Neobanking to gain as digital natives shun bank branches

Going to a bank for any of its services might soon become a thing of the past.

Millennials, familiar with the internet from an early age, are increasingly growing comfortable with the idea of neo-banks, or online-only banks without a physical presence, boosting the prospects of such banks in India.

The neo-banking market in the world’s second-most populous nation is expected to grow at a three-year compounded annual growth rate (CAGR) of 50.5% to reach $11.65 billion by FY2025, according to a Grant Thornton Bharat report released on Monday.

“The Indian neobanking market is set for rapid expansion driven by the outreach to customers from the NTB (new-to-bank), SME (Small and Medium Enterprises) and salaried segments,” according to Jaikrishnan G, Partner, Financial Services Consulting, Grant Thornton Bharat.

More than 50% of India’s population falls below the age of 28, giving that first generation of truly digital natives the power to dictate future consumer trends, the report pointed out.

Neobanks cater to the millennials, MSMEs, unbanked population and thin-file customers who are looking for easy accessibility and instant turnaround, as per the report titled, ‘The banking matrix: Emergence of open and integrated neobanks’.

The India stack has played a central role in India’s digital banking growth allowing banks, non-banking financial companies, fintechs, governmental agencies and other financial services players to enable the digital, paperless and cashless delivery of services.

Neobanks will face their own set of challenges too.

“The neobanking industry may face challenges from the entrenched players, their dependency on banks, security concerns, regulatory ambiguity, increased competition from fintechs and super apps that combine elements of ecommerce, payments and financial services into the same platform,” Jaikrishnan G added.

The report also urged banking regulators to monitor neo-banks consistently and highlighted the need for a formal licensing regime in this space.