A new breed of private banking startups, catering to both consumers and SMBs, have recently become the epicenter of fintech transaction activity, as investors continue to funnel millions into new ventures. time. Called “neobanks”, these startups operate unlike traditional banks, with bank accounts managed digitally and without a physical presence.
According to a recent report by management consultancy RedSeer, neobanks such as Razorpay, Open, Fi, Freo, Niyo, Flobiz, Zolve and others raised nearly $900 million in funding in CY2021, a growth of 7.5 times compared to 2020. Even in 2020, despite the uncertainty of the Covid-19 disruption, neobanks raised around $120 million in funding.
With an addressable market opportunity of over 120 million potential users, analysts and consultants such as RedSeer expect neobanks to disrupt the personal banking experience of consumers, as well as the accounting and banking experience of SMEs. .
Currently, consumer-focused neobanks work on a strict partnership model with licensed private banks, to offer a range of banking and financial products primarily focused on savings, loans and long-term investments such as FDs and mutual funds. The only differentiation is a superior user interface (UI) and user experience (UX), as well as a faster, paperless onboarding experience.
Sujith Narayanan, CEO and co-founder of consumer-focused neobank Fi, noted that historically, banking segment products such as insurance, lending and investment use cases have been carved out as as separate businesses by multiple startups. Along with neobanks, startups like Fi are trying to offer a new savings bank account system with benefits like lower bank and transaction fees, superior customer service, and consolidated loan products.
“Globally, neobanks have preyed on underserved categories, particularly blue-collar and enterprise-focused. In India, however, we are seeing a mix of the two categories, but with a more targeted approach to millennials and core users who are looking for a vastly superior banking experience,” Narayanan added.
Bengaluru-based neobank Fi, which has raised approximately $75 million in funding from investors including B Capital, Ribbit Capital, Sequoia Capital and others, was last valued at $350 million during of a funding round in November 2021. Fi claims to have crossed 1 million active users currently on the app, with 25 monthly transactions per user, and serves users through 19,000 PIN codes in India.
Fi charges minimal banking and transaction fees compared to traditional banks, and has also waived fees such as account maintenance fees. This is mainly possible because neobanks do not invest a large amount of capex in brick-and-mortar branches, and therefore also spend a lower amount on compliance costs; this benefit is passed directly to consumers through lower banking and transaction fees.
Kunal Varma, CEO and co-founder of consumer-focused neobank Freo, told FE in an interaction that neobanks typically target consumers in the middle and upper class regular spending segment, in urban and semi-urban areas. -urban.
“The demographic age of our clients would be between their mid-twenties and mid-forties. They’re all pretty smartphone-savvy individuals, and they’re already accessing other online services, whether it’s content or hyperlocal delivery, ticket booking, and so on. They are therefore comfortable with the applications and are people who have a regular income. Most of them are salaried,” Varma added.
Freo, which originally started as an app-based line of credit product named MoneyTap, has recently pivoted to the neobank segment. In the last six years of its existence, Freo has disbursed over Rs 4,000 crore in credit to over 11 million users. Freo only launched its savings bank account this week, June 21, with an attractive interest rate of up to 7% per annum. Varma said that since launching her savings bank this week, she has received over 100,000 customers and onboards over 100 customers organically every day.
However, startups like Open, which offer banking and accounting services to SMBs and other businesses, have far greater monetization options than consumer-focused neobanks that derive their revenue primarily from lending operations. Anish Achuthan, co-founder and CEO of SME-focused neobank Open, said the startup has several sources of revenue, such as subscription fees it charges the customer for accounting software products, transaction fees generated by users, as well as commission and interchange revenues. with its banking partners.
“With their customer-focused digital products in corporate and small and medium business banking, transfers, transaction banking, bill payments and personal finance, neobanks are now disrupting the banking industry. High levels of customer adoption are the result, providing the end user with a unique experience. Major neobanks are attracting investors’ attention, as evidenced by their lofty valuations,” said Ankur Bansal, co-founder and director of alternative investment fund BlackSoil, which invests in new-age banking firms.