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Neobanks could become full-stack digital banks;  here’s how

Following the recommendation of an RBI task force to regulate digital banking services, government think tank Niti Aayog proposed to create “full stack digital banks” in India.

The proposal will cover a multitude of neobank fintechs that partner with traditional banks to provide technological support for customer acquisition and banking activities.

In a discussion paper titled “Digital Banks: A Licensing and Regulatory Scheme Proposal for India,” Niti Aayog highlights the challenges posed by the “partnership model” in the neobank.

Niti Aayog presents a possible action plan for neobanks to acquire a full digital banking license and possibly provide loans, deposits and other banking services to medium, small and micro enterprises (MSMEs).

What are digital banks and neobanks?

According to the document, the terms “challenger banks,” “neobanks,” and “digital banks” are used interchangeably among fintechs, even though they don’t actually function as banks.

Digital banks are defined by the Banking Regulation Act 1949 (BR Act) as entities that issue deposits, provide loans and provide a full range of services. As the name suggests, these banks rely on the Internet and other nearby channels to offer their services instead of physical branches.

Digital banks offer superior speed and user experience compared to a traditional bank. They also offer low and transparent cost structures to their consumers. They also have a high efficiency metric compared to commercial banks because they rely on digital channels. The government can effectively use the channel to reach underfunded small businesses, Niti Aayog proposed.

Neobanks in India include startups like Open, RazorpayX, Freo, Jupiter, Fi, and Niyo.

License framework

In the absence of a licensing regime for “full stack” digital banks, neobanks have partnered with traditional banks, providing technical support at the customer engagement layer.

The document recommends a two-step approach to licensing: a digital banking license should be issued first, followed by a digital (universal) banking license.

Licenses will be limited in terms of volume and value of customers served. The license holder will then be authorized to operate within a regulatory sandbox. In a sandbox, companies can innovate, operate and experiment in a monitored environment. Upon satisfactory performance within the framework, these licensees will be issued a “full battery” digital merchant banking license.

“According to the illustration, as the sandbox progresses to the final stage, a full-stack digital merchant bank will need to bring in 200 crore rupees (equivalent to that required from the small finance bank),” said said the newspaper.

Welcome move

Welcoming the recommendations, Harshil Mathur, co-founder and CEO of Razorpay, told Moneycontrol: “Today neobanks function as layers of technology. What this document proposes is that over time we can get into full-stack banking. “

Meanwhile, neobanks hope to urge Niti Aayog to include the retail banking provision in the recommendations. Most neobanks focus on retail clients (individuals).

“We will write to them asking that retail banking also be included in the services that licensed neobanks can provide. We will also add recommendations on what more can be included, ”Jitendra Gupta, founder of the Jupiter neobank, told Moneycontrol.

Niti Aayog will accept comments on the discussion paper until December 31.

(Edited by : Shoma bhattacharjee)


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