Neobanks diversify into cards, payments, investment businesses amid struggle to offer core banking services

Neobank

"Not sure whether I would say that it was the wisest of decisions. Frankly, it's tough, it's very tough to build in this sector," said Jitendra Gupta, founder of neobanking firm Jupiter, at a startup event early this year.

Gupta is a seasoned fintech entrepreneur who founded  Citrus Pay, which was acquired by PayU for $130 million in 2016. He is also an angel investor in multiple startups, including Cred and MPL.

Gupta was responding to a question on his journey of starting a neobank in India. Jupiter, founded in 2019, has raised $167 million in funding at a valuation of around $650 million, according to Tracxn, a private company database.

Gupta is not alone.

The futility of neobanking is a sentiment shared by other startups in the space, with many of them struggling, pivoting, or even referring to neobanking as a feature rather than the product itself. All of them are positioning themselves as money management apps, from payments and savings to investments.

Jupiter’s website, which launched in 2019-2020, looks significantly different now. While it promised a premium, fully digital savings account, customer service and banking assistance without ever visiting a branch, today, its star products are co-branded debit and credit cards with its banking partner.

To be sure, it still enables its customers with a savings bank account through partner bank and savings and investment offerings; it looks a lot like other fintech websites or apps.

“We realised over time that many users — especially those in their 40s or 50s — already have a primary bank account they don’t want to switch from. But they still want access to other features we offer. That changed our approach,” said Sumit Gwalani, cofounder of Fi Money.

The discovery process has been hard for everyone. FiMoney raised $170 million at over $500 million valuation. FiMoney has pivoted to a money management app model.

The fintech realised that the idea that a savings account is a prerequisite for using neobanking features has gone away. Gwalani said that users come to FiMoney for specific use-cases — lending, investments, payments — and not just to open a new account.

Incidentally, some of these players were launched or expanded during the Covid period, when the promise of a fully digital bank took off.

Neobanking even produced a unicorn, Open. The company registered an operating revenue of Rs 25 crore in FY 24, with reports suggesting the company is struggling to grow its revenue.

Bengaluru-based Open was founded in 2017 that offers a digital banking platform designed specifically for small and medium enterprises (SMEs).

Open’s services allow SMEs to manage payroll, taxes, invoicing, and expenses while linking to existing bank accounts.

With India’s large and underserved SME base, Open positioned itself as a full-stack financial platform catering to the operational and credit needs of this segment.

Neobanks are usually digital-only banks with no physical presence, offering similar or identical banking services to their customers. Theoretically, neobanks provide a technology layer on top of the banks, delivering better and faster financial services products and offerings to their customers. However, since they are not recognised or regulated, they need to partner with banks and other financial institutions to offer these.

“The idea of a consumer-focused neobank in India is essentially a solution in search of a problem,” said Nitesh Singhal, founder of fintech consultancy Aryaa Advisors. “India’s private and even public sector banks already offer robust digital interfaces and seamless real-time payments.

For the average Indian consumer, there’s little incentive to seek a differentiated banking experience. Neobanks, as currently conceived, cater primarily to the top one percent - who already enjoy premium banking services or delegate financial management altogether.” Singhal previously held roles at PayPal and Axis Bank.

Indian startups have adopted global playbooks and successfully replicated them in India. However, in the case of neobanking, it is a stark contrast.

That is probably because, from money transfer to opening accounts, bill payments and availing loans, pretty much every major financial services offering can be fulfilled through banks' online channels, rendering neobanks' service redundant to digitally savvy customers.

Globally, there have been multiple large digital banking platforms, and many are expected to get listed this year. NuBank in Brazil, with a market cap of $60-70 billion, has been successful in Brazil and is challenging the traditional banks. Revolut in UK is raising its pre-IPO round at about $60 billion. Chime went public at a $10 billion-plus market cap in the US.

“India offers the single largest untapped digital banking opportunity today, with over 400 million transacting users. But without a banking license, you are severely curtailed in your ability to serve Indian digital consumers. If you haven't built a large distribution platform with tens of millions of users, I am afraid it is too late for you,” said Vikram Chachra, founding partner at 8i Ventures.

The lack of clear identity or regulatory recognition meant that they were at the mercy of banks to provide all the financial products and services, limiting their growth and scale.

The problem with neobanks was that without scale, there is no big money to be made and with the kind of premium service promises, scale was not easy. Without a banking license, the neobanks cannot collect deposits. When the deposits are not kept with them, there is no cheap capital to lend.

