The Rise Of Neobanking In India: Decoding Growth Drivers, Funding Trends & More

Neobanking is one of the major fintech innovations to have come over the last few years, the next evolutionary step in banking after net banking, mobile banking, app-based banking and online payments. 

The Indian neobanking ecosystem has become one of the most lucrative opportunities for fintech startups, witnessing a high inflow of funds over the past few quarters.

According to Inc42’s ‘State of Indian Fintech Report, Q3 2022. InFocus: Neobanks’, Indian neobanking startups raised $869 Mn across 48 deals between 2014 and H1 2022.

Neobanks managed to raise only $131 Mn across 16 deals between 2014 and 2020. However, the funding rose at a CAGR of 216% to $738 Mn across 32 deals during the 18 months ended June 30, 2022.

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While neobanking startups raised $416 Mn across 18 deals in 2021, they secured funding of $322 Mn in 14 deals in just the first six months of 2022 and seem to be on track to surpass 2021’s cumulative funding this year.

These factors have seen neobanking become a huge market opportunity in recent times. According to the Inc42 report, neobanking in India is a $48 Bn market opportunity in 2022 and is set to increase 281% to reach $183 Bn by 2030.

Neobanks will account for 9% of India’s total fintech market size in 2030, which is estimated to reach $2.1 Tn by then.

Funding Trends Within Neobanking

Late-Stage Funding Dominates: Late-stage neobanking startups accounted for 49.9% of all funding that flowed into neobanks between 2014 and H1 2022. However, this further rose to 59% when accounting for neobanking funding during 2021 and H1 2022.

Seed-stage neobanks raised $56 Mn between 2014 and H1 2021. However, 70% of that funding was raised from 2021 onwards, indicating the renewed focus on early-stage funding in neobanks.

Similarly, growth-stage neobanks raised $336.5 Mn between 2014 and H1 2022, however, 66% of that was raised during the 18 months ended June 30, 2022.

Bengaluru Remains The Funding Hub Of Choice: Of the $869 Mn raised by neobanking startups in the country between 2014 and H1 2022, Bengaluru-based startups attracted 63%, or $545.9 Mn. Mumbai-based neobanking startups raised $165 Mn during the same period, while Delhi-NCR completed the podium with neobanking startups raising $130 Mn.

The only neobanking hub outside of these was Chennai, having raised $27 Mn.

Top Funded Neobanking Startups: The only neobanking fintech in the country, Open, is also the best-funded fund and has raised $186 Mn so far. The top five neobanking startups in terms of funding raised are Jupiter ($157 Mn), Niyo ($149 Mn), INDMoney ($97 Mn) and Fi ($63 Mn).

The top 10 most funded neobanking startups have raised a total of $825 Mn between themselves, cornering a whopping 95% of the total funding secured by neobanking startups.

Top Investors: Neobanks in India have managed to attract some of the biggest names in investment. The likes of Sequoia, Tiger Global, Accel, BEENEXT and Y Combinator have all participated in funding events within neobanking. 

BEENEXT and Tiger Global have participated in four deals each, while Accel, Prime Venture Partners and Y Combinator have done so in three deals each. Sequoia, Orios Venture Partners, Blume and Unicorn India Ventures have participated in two deals each.

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Growth Drivers For Neobanks In India

India has traditionally been an underbanked country. However, with the advent of the internet economy, app-based banking and therefore neobanks, the demand for formal finance has skyrocketed.

Key events such as the demonetisation in 2016 and the fast adoption of the UPI stack shortly thereafter have accelerated the demand for formal finance in the country. UPI has proved to be a massive success; as of August 2022, the cumulative transactions processed on the UPI network stood at over 116 Bn worth $2.4 Tn.

Along with payments and banking, digital lending has also turned into a lucrative opportunity for both B2B and B2C neobanks. The total loan disbursal to SMBs in FY21 stood at $128 Bn, while the country’s retail loan portfolio stood at $963 Bn, as per Inc42 calculations and data from CRIF, BCG and RBI.

The recent RBI move to issue a new set of digital lending guidelines would also steer the digital lending ecosystem in the right direction, making it possible for neobanks to open up a new revenue stream.

Emerging Trends Within Neobanking

It is interesting to note that almost two-thirds of the funding raised by the neobanking ecosystem went to B2C neobanks. Therefore, these are the ones that stand to benefit from the emerging trends within neobanking in India.

The most prominent trend is the increased usage of B2C neobanks by teenagers and young adults. Almost half of India’s population is under 25 years of age, which allows neobanks to be more innovative as this group would have enough tech knowledge.

In a similar vein, neobanks in India are also developing solutions to provide banking services to Indians going abroad to work or study. Since a majority of these are expected to be under the age of 25 or 30 years, the increase in immigration is expected to propel the growth of international neobanking.

For B2B neobanks, SMBs are going to be crucial as startups and SMBs are propelling their adoption within the country. Given that there are 63 Mn SMBs in the country, with 51 Mn of them lacking access to formal credit, they are set to increase adoption for sector leaders such as Open, Flobiz and Karbon.

As mentioned earlier, digital lending is also becoming a lucrative area for neobanks. This is set to prompt these startups to adopt full-stack models. 

A full-stack neobank would provide all banking solutions under one roof. This model has been pioneered by the likes of Paytm in India and as neobanking in India grows, big players would move towards full-stack neobanking.

The Road Ahead

While neobanking has emerged as a favourite subsector of investors in the fintech ecosystem over the last few quarters, increasing competition, outdated legacy banking infrastructure and a lack of regulation are proving to be key challenges for neobanks in India.

The absence of regulations is a big hurdle for neobanks. In the absence of proper regulations, neobanks are developing business models which might be objectionable to the Reserve Bank of India (RBI). The same happened when the RBI introduced new regulations for prepaid payment instruments (PPIs) and digital lending guidelines. 

At the end of the day, neobanks are the result of the evolution of banking over the past two decades or so. With proper guidelines and healthy funding, Indian startups can make full use of the $183 Bn market opportunity neobanking presents by 2030.

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