Globally,
neobanks are ‘digital only’ banks specializing in financial products, like
deposits, payments, debit cards, money transfers, lending, and more. They cater
to the increasing demand for technology-based banking services from tech-savvy
consumers who may find traditional banking procedures tedious and cumbersome.
Unlike traditional banks, neobanks primarily operate online and do not have
physical branches, allowing them to devote more capital towards improving the
customer experience through technology and faster turnaround time.
Although
neobanks are relatively new, they are registering impressive growth, with more
than 200 neobanks worldwide. In the Indian context, however, neobanks are
fintech firms that offer a banking app in partnership with a traditional bank.
While the partner bank plays the role of providing the core banking needs, the
neobanking app helps provide a seamless delivery of these services and enhanced
engagement experience to customers on behalf of the partner bank.
In
the following sections, we look at the regulatory landscape surrounding
neobanks in India.
The
RBI does not recognize neobanking players as banks!
The
Government of India has made significant progress in advancing the fintech
ecosystem, but neobanks are not currently recognized as banks by the Reserve
Bank of India (RBI). In November 2021, the RBI indicated that it plans to
regulate the establishment of digital banks and neobanks. It has reiterated its
position that traditional banks partnering with neobanks should not allow the
neobanks to refer to themselves as "banks," and should also impose
strict outsourcing obligations. These obligations may include requirements for
continuous monitoring, data security, grievance handling, and regular audits,
as well as giving the RBI access to the accounts and transaction records of
neobanks.
NITI
Aayog’s views on digital banks
The
NITI Aayog released a discussion paper called "Digital Banks (A Proposal
for Licensing & Regulatory Regime for India)," which suggests the need
for a framework to allow neobanks to become fully licensed digital banks. The
report recognizes that India has the necessary technology infrastructure to
support digital banks and that a regulatory framework is needed to take
advantage of this. The NITI Aayog has also highlighted the challenges faced by
neobanks, including:
- The
obsolescence of the partner bank’s core banking system leading to failure in
partnerships that neobanks currently have
- High
capital cost - Lack of low-cost deposits and the need to rely on expensive
equity capital for innovation and operations reduces profitability for current
players in the neobanking market
- No
Entry Barrier – The absence of licensing framework may lead to creating
opportunities for actors who may not meet the necessary standards, leading to
potential risks to consumer protection
- Limited
revenue potential – Neobanks currently earn fee-based revenue wherever they act
as channel partners (account opening and onboarding, investment opportunities,
credit), and potentially earn a percentage of interchange on card payments
In
the process of obtaining a license, the RBI and the applicant will agree on a
set of metrics to monitor the licensee's progress. These metrics may include
the cost of acquiring a customer, the volume and value of credit provided to micro,
small, and medium enterprises (MSMEs), the licensee's technological readiness,
and compliance with prudential regulations, among other things
A
light at the end of the tunnel?
In
the process of obtaining a license, the RBI and the applicant will agree on a
set of metrics to monitor the licensee's progress. These metrics may include
the cost of acquiring a customer, the volume and value of credit provided to micro,
small, and medium enterprises (MSMEs), the licensee's technological readiness,
and compliance with prudential regulations, among other things