Fintech Inside #29 - 18th Jul, 2021 | Neo Banks

Of neo banks and its challenges, Paytm and Mobikwik's IPO, RBI's restrictions on mastercard and SEA's cashless payments growth.

Jul 18, 2021

Hi Insiders, Osborne here.

Welcome to the 29th edition of Fintech Inside. Fintech Inside is the front page of Fintech in emerging markets.

This week I cover something curious that's happening with India's neo banks. There's also news on Paytm and Mobikwik's IPO, RBI imposing restrictions on Mastercard and Cashless payments growth in SEA.

Announcements: Last week we announced the partnership between Fintech Inside and This Week in Fintech. This week: we will be launching a community initiative by EMVC. On Wed, 21st July, 2021, I will be speaking at Money2020 on embedded finance. Lastly, on Thur, 22nd Jul, 2021, I will be speaking on digital transactions and Indian Fintech organized by University of Queensland Australia. Join me at those sessions and please support me in the launch of the community initiative.

Globally: TikTok banned financial services ads. Here’s a handy overview of InsurTech business models and key metrics. Revolut raised $800mm and is now UK's most valuable startup. ECB gave approval to start pilot and investigation phase of the Digital Euro. Square is doubling down on Crypto with a new business.

If you’re an early-stage fintech startup founder raising equity or debt, I may be able to help - reach out to connect@osborne.vc

🤔 One Big Thought

Something curious is happening with India's neo banks

India's neo banks were founded with much fanfare - stellar founding teams, between 15-30mm in funding raised, generous ESOP's and more. The larger ones, on the consumer side, being Jupiter, NiYo, EpiFi and so on, and on the business side, Open, RazorpayX and others. Today most Indian Fintech's want to convert or are converting to neobanks.

On the consumer side, these neo banks faced several delays for over two years but are now slow opening up their product to a wait list of consumers. As this gradual roll out is happening, more and more consumers are realising that they cannot open an account with more than one neo bank that's working with the same Bank at the back end! For example, Jupiter and Fi are working with Federal Bank at the back end. A user cannot open an account with both Jupiter and Fi.

Why is this happening? Buckle up, it's going to get technical. India doesn't have a digital/virtual banking framework/regulation yet, but India does have a business correspondent framework. Business Correspondents are intended to increase financial inclusion through agents where the bank itself cannot access a consumer. From what I understand, neo banks are using this business correspondent framework to build their digital banking platforms. However, a Bank can only have one primary account per KYC'd customer. In Jupiter and Fi's case, both are using Federal Bank as the underlying bank. Federal can have only one primary KYC'd account, acquired by either Jupiter or EpiFi but not both.

This is where it gets interesting. At first thought, how did NO ONE think about this? It's taken over two years to roll out and only at launch, consumer's are the one's realising this? Didn't Federal Bank highlight this fact? Honestly, none of us thought of this problem, at least I didn't. Secondly, this has serious implications for neo banking in India - more than one neo bank cannot, technically, use the same underlying bank, moreover, there's no point in partnering with a bank that has a large customer base, because a neo bank cannot "open an account" of the underlying bank's existing customer. Lastly, the underlying bank can, technically, discontinue its partnership with a neo bank and still reap the benefits of the customers acquired by the neo bank. NiYo and IDFC First Bank discontinued its partnership and NiYo switched to Equitas Small Finance Bank. Of course, the underlying bank can partner with as many neo banks but from a business perspective, it doesn't make sense for the neo bank to partner with a bank that has an existing neo bank partnership, especially if the neo bank is targeting the same consumer segment.

Honestly, I don't know how this will impact India's neo banking ecosystem. It opens up more questions than there are answers at the moment. Jitendra Gupta says Jupiter is aware of this situation and is working to roll out a fix in "couple of weeks". Apparently, RBI is working on a digital banking intermediary framework but it will be at least 2-3 years before that becomes a reality.

Have you spent some time thinking about this? I'd like to learn from your experience. Happy to speak on neo banks or fintechs in general. I'm at connect@osborne.vc

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💼 Fintech's Hiring

Something interesting is brewing here. Stay tuned.

3️⃣ Fintech Top Three

1️⃣ Paytm and Mobikwik file their draft IPO prospectus in India

Paytm and Mobikwik, Indian payments companies, filed their Draft Red Herring Prospectus (DRHP) with India's SEBI (securities regulator) to list their shares on the Indian stocks exchanges. Paytm expects to raise $ 2.2bn at the IPO, India's largest IPO ever, at a valuation of $ 24-30bn. Mobikwik on the other hand expects to raise $ 255mm at a valuation of $ 1bn.

Takeaways: India's startup ecosystem is coming of age. Starting with Zomato this past week where its IPO was oversubscribed 38.25 times overall. Moreover, the retail portion of Zomato's IPO was oversubscribed 7.4 times! I hope to see the same with Paytm and Mobikwik.

I couldn't do a detailed breakdown of Paytm and Mobikwik's DRHP, neither am I qualified enough to do so. Both payments businesses started off in Fintech with their mobile wallet business and both were impacted post the launch of UPI - which is when Google Pay and PhonePe took over the consumer payments market. However, Paytm broke out of the pack as it built a strong merchant acceptance network whereas Mobikwik largely focused on the consumer side of things. Overtime, Paytm diversified into a holistic financial services offering - acquiring an insurance company, getting its payments bank license, launching its mutual fund and stock trading businesses and more. All without being a universal bank, even though it tried acquiring a bank and later denied it. Here's a very detailed breakdown of Paytm's DRHP - for those interested.

Mobikwik on the other hand, over time tried to build more use cases for its consumers by integrating with merchants across categories. It's investment from Bajaj Finserv should have, in theory, yielded a very strong proposition for consumers and solved for distribution, but that fell through somewhere along the way. Bajaj itself is now getting into those same businesses with its announcement in Mar, 2021. Recommended to read Mobikwik's DRHP - it's a much better read than Paytm's DRHP.

2️⃣ India's Central Bank banned Mastercard from issuing new cards

Earlier this week, RBI, India's central bank, imposed restrictions on Mastercard from issuing new cards (debit, credit or prepaid) from 22nd July, 2021. The restrictions were imposed after Mastercard was found to be violating RBI's data localisation norms.

Takeaways: In April, 2021, RBI also imposed similar restrictions on American Express and Diners Club. Mastercard is the "switch" between several banks, brands and consumers. A restriction on this "switch" impacts the entire network. However, it is important to note that the restriction is only on "new user" onboarding and will not impact existing users.

Of course this restriction will only intensify competition