, they can ensure that there are good partnerships, robust profitability models, and making sure to educate their customers in terms of various product services, as well as the means to bank. So, in short, we want to see how they can maximise it.
Amazing, okay, we have all of the above. That’s the majority. Now, let’s see how the leaderboard has changed. Rachel is still winning. But we have Akshi coming up, followed by Jake. Final question, guys, and that will bring us to our top three winners.
What are the different digital measures of success for neobanks?
Is it the Casa ratios, which is the current account and the saving account ratios? The cost of distribution? Is it the number of customer journeys you actually manage or is it about your active monthly users? Is it the partner partnership ecosystem that you’ve developed? Or is it all of the above?
After we have the answer, this will be my next question to our experts and also the last question in the interest of time. The question being, how do we establish the right success metrics for neobanks for the long term viability in the industry? But, first, let’s have the answers and determine who the winner is. Amazing, so I think Akshi, you won by 29 points. Congratulations on that. This is followed by Jake, and Aparna. So thank you for joining in and taking in the quiz. The team will follow up with you and share the final report as well as trial access to the Twimbit platform.
That brings me to you three. We’ve seen various digital measures of success that we’ve been tracking continuously for all of the new banks, whether in terms of products or the customer journeys managed. But what are the top three things that you guys believe are extremely important for us to define the success of a neobank? Earlier, from a traditional standpoint, we used to analyse the number of walk-ins, the number of conversions, the sales funnel for particular, and the RM for branch success. Those were the actual measures of success, but in a digital-only environment, these measures of success have changed. So what, according to you guys, do you believe, specifically in the Indian context, what kind of measures of success should neobanks actually track?
Bala Parthasarathy
I can go first. The answer is pretty easy. Profitability. Because the funding party has sort of ended or at least like paused a little bit. So, burning investor money to build all this will not result in a sustainable model. So profitability is number one; you must do several things to achieve it. Of course, this includes acquiring a customer and having an active customer. And Varnika, your point is that it is not just about getting a database and being unsure if the customer will ever return. That’s true. It’s just not acceptable anymore. Today, you need to genuinely engage the customer in whatever you do. So as Jasmin mentioned earlier, with LXME’s focus on women, the same concept applies here. You’re doing something. You’re engaging with them. You want them to walk through your door. Because the advantage of a ‘Main Street’ bank is that they physically have a building with a big board. In online, the cost is very high. It’s not so easy because you’re competing in a Play Store with literally a million other apps. So getting the customer cheaply, keeping the customer engaged, and becoming profitable are the most important aspects. As for regulations, we will figure it out over time. You cannot control regulations, but you can control engagement, profitability and other aspects.
Dr. Jasmin B Gupta
Yeah. And to add to that, profitability and customer centricity are the core aspects you should consider as well. So, the core of a neobank should be toward a customer-centric approach rather than a product-centric approach. So you know, when we say KYC, know your customer; it’s not just the OTP or in-person verification. It is also knowing your customer through all the data points and the digital footprint the customer leaves behind. And then, of course, building on it.
Vaibhav Joshi
Well, profitability is the key underlying word everywhere. For me, there are three key parameters you must focus on – Acquire, Service, and Engage. And how smartly you can do these three things will define how fast you are on the road to profitability.
Varnika Goel
So, can we say this is a good framework for profitability for neobanks? That there is this three-step approach – Acquire, Service and Engage.
And across these three parameters, there is a certain level of sub-parameters. These are acquisition, the number of customers acquired, the monthly active users that we have, and what is your CASA ratio. In terms of service, we also can look at the number of journeys managed, the number of interactions, the transaction value, etc. It will serve as a good takeaway for all of us and also work as an intelligent framework. This is how you can manage the success journey of your neobank across these three stages.
Vaibhav Joshi
Absolutely, Varnika, because there are multiple metrics and levers that come into play. So when we talk about acquisitions, we must know;
- How fast is your acquisition?
- How smooth is your acquisition?
- Is your acquisition adhering to all sorts of risk and compliance frameworks?
And then if it is digital, then we must consider all possible pain points that can come to bite you in the future to ensure we have a legitimate customer. There are two types of customers. Ones who will transact with you and one who will just download your app because they have heard about it. The latter is not going to transanct with you.
Next, servicing now. Because it is a neobank and it’s FinTech, everything is digital. So you have to be extremely customer-friendly. Like Jasmin said, you have to create that bond of trust with that customer. And that can only happen through your product and experiences that you provide. I like to call it the Amazon experience, with the customer receiving anything and everything they want. There is a bot sitting on the other end, and regardless whether it’s a conversation about a transaction or it is a sell, servicing matters.
The third is making sure you engage with the customer because this is where profitability comes in. You take out your dashboards, you look at them and then you segment the customer into categories. You need to know who is using what sort of products to help you determine if a particular product is effective. You need to assess the type of campaigns you are running and catalogue the responses you receive from them. There is a continuous level of engagement that keeps on happening because a customer LTV (lifetime value of customer) has to be at the highest possible level. That can only happen with very continuous and smart engagement from your end.
Varnika Goel
Great. I think that was a very, very insightful discussion. I think for me as well, and I learned a lot about the Indian neobanking industry. And I’m sure even our audience did. What we will be doing as a follow-up is, since we have recorded this session, we will be putting this up on the twimbit platform and sharing the link with the listeners in the audience today. We will also be putting up a post on our social channels for you to access in case there are any insights you want to read or revisit. I will also be preparing a short summary of the great insights we’ve shared today, specifically in terms of the key takeaways from this insight and what our audience can benefit from as well.
I also want to extend a heartfelt thank you to Vaibhav, Bala and Jasmine. Thank you for coming together today and sharing these great insights on the neobanking industry. I think we will regroup again. There are many things that I still have in my mind that I can get your intelligence on. So thank you so much. All three of you today. Yeah.
Dr. Jasmin Gupta
Thank you so much for your time. Thank you. It’s been a pleasure to interact with Bala, Vaibhav, Varnika and all of you.
Bala Parthasarathy
Thanks. I just want to put in a plug for both Vaibhav and Jasmin, with whom you’ve worked in the past. It’s wonderful to see actual bankers come and switch to the other side. The industry needs that. The ecosystem needs that. It’s one thing to have entrepreneurs and techies and all that. But I think the industry is getting to a stage where we also need people who actually have done banking and not taking wild guesses on what banking is to come in and run this business. So, from an ecosystem point of view, I think it’s great. I’m glad you made the leap.
Vaibhav Joshi
Thanks, Bala. Thank you for those words. Thanks, Varnika. Thanks, Jasmin. Thanks, Twimbit.
Varnika Goel
Thank you, thank you so much. Take care and all the best.
Speakers:
- Vaibhav Joshi, Co-Founder & CEO, Easy Pay
- Dr.Jasmin B Gupta, CEO and Co-Founder, LXME
- Bala Parthasarathy, Co-Founder and Chairman, FREO
- Varnika Goel, Research Director & Co-Founder, twimbit
Time & Date: 12.30PM IST/ 3:00PM SGT, 17th August 2022