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India’s growth story relies heavily on its young population, with more than 50% of the population being under the age of 28. The bank will soon see the first generation of true digital natives who rarely visit branches for transactions and may not be tied to a long before digital bank, says Grant Thornton Bharat’s latest report on the emergence of neobanks open and integrated.
According to the report, the Indian neobank market is expected to grow at a compound annual growth rate (CAGR) of 50.5% over three years to reach $11.65 billion by fiscal year 2025.
The technology is driving fundamental change in banking with automation, predictive analytics, and machine learning finding beneficial applications across multiple functional areas of the retail banking industry.
While neobanks are focused on improving many of their customer-facing front-end operations with digital solutions, the reality is that many processes in traditional banks are still heavily reliant on people and paper to process requests. customers, which is costly, slow and can lead to inconsistencies. results and a high error rate, he added.
“Traditional banking services are transforming and customers are now deeply accustomed to hyper-personalized digital banking services. The Indian neo-banking market is poised for rapid expansion through outreach to New Banking Segments (NTB), SME and salaried customers,” said Jaikrishnan G, Partner, Financial Services Consulting, Grant Thornton Bharat.
The report further pointed out that the Indian stack has played a pivotal role in the growth of digital banking in India, enabling banks, non-bank financial companies (NBFCs), fintechs, government agencies and other players financial services to enable the provision of digital, paperless and cashless services. .
While neobanking may have its roots in Europe, other economies have actively pursued this concept and devised unique approaches suited to their markets and regulatory policies.
For example, development in North America, South America and Southeast Asia has been driven by customer needs in domestic markets, while in regions such as Australia and the UK, the development has been driven by regulatory mandates.
Unlike the global development path, India’s neo-banking ecosystem is built on a hybrid method where the market as well as the government have collectively impacted the development of the industry.
The neo-bank market in the country was estimated at $3.42 billion in fiscal 2022, driven by rapidly changing technology and rising levels of internet and smartphone penetration, it said. -he adds.
Institutions are building the capacity to access available data in real time and make rapid decisions based on algorithms, the report says while adding that the shift from physical to digital will pose challenges such as establishing the trust and sustaining the humanity of digital interactions.
“The neo-banking industry may face challenges from established players, their dependence on banks, security issues, regulatory ambiguity, increased competition from fintechs and super -applications that combine elements of e-commerce, payments and financial services on the same platform,” Jaikrishnan said. added.
While regulators in India welcome and promote fintech innovations, neobanks face several regulatory challenges such as RBI not recognizing pure virtual banks or regulating them.
Moreover, in such an unregulated environment
environment, non-compliance and fraudulent behavior by any of the incumbents would trigger a regulatory compliance review of the banks/NBFC fintech partnerships, bringing neo-banks under the radar of the RBI, putting the whole sector under tough supervisory standards.
Indian neobanks are also barred from performing some of the key banking functions including loan sanctioning, investment portfolio management and determining KYC compliance, while traditional banks deploy neobanks as offers, which makes the market space more crowded.
Tech giants such as Facebook, Amazon and Google could also enter the neobank market, further tightening competition. With access to numerous customer data points, existing loyalty, and advanced technology capabilities, these players could disrupt and rebuild neo-banking.