The neo-kids in town
The current buzz in fintech is around Neo Banks and Account Aggregators (AA). Investor interest in Neo banks especially, seems to have spiked with about 8 players raising over $90 million in recent times. As for AAs, the news is that RBI regulations are getting in place and in-principle approval has been accorded to about five players.
Neo banks are not a new breed of banks but essentially tech entities that piggyback on regular banks to offer differentiated digital services – the key feature being they do not have a physical presence. Globally neo banks (also called challenger banks) came on the scene in the UK about five years ago with Monzo and Atom. This was a response of tech entities which wanted to go beyond lending and payments and own the entire customer relationship end-to-end.
“Neo banks” are difficult to define and they come in many flavours, but they are not the same as digital banks although both are based on a mobile-first approach. NiYO (partnering with Yes Bank, DCB Bank) for example, describes itself as “as an employee benefits platform comprising of a card and a mobile app” while Open (with ICICI Bank) styles itself as a “business banking service that combines everything from banking to invoicing and account keeping in one place”. Others such as RazorpayX offer current account, credit card and compliance services for SMEs. Clearly much of this stuff- bookkeeping, GST invoicing, bank reconciliation, balance sheets and P/L statements for SMEs – have little to do with banking, which itself happens on the associate bank’s balance sheet, meaning the onus of compliance is on the licensed bank. The neo banks thus seem to operate in a regulatory no-man’s land, but things could change as the RBI takes more cognizance and formulates separate regulations for them.
But AAs look exciting, because they promise to truly herald Open banking. In India, open banking has been around since 2013 when RBL Bank and Yes Bank exposed their APIs to developers and partners. Companies such as Swiggy, PhonePe already use these platforms. Others like Perfios use them for bank statement analysis (used widely in customer authentication). Open banking got the impetus from a European regulatory initiative called PSD2 that gave licensed third parties access to bank customer data, whereby they could make value added services available to customers. This is actually a part of the larger process of unbundling that we see everywhere today– in online shopping, news, music and now banking. Essentially it means giving consumers the choice to pick products. We already see this in our daily lives – when we take a cab ride, for instance, software apps of the taxi company, the bank and Google Maps, though different, have their APIs working together in the background, sharing information and enhancing the capability of the other.
AAs are expected to be a game changer for Open banking. We can visualize it as a Unified Payments Interface (UPI) for data. AAs will allow the transfer of user data of financial nature, held by customers in bank deposits, equities, mutual funds, pension funds – called Financial Information Providers (FIPs), to any entity wanting to use that data (a Financial Information User. In exchange for data, the customer gets easier access to credit, insurance and other financial products or is simply able to track all his or her investments. Data aggregation services have existed, but what has changed now is that the RBI has prescribed standardized formats that will be machine-readable, besides allowing the use of APIs. AAs are being structured as NBFCs (NBFC-AA) and will act as “consent brokers” enabling sharing of structured financial data, while maintaining a log of consent given.
What is in it for banks?
Neo-banks may not yet pose a threat to conventional brick and mortar branches in India, but this could change if they become formally regulated entities. But AAs could give banks a run for their money- for one, they will pressure them to improve their offerings as non-bank competitors become enabled to enter with innovative offerings. But a lot will depend on the kind of AA-bank partnerships that emerge. However, the key issues will be the consent architecture as well as the challenges in educating customers on consent and data privacy. Also, the business model does not appear to be clear at this moment, with many restrictions on AAs (for instance, AAs cannot store data or perform data analytics). All said, this will be an exciting space to look out for.