Neobanks have taken the Indian market by storm. Established in the last 5 years, a handful of these have already gathered more than a million users each. Niyo claims to have over 4 million users, and Jupiter and Fi crossed the million mark recently.
While this seems like a sweet business to be in, with massive tailwinds supporting growth, like every other startup story here in India, and globally, these businesses are new, and have the same bones: high customer growth, high CAC (customer acquisition cost) and wait yeah, no sings of profitability.
But there’s an opportunity brewing below this, which might just make you some money!
Neobanks or Cool Interface?
Neobanks are simply banks which offer services digitally, making banking more simple, convenient, personalised and delightful. However, central banks don't just give out banking licenses freely. There are stringent checks to ensure the safety of public money. A bunch of startups getting licenses is hence out of question. The solution?
Fintech startups tie up with traditional banks, and leverage technology to offer better experiences. If you download any of the neobanking apps, and open an account with them; essentially you will be opening an account with one of the traditional banks, which has provided APIs to the startup, to be plugged into their apps.
Essentially, a neobank is just a cool product built out of a number of partnerships in order to provide a full-stack of banking services to customers, in a manner which is much better than that of a traditional bank.
Who Are These Underlying Banks?
Traditional banks globally do realise the rapid pick-up of neobanks. The very fact that they're growing at astronomical rates does highlight the underlying problems associated with traditional banking, even if all banks now have their own apps and digital platforms to offer better experiences.
Everyone has a different strategy to tackle this. In India, the few banking names that have been at the forefront of new technologies and API-based partnerships - in corporate banking, ICICI Bank and Yes Bank, and in retail banking, Federal Bank, ICICI Bank, IDFC First Bank and Yes Bank.
Other large traditional banks like HDFC Bank and SBI have not been active on partnerships. Instead their focus has been towards building their own digital assets. This route tends to fail because of a legacy mindset, lower appetite to adopt new means of customer acquisitions, protection of old ways, traditional structures, etc.
But then, as if the neobanks are making money! 🤷🏻♂️
Who Makes Money Then?
The traditional banks who are supporting the backend for neobanks! Why?
No burn: burning money and acquiring customers is the neobank’s job
Low cost: APIs enable offering services, and connection to the traditional bank’s infrastructure - that means no people, no branches, and low costs to service customers from this channel
Super growth: Neobanks have been growing at an exponential rate. Traditional banks can benefit from this and expand their base now when the tailwinds are there
Monetisation opportunity: The large set of new customers can be monetised over time through the sale of several products and services just like in the traditional banking channel
Revenue-share: While the cost is negligible for traditional banks, they get into variable revenue arrangements with neobanks
While this sounds like an amazing opportunity, a traditional bank, in order to benefit, has to:
Partner with the right fintech players
Have a business from fintech partnerships that sizeable enough to make a difference to overall financials
Federal Bank - the Star so Far
One name that checks both the ticks on how to successfully benefit from this opportunity, it is Federal Bank.
Federal Bank has tie-ups with two of the most ongoing successes in the neobanking space - Jupiter and Fi. Both these have crossed the 1 million user mark recently. In fact for Fi, it was within 10 months of launch.
For Federal Bank this translates into a massive upsurge in accounts. It is the only bank which has managed to grow 2.5x in terms of business, while simultaneously having opened up only 20 new branches.
By the end of 2021, Federal Bank already had 75% of its new account bookings coming from fintech partnerships.
The current run-rate of account opening through fintech partnerships is as high as 4.5 lakh per month.
Federal Bank expects these partnerships to contribute to 25% of its incremental deposit growth, and nearly 50% on the lending side.
However, despite them being so large on the account openings, monetisation is still a bit of a problem.
The people who are opening neobank accounts are younger, and new to work. These are usually their secondary accounts, and not salary or primary accounts. Account balances, and transaction values are hence lower.
The number of services offered by neobanks are still narrow. They are now getting into more lending products, wealth management, forex transactions, etc. which will add up to revenue opportunities over time.
Picture this, for Federal Bank, despite the millions of customers from fintech partnerships, the book from these customers is still only roughly around Rs. 500 crore. This puts the average balance in accounts at less than Rs. 5,000 (including dormant accounts for calculations).
💡 In any case, for banks like Federal Bank, the opportunity is new, and what seems like a wonderful proposition is driving of a massive revenue opportunity over time with minimal cost and effort.