Today banking has become an integral part of everyone’s financial activity, and digital banks in India have advanced to a greater extent. Digital-only banks are transforming the way customers used to view banking operations. New digital-only banks, also known as the neobanks, are being launched worldwide, including the US, Canada, UK, Germany, Hong Kong, and have been fighting for their market share.
Since the period of demonetisation, India has also been focusing on completely going digital. The Indian Government has been continuously trying to bring up digital payment, but there have been certain limitations. To overcome such limits, digital banks have come into the limelight wherein DBS’s digital bank is India’s first and the best Digital-only bank.
Neo banking in India is seen to take over fintech considerably at a faster pace. In North America and Europe, estimates are that neo banks will reach 60 million customers by the end of 2020 and be 145 million by 2024.
Examples of Digital-only Banks in India
- InstantPay – this delivers banking services to most individuals and businesses.
- Open – It began its journey in 2017, where it offers small businesses and startups online bank accounts and credit cards by combining banking, payments, and accounting in a single form.
- RazorPayX – Introduced by Razorpay, it has served over 10,000 businesses wherein it processes their payroll, pays for expenses, and pays off the vendors of businesses in real-time.
Working on Digital-only Banking Model in India
The existing regulatory architecture in India currently doesn’t allow a fully licensed digital-only bank. Due to this, the digital-only banking model is structured as a partnership between a licensed bank and a non-bank, commonly referred to as the neobanks. These act as a technological interface that provides access to various banking and value-added services. However, here the banks are the ones that provide actual regulated services such as opening an account, accepting deposits, giving away loans, etc.
Digital-only Banking Models
Globally, terms like neobanks, challenger banks, digital banks, and virtual banks are often used interchangeably. The digital-only banking model is determined by the regulatory architecture of a particular jurisdiction. In India, such a banking model involves a partnership between an existing licensed bank and a non-bank or the neobank.
Basically, the digital-only banking model is categorised as follows:
1. Model A: Licensed Digital Bank
These are licensed by the regulator to provide all banking services. They normally have a technology-enabled business model and provide services remotely with no or minimal physical contact. These banks mostly partner with fintech companies to provide value-added services through a marketplace model or banking-as-a-service model.
2. Model B: Digital Unit of Existing Licensed Bank
These models offer digital-only services under a different brand name or unit. With the help of technological solutions, they target the tech-savvy customers to deliver banking services. These models can be widely seen in the Indian market.
3. Model C: Partnership Model
These include the customers facing the non-banks that partner with licensed banks and financial institutions to provide a software overlay. Through such partnerships, the neo-banks provide customers access to a wide range of financial services like opening current accounts, applying for loans, issuing co-branded cards, and payment services. To differentiate their services, they provide value-added solutions such as expense management, preparation of invoices, vendor payment management, and so on.
Types of Digital Banking License
The best way to categorize modern banks is by the type of banking license they have. There are mainly four types of main digital banking license, which are as follows:
1. Traditional Banking License
As the name itself suggests, banks with this type of license normally follow a traditional way of offering financial services, including the physical presence, that comes with widespread branches and large-scale operations. Many such traditional banks are looking for ways to reduce their branches by cutting their costs and are mostly focusing on digitising their systems to keep up the pace in the industry.
2. E-money License
With an e-money license, the E-money institutions or the other Payment Service providers won’t have a full banking license. They hence will be restricted in doing certain payments and banking services to customers. Generally, banks with this license offer payment services such as money transfer and currency exchanges.
TranferWise and InstaReM use e-money licenses to provide payment services.
3. Extended Banking License
Providers with this license are digital-only banks that make use of a parent bank’s license to offer a broad scope of financial products and services, and they will also target a distinct group of customers.
Finn by JP Morgan Chase and Up by Bendigo are examples that fall in this category.
4. Fintech/Virtual Banking License
This license has got many names and has been launched by many financial bodies across the globe. With these licenses, new digital-only banks emerge by offering the same product and services that the traditional banks provide. The highlight is that these will be without branches and will laser-focus on online customer experience.
Monzo, Starling, and N26 can provide such products and services with these licenses.
Challenges Faced With it in India
While neobanks are rising their presence very aggressively, it still lags its momentum. The major lag it faces is its sticky customers and lack of regulations. Since the Reserve bank of India hasn’t given a full green signal for a 100% digital bank model yet, this might have to take its steps bit-by-bit and wait for its long run.
Understanding the needs of a well-functioning financial system that requires a mix of institutions to serve the diverse needs of the Indian population, RBI has introduced differentiated banks in the form of small finance banks and payment banks. These were envisaged to be technology-driven. Considering its needs, Indian must, in fact, think about introducing digital-only bank licenses.
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