A majority of the MSMEs in India still rely on informal sources for accessing credit and end up accepting usurious and unfavorable terms for their financial needs. The rigidities and inefficiencies of traditional banking further accentuate the problem of overreliance on informal credit. This is the gap that Neobanks are trying to fulfil. Acknowledging the fact that a one-size-fits- all solution does not work, they are developing tailor-made, cutting-edge solutions for SMEs by understanding the real, current, and emerging needs in the rapidly changing business environment.
Structure Of NeoBanks
While most traditional banks have their mobile apps and online banking facility, they are still not purely digital and customers still need to visit branches for certain processes. Neobanks have positioned themselves as being more flexible and alongside regular banking options, they offer services that are not accessible through traditional banking methods. With a focus on applying a design thinking approach and tailored products, they make banking simpler and convenient. The result? A higher client adoption rate and differentiated experience to the end-user.
Countries like the U.S. and Australia have licensed neo-banks, however, in India, the RBI does not allow them to act as independent banks. Thus, they have to partner with traditional banks to offer regular banking services through their platforms. The bank is responsible for regulatory, compliance, cash reserve ratios, and its main incentive to partner with Neobanks is to access a wider customer base. The tech-savvy GenZ, millennial population and low internet cost make it a profitable association for both banks and their customers as it saves a lot of transaction costs for both.
NeoBanks Offerings To MSMEs
Based on a report by RazorPay, SME business owners face several operational challenges while relying on the age-old banking system that hinders their businesses’ growth. Apart from limited access to credit, the lack of digital services compels them to manually carry out banking operations, which further leads to errors, delays and overheads. The annual average loss from traditional systems dependence is INR 67 lakh (per SME, annually) which equals 1689 hours worth of man-hours per SME, per year which clearly signifies the need for digital banking solutions for MSMEs.
To address these issues, Neobanks like Niyo, Open, Razorpay, etc. use APIs, real-time cashflow monitoring, instant receipts and payments gateway, automated accounting and bookkeeping, vendor management, payroll management and integrate SME’s business workflow into one platform. As a result, the entire process becomes automated, with a limited scope of error. The key value addition that neo-banks provide is a seamless and integrated
customer experience while managing their financing and business banking needs. Improper documentation, incomplete tax returns and inadequate accounting make the MSMEs ineligible for traditional loans by banks and NBFCs. To address this, Neobanks offer integrated invoice generation and tax-filing services which help them provide customized loans based on cash flows of the MSME. By providing digital onboarding even in remote locations of the country, the Neobanks are tapping the previously untapped market and have increased their revenue potential. To circumvent the problem of low-tech adoption rates in MSMEs, Neobanks are interacting with their end customers by leveraging upon alternative data models and smart partnerships
Key Issues Going Forward
While Indian Neobanks continue expanding their presence across the country with wide product offerings amid a heavily contested space, their unlicensed status and reliance on traditional banks will present challenges to their unbridled growth. The main USP of being purely digital is also a major challenge for the Neobanks because the customers don’t have an option to walk into any branch to resolve their complaints. It will be interesting to see how the Neobanks win the confidence of customers in an industry which heavily relies on faith and trust.
Notable VC firms like Tiger Global are bullish on Neobanks for transforming the banking and credit landscape of the country. However, majority of these digital banks are unprofitable as of now and are burning cash due to a high focus on acquiring customers. Given the fact that VCs are now tightening their funding tap for startups, their survivability will surely be tested.
Additionally, while the MSME sector seems a lucrative and untapped market, it is also quite risky because of the high NPAs and delayed payments. Striking a balance between compliance and judicious lending, while promising quick and easy loans will be a dauntingtask for the Neobanks expanding beyond Metros and Tier 1 cities. By working in tandemwith the government, they can play a vital role in ensuring a wider reach of government schemes and financial inclusion of all sections of society.
The banking industry is at an inflection point in India and Neobanks are reshaping the expectations of both consumers and businesses by offering a plethora of innovative products and services at the touch of a screen. However, customers and small businesses are still skeptical about purely digital banks that have no physical presence and thus, are unable to repose their faith on the internet especially when it comes to finances. Tackling this would require behavioral change and assurance to the customers in the form of increased security measures.
Author: Kushal Garg
B.A. (H) Economics at Shri Ram College of Commerce, Delhi University