The Indian Growth Opportunity for Neobanks

February 4, 2022

Digital challenger banks are transforming the way banking is viewed by the consumers and the market. They are simplifying the financial world by creating a customer-centric digital approach to services. Global neobanks are catering to multiple target segments and have successfully validated their business model by providing excellent customer service. E.g., Monzo, Starling, Revolut, N26, Tide, and the list goes on. The major ingredient of success is having a customer-centric approach, and India is emerging as a playground for neobanks to offer state-of-the-art customer-centric products by solving major pain points in the current banking industry. Players like Yelo, Open, and Payzello are already working towards catering to specific target segments with product and business model innovation. Let’s have a closer look at two such segments that have created a chasm of opportunities for neobanks.

Gig Economy

While the idea of pooled resources is by no means a novel concept, the advent of digital networks as a means for freelancers to connect with customers is a rapidly evolving and yet somewhat ill-defined movement. The major drivers of the gig economy being increasing adoption of P2P sharing, increasing digitization rates with increased smartphone penetration, shift towards flexible work-life environment, and rising cost of living – the gig economy is poised to grow at the rate of 17.4% CAGR from today through the end of 2023 according to a report published by Mastercard. Developing markets like India, Brazil, and Indonesia present a greater potential for the supply of freelancers with their expansive population. India is projected to grow its gig gross volume by 115% by the end of 2023. Such emerging markets are projected to represent a greater portion of the global gig economy with their increasing digital banking access and smartphone penetration.

Neobanks, unlike the brick-and-mortar establishments set up by traditional banks, leverage this knowledge to provide solutions that can cater to this customer segment. Some of the major services offered to freelancers by neobanking platforms, like Open, include doing everything right from applying for a current account with ease to raising GST-compliant invoices, collecting payments, and automating accounting, in one place.

SME and Startup Segment

It’s undeniable that SMEs are usually the lifeline to various industries, and they contribute massively to a country’s international trade. SMEs are also the largest contributors to company registrations in any economy and represent a large segment full of opportunities as the best companies from this segment often go on to become pioneers in their areas of operation. Micro/small businesses are the engines of economies, critical for moving it forward. According to the International Council for Small Business (ICSB), formal and informal MSMEs makeup over 90% of all firms and on average, account for 60–70% of total employment and 50% of the GDP. The fact is, in spite of all the contributions to the evolution of the next-gen business landscape, SMEs have never received the kind of support they deserved. Traditional banks tend not to focus on SMEs, consequently leading it to be considered an underserved segment. Even the FinTechs that earlier concentrated on SMEs did not provide a holistic range of banking solutions required by SMEs and only focused on specific solutions.

As per the research by the Startup India initiative by the Government of India, India is the second-largest startup ecosystem in the world and is expected to witness a YoY growth of 10–12%. With ~20,000 startups in India, around 4,750 of these are technology-led startups. A total of 1,400 new tech startups were founded in 2016 alone, implying that 3–4 tech startups are founded every day. With India raking 77th for ‘Ease of Doing Business’ in 2019 (up by 23 positions), India has a long way to go for creating a startup-friendly environment. From current account opening to compliance with GST norms, to tax filling, and access to working capital needs, vendor payment management – these are just a few of the challenges which an entrepreneur has to face from day one of the startup’s journey. With traditional banking not able to serve this segment fully due to regulatory compliances, a big gap has opened up for neobanks to fill with their offerings.


An overview of global neobanks catering to various market segments

As a result, a highly crucial innovation came from neobanks, which provided holistic banking services to SME and startups online or via mobile. This can be reflected in the growth of the number of neobanks globally catering specifically to the SME and Startups segment. The SME and startup banking landscape is a combination of non-licensed over-the-top banks, digital initiatives of traditional banks, marketplaces, as well as licensed challenger banks. These digital-only banks provide a wide range of services, including ground-up capabilities around accounting/tax/payments, API-driven marketplace, etc. This enables them to plug-and-play solutions of their choice with their banking platforms. For example, neobanking platform Open provides an end-to-end business banking solution for startups & SMEs. They solve for an entire spectrum of problems by providing solutions to make seamless payouts, auto-reconcile transactions, perform expense management, and auto-generate accounting reports. Open also offers developer-friendly APIs that empower SMEs & startups to integrate banking into their business workflows.

Rise of the total number of neobanks catering to SMEs and Startups

It is interesting to observe how neobanks are growing, and given the current trends we’ve discussed so far, we expect an uptick in the number of such players providing services of value to the fast-growing number of SMEs and startups along with the gig economy across the world.

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