India’s neobanks, or digital-only banking startups, seem to have just about escaped the funding winter that has descended upon their tech peers this year.
Over half-a-dozen Indian neobanks attracted significant funding last year and even up to February 2022, when Bengaluru-headquartered Niyo raised $100 million. In total, neobanks like Niyo, Fi, Freo, Zolve, and others cumulatively picked up about $900 million in funding in 2021, according to a report from consulting firm RedSeer.
However, none of these neobanks, which were mostly born in the last two to three years, have attracted more than a few million users. Seven-year-old Niyo, the oldest, has about four million. To put this into context, the neobanks’ combined user base is less than 1% of India’s traditional bank account holders. “If you include MSMEs MSMEs MSME MSME collectively refers to micro, small and medium sized enterprises or business-facing neobanks, the share might touch 1 or 1.5%, but it’s still minuscule,” a fintech analyst at a global consulting firm told The Ken.
This is essentially down to what neobanks are, or what they’ve been allowed to become, in India.
The main selling point of a neobank is a superior digital experience compared to the usually wonky apps rolled out by large, traditional Indian banks. Neobanks can afford to slash customer fees and offer services like a zero-balance savings account since they don’t have to bear the costs of opening physical branches around the country. Users can open accounts within minutes using their smartphones without leaving their homes.
According to a survey The Ken conducted, 425 people out of over 1,000 respondents said they have a neobank account. Out of these, 70% said the neobanks’ superior digital experience attracted them.
In terms of the demographics, around 88% of the neobank users in the survey are aged between 18-40, and a large majority counted salaried jobs as their primary means of income. “The majority of our over one million users are millennials and Gen-Z, or digital natives more broadly, lying between the ages of 22-35,” a spokesperson for Fi told The Ken.
Freo’s users typically earn between Rs 20,000 ($250) and Rs 60,000 ($750) per month, according to Hitharth Saini, the neobank’s head of marketing. Its customers are spread over 1,200 Indian cities and tend to be tech-savvy people seeking digital banking services, he added.
However, neobanks in India are crippled from a regulatory standpoint. In fact, they aren’t technically even banks because India’s banking regulator doesn’t give them a banking licence. As a result, neobanks have tied up with traditional lenders like Federal Bank, Yes Bank, and ICICI Bank to provide licensed services like a savings bank account, debit cards, and fixed deposits.