India Neobanking Sector Poised For 50.5% Annual Growth By 2025

India’s neobanking market is growing rapidly, driven by rapid changes in technology, rising internet and smartphone penetration, and supportive government initiatives.

Accounting and consulting firm Grant Thornton estimates the Indian neobanking market to be worth US$3.42 billion in 2022, with the company attributing this growth to the country’s young population, with more than 50% of the population below the age of 28, And this was facilitated by India Stack, a set of Application Programming Interfaces (APIs) spanning Unique Identification, Digital Documentation and Finance.

This digital infrastructure has played a central role in the country’s digital banking development, the company says, providing digital, paperless and cashless delivery of services to banks, non-banking financial companies (NBFCs), fintech companies, government agencies and other financial services companies. allows to enable. of services.

Grant Thornton expects the momentum to continue this year as well, estimating that the Indian neobanking sector will grow at a three-year compound annual growth rate (CAGR) of 50.5% by FY2025. By then, the industry is estimated to be worth an estimated US$11.65 billion.

Estimated Indian Neobank Market Size (by Revenue) in US$ Billion, Source: Banking Matrix: The Emergence of Open and Integrated Neobanks, Grant Thornton India, July 2022

Projections by market and consumer data specialist Statista also offer a positive outlook, forecasting that user penetration of neobanking will increase to 1.4% by 2027, growing from just 1% in 2023. By 2027, the region is set to serve over 21 million users. , predicts the company.

Grant Thornton says a key driver of this growth will be the micro, small and medium-sized enterprises (MSME) segment.

India is home to over 63 million SMEs, which contribute around 30% to the country’s gross domestic product (GDP). Yet, despite their important role in the local economy, MSMEs struggle to secure funding from commercial banks. The firm says this market is well positioned to embrace neobanking.

It says that innovative startups have emerged in the last few years to provide seamless digital experience, low-cost infrastructure and several value-added services to consumers and businesses, apart from banking products. Many of them are enabling credit penetration among under-served and un-served small business, helping small business owners and entrepreneurs to capitalize on India’s growing digital economy and achieve rapid growth.

India’s Neobanking Market

Compared to more mature markets such as the European Union (EU) and China, the Indian neobanking sector is relatively nascent and all major players have launched their products in the past two years, Swapnil Bhaskar, head of strategy at local neobanking startup Neo, told BusinessLine. told The World in an interview last year. Considering that neobanks have just started in India, the market is witnessing a year-on-year (YoY) growth of over 100%, though on a low base, he said.

Jasmine B Gupta, co-founder and CEO of LXME, an Indian neobank exclusively for women, estimates that there are around 36 neobanks operating in the country, indicating that entrepreneurs and market participants have recognized the opportunity and are taking the market by storm. come on a large scale.

Boston Consulting Group identifies three main types of strategies emerging in the Indian digital banking sector. First, banks such as Kotak Mahindra Bank and DBS are launching their captive challenger entities to meet changing customer expectations, drive agility and innovation, and expand their user base.

Second, pure players such as Niyo, Freo and Jupiter are entering the market to provide a modern and seamless customer experience, greater speed and convenience, and more competitive pricing and transparent charges. These companies partner with licensed banks to provide differentiated banking services to specific target segments such as MSMEs, women and millennials.

Lastly, the third strategy outlined by the consultancy is existing digital finance ecosystem players with large customer bases and multiple use cases expanding to digital banking as an added feature. These players include names like Razorpay and Paytm.

Digital Challenger Banking Play in India, Source: Boston Consulting Group, June 2021

Neobanks popular with consumers include Neobank, which provides digital savings accounts and other banking services largely to salaried individuals in India and which boasts of over six million customers; Jupiter, a neobank licensed as an NBFC serving over two million customers; Freo, which has 1.5 million customers; and Fi Money, a neobanking platform designed for working professionals that counts one million customers.

In the SME neobanking space, key players include Razorpay, the business banking platform of Petech firm Razorpay, which served around 15,000 companies in April 2021; and Open, a neobanking platform for SMEs and startups that serves over 2.3 million businesses.

In November 2014, the Reserve Bank of India introduced guidelines for issuing licenses for setting up new banks in the country, including licenses for digital or “payments” banks.

Under these guidelines, these so-called payments banks are allowed to provide limited banking services primarily focused on payments and remittances and can accept deposits from individuals and small businesses. However, they are not permitted to undertake lending activities.

Recent reports have suggested that the government is now considering bringing in new rules that will allow digital banks to offer business loans entirely digitally. The regulation will aim to allow MSMEs to secure and access digital credit more easily.

Featured image credit: Edited from Freepik