The neo-banking model explained

All you need to know in 4 minutes!

If you’ve heard of neobanking apps like Fi, Jupiter, Open etc, you would be wondering whether your money with them is safe.

So today I’m just writing a quick article to talk about neobanking platforms - what they are, how they work and whether they’re safe. We’ll only discuss the B2C ones today. There are B2B neobanks as well, but that’s for another time.

(And yes, today’s not Sunday, but I’m starting a separate fintech series, every alternate Wednesday, along with the Sunday newsletter. Public demand! 😁)

So..if you don’t know what Neobanks are, I’ll quickly explain them. If you have a fair idea, you can skip to the next section.

What exactly are neo banks?

Well, Neobanking is a concept that originated in the western countries. A “neo bank” is essentially a bank without branches. A purely digital bank where you can open an account and operate it from your mobile app, without having to visit a branch.

Now, in some countries, neobanks are actually licensed banks.

But in India, the regulations are different.

What are neo banks in India?

So here in India, RBI has not issued any guidelines for neo banks. The fintechs that you see, are essentially neo banking platforms that have tied up with actual banks at the back-end to provide banking services.

So for example, if you use Fi or Jupiter’s platform, they’ve partnered with Federal Bank at the back-end. This means that your savings account is actually a Federal Bank account, and the neo-banking platform (Jupiter or Fi) has provided you a seamless interface to do transactions from that account. The company is not technically a “bank”, and you can’t call it one (at least not yet).

Why neobanking?

Let’s look at it in two parts.

1. Why will the user use them?

Well, traditional banks, while they do have mobile apps now, are still quite old-fashioned, with sub-par customer service and poor user experience. That’s what these neobanking platforms are here to change for the user. If you doubt this statement, just try using Federal Bank’s native app and use Fi or Jupiter’s app and see the difference!

2. Why will banks partner with them?

As per Kalaari Capital’s blog, the cost of acquiring a customer for traditional banks is approximately Rs. 3,000. And the yearly cost of maintaining that customer is about Rs. 2,500.

This is huge.

With neobanking platforms, their customer acquisition cost shoots down to about Rs. 800-1,500 - cutting it in half! Probably because neobanking platforms don’t have massive real estate costs and can scale their platform rapidly, thanks to better technology.

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Yeh sab toh theek hai, but how do Neobanks earn money?

Yes yes. Everyone around is asking about startup revenues. And neobanking platforms are not spared either.

But first, if you’re not reading this on email, why don’t you sign up for this content in a weekly newsletter?

Now, without getting into the “shouldn’t startups be profitable from day 1” conundrum, let’s talk about revenue sources for neobanking platforms.

Yup, they do have revenue models in place:

1. The bank at the back-end (like Federal) pays an account activation fee to the neobanking platform. This means that for every new customer that the neobanking platform onboards, the partner bank gives them some commission

2. For debit cards that are issued by these platforms, there is interchange income that they earn (similar to credit card interchange income that I wrote about HERE)

3. In future, a lot of other bank products can be upsold by these neobanking platforms, for which they would get a cut of the income that the bank earns (loans, credit cards, investments etc)

Unlike apps where “we will earn sometime in the future” is the answer for revenue-based questions, neobanking platforms already have revenue models in place. They just need to acquire a large number of users for economies of scale to kick in, so that revenues can increase and lead to profits.

Having said that, Neobanking is a relatively new concept in India, and is yet to catch up. I’ve used some platforms personally, and really liked the experience.

However, will it become the primary bank account for users like you and me, is something we need to wait and watch!

As for safety, your money with them is safe. The bank at the backend is regulated by RBI, so your money isn’t going anywhere 😁

Well, that’s all you need to know about neo-banks! Let me know your views or questions in comments. Or simply write back to this email, and I’ll reply!

See you on Sunday!