The neobanks brought new customers to banks, and the revenue from those customers was shared with the partner banks. The neobanks' primary targets were consumers who entered the workforce recently and did not have a deep relationship with banks. Like Galwani of FiMoney said, most people in their late 30s and 40s had a deeper relationship with their banks.

“The core reason is that profitability is impacted as customer Savings Bank balances are low because of their customer profile. SB accounts do not generate enough balances for profits that the banks can share with the neobanking partner that brings these customers. Lending is where the margins would be and hence all Fintechs ultimately end up there,” said a former banker, who headed digital for a private sector bank.

“To use the word 'neobanks' is a misnomer and misleading to the consumers. By no regulatory imagination, are these entities banks or any form of banking framework. They are the new-age DSAs - instead of traditional Direct Selling Agents (DSA), they are Digital Sales/Sourcing Agents. For such a model to succeed, you need a well-oiled sales engine, which cannot come only from good digital marketing,” said Srinath Sridharan, a policy researcher and corporate advisor.

Gupta of Jupiter also highlighted the difficulties of scaling a neobank, particularly after the initial phase of customer acquisition.

“Getting the first 100,000 consumers is way easier... but getting from 2 million to 10 million to 20 million is very tough. We are somewhere in between the 2-10 (million) bracket right now. We have to do more hard work to get more customers," he said at the startup event.

Jupiter did not respond to Moneycontrol queries requesting for comments.

Without a banking license, there is no regulatory approval or sanction for customers to trat neobanks as a bank.

India has had bad experiences of multiple bank failures from time to time, and it takes a lot for consumers to trust a new financial institution, especially when it comes to keeping their deposits.

Gupta stressed that trust cannot be bought through aggressive spending or marketing.

"Nobody trusts you by face, by you proclaiming yourself to be better.it's very tough to build in this sector, because you are asking consumers to trust you without having any brand, and you're asking consumers to park their money with you, which is the toughest thing in the Indian market or anywhere in the world for that matter," Gupta said at the event.

Razorpay still thinks that serving small and medium businesses with customised banking services can be a great value addition.

“We don’t monetise the current account. We charge for the platform layer—₹50 per employee per month for payroll, or per-transaction fees on disbursals and vendor payments,” said Harshil Mathur, co-founder of Razorpay.

The payment gateway company, under its RazorpayX platform, is solving specific use cases for businesses, such as payouts at scale, payroll, vendor payments, and tax disbursements, far beyond what a typical bank current account offers.

“Unlike consumer retail banking, the MSME sector does not get due recognition from banks. This is a niche that can be solved successfully by neobanks in India,” says Singhal.

Razorpay works with around 45,000 businesses and the neobanking platform processes about $25 billion in annual total payment volume (TPV).

“For us, the bank account is just a channel. The product is the problem we solve—whether that’s salary disbursals with compliance or high-frequency gaming payouts. Most banks aren’t built for scale or automation. We offer APIs that integrate with internal systems for real-time reconciliation,” Mathur added.

The neobanking platform provided a service that was not available for customers forcing even the banks to refer clients to Razorpay.

“Even banks can’t support use cases like automated tax payments or gaming disbursals during high-traffic events like IPL,” said Mathur.

“In a UPI-first world, you don’t need a neobank to do payments. Consumers rarely open their bank apps anymore—everything is done on Google Pay or PhonePe,” said an investor in neobanks.

It is not to say that these startups’ pivots or products and services have no takers. The payments and lending can still act as a successful business model for these startups.

Fintechs such as Slice, Scapia, OneCard, Unicards, FiMoney, Jupiter and Niyo are offering debit and credit cards with zero forex markup, lounge access, and one per cent cashbacks for all spends, helping them acquire customers.

“Our zero forex debit card feature, launched back in 2021–22, continues to do well. For international and travel-related spends, our usage metrics are among the highest compared to the industry average,” Gwalani said.

While savings accounts and cards are strong revenue drivers for FiMoney, those are no longer the only way to acquire customers. Late last year, in a shift in strategy, the company allowed users to use Fi without opening a savings account.

“Our broader vision remains unchanged: to be a financial hub that adds value across a user’s financial journey. But we now let users choose their own entry point — savings, credit, investments — based on their needs,” Gwalani added.

The awareness and ease of starting an investment journey through Systematic Investment Plans (SIPs) on some of these platforms are helping them retain customers. Then there is lending, which remains the key revenue generator for banks, neobanks, and payment fintechs.