How Savvy Startups Are Rebooting Banking

Bansal's push for a universal banking licence is important given the central bank's reluctance to issue new licences. RBI last invited bids for universal banking licences in 2013, where out of more than a dozen firms, only Bandhan Bank and IDFC First Bank made the cut.

Mint has learnt that Bansal's example is likely to be followed by several other startups. Half a dozen entrepreneurs in neo banking, financial services and related segments that Mint spoke to said that they are working on readying their firms for obtaining a licence from RBI over the next two years. Not all these firms will apply for universal banking licences, which is the toughest to obtain. Some startups will apply for a small bank licence (which focus on small loan sizes up to INR25 lakh, originally meant to improve banking access in semi-urban and rural areas).

Presently, neo banking startups are partnering with traditional banks to offer services. NiYO has a partnership with DCB Bank while Open works with ICICI Bank since the two startups don't have banking licences yet.

"For a customer to trust a neo bank that has no branches is going to take time. That's why a co-branding arrangement with an established bank works for a startup," said NiYO's Bagri.

"Over time, the customer, and the entire banking ecosystem, develops trust. It puts you in a better position to launch your own banking services down the line," he added.

Risks remain But despite the optimism and the widely held perception within the startup world that neo banking is the flavour of the season, significant risks still remain.

India's last experiment with banking licences in 2015--when RBI allowed payments banks to be set up--has flopped. They were meant to take banking to the masses, but because of restrictions on deposits and a ban on lending, no payments bank has achieved significant scale (though about a dozen entities got licences).

While payments banks have tried to sell other financial products such as insurance and mutual funds, the success of this attempted diversification is unclear. Small finance banks, which are allowed to lend and accept large deposits, are faring better.

But on the whole, private sector lenders like HDFC Bank and ICICI Bank still dominate the banking sector and are seeking to increase their share in net banking too. Another bank, Kotak Mahindra, already operates a digital banking product called Kotak 811 that is popular with customers.

"Some banks have innovated and kept pace with change, so neo banks are not going to give a 10x better experience to the consumer," said Anand Lunia, managing partner at venture capital firm India Quotient. "Neo banks are promising transparency, no minimum balance, etc., but it is not fundamentally a new business."

Lunia said that he has evaluated several neo banks but decided against investing. "Even assuming they can figure out a revenue model, consumer neo banks seem to have a smaller target addressable market. Banks still have a disproportionate hold over salary accounts of employees at large corporates," he added.

NiYO's Bagri estimates that over the next three years, these banks can serve more than 20 million customers, which he said was a large-enough number to sustain several thriving neo banks.

But other entrepreneurs are more cautious and say that it will take a long time to build a business in this space. "Consumer inertia and the barrier to switch in financial services are both very high. People don't usually change bank accounts," said epiFi's Narayanan.

"To offer value, you will have to have the right tie-ups with banks, insurance companies, mutual funds, etc. It's not only critical to have the right supply, but you can't just become a simple marketplace. So, while the neo banking opportunity is attractive, it's going to take a focused effort to build a product platform in this space that offers real value and is a profitable model too," he added. ___ Distributed by Tribune Content Agency, LLC.

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