How neobanks are bridging the gap in informal pathways to small business banking needs
- By Veena Sivaramakrishnan, Partner and Yugal Jain, Senior Partner
Credit and financing for MSMEs: In the Indian finance space, when the integration of robust digital banking services has become the key to sustaining and growing the business of traditional banking institutions, there is another term that is rapidly gaining popularity: neobank. Simply put, néobanque refers to a 100% digital bank with no physical presence in the field.
Neobanks are reshaping and rewriting banking history around the world and have the potential to positively disrupt the established rules of traditional banking. They offer all the traditional banking solutions and services with an emphasis on the customer experience. Historically, banking with traditional banking institutions has been a long and tedious process – from opening a bank account to using a credit facility with a traditional banking institution. Each step requires numerous documents and several levels of verification, references and approvals, and in the case of financing, a full process of reviewing the collateral and the borrower’s books.
These processes are often conducted according to predetermined standards, with little scope for customization. Personalization and bespoke services are only available to clients who bring in the quantum or volume of transactions. Small business owners and customers requiring standard banking products often get caught up in lengthy processes and get a gross deal. Due to the cumbersome process, small business owners often rely on informal channels to meet their banking needs and end up accepting usurious and unfavorable terms for their financial needs.
This is the gap that the neobanks are trying to fill. They promise to serve underbanked communities, by redesigning and simplifying banking services, with a focus on robust grievance resolution and constant guidance for customers throughout their banking journey. These banks are focused on providing seamless banking services to each of their customers, creating user-friendly banking portals using technology. In addition to simplifying the process for traditional banking services, neobanks also provide their clients with various technological tools for bookkeeping (including financial statements), tax returns, invoices and other relevant services required in the business. universe of financing.
Neobanks are bringing banking services to the doorstep of the underbanked small business community. This is done without compromising the sanctity of the process and ensuring that the appropriate tools are provided to facilitate the process and facilitate compliance. Neobanks are able to deliver on these promises by resetting their priorities and using all of their resources to achieve this goal.
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In India, there is a growing misconception that FinTech companies are one and the same as neobanks. The main difference is that fintech companies do not have their own banking license and provide online banking services in conjunction with traditional banking partners. The neobanks will have the capacity to lend and will meet the objective of financial inclusion.
The existing regulatory regime needs to be changed for the licensing and operation of a neobank in India. Although the Reserve Bank of India (RBI) has not issued any guidelines on the subject of operating a neobank, its various existing guidelines for operating banking institutions reflect the mindset of banking institutions. traditional, i.e. physical branch requirements. In order to facilitate the rapid growth of digital banking infrastructure and to oversee and regulate the incursion of new entrants into a sensitive banking industry, it is essential that the RBI consider issuing guidelines for the operation of a neobank in India. . This can probably work under the “Regulatory Sandbox” model as the next cohort.
It would be interesting to see how a neobank in India (without leveraging the brand of its traditional banking partner) is able to serve under-banked areas without any physical presence. Serving under-banked areas will not only require a change in behavior but will also require a change in mindset from customers, especially those who are used to a symbolic presence of a building to trust them and who do not have not have Internet access or are unable to trust the Internet for their financial transactions. Given that change is indeed the only constant, it’s probably time for neobanks to become a reality, and there might not be a better time than the recovery from a pandemic to test the waters.
Veena Sivaramakrishnan is a partner and Yugal Jain is a senior partner in banking and financial practice at Shardul Amarchand Mangaldas & Co. The opinions expressed are those of the authors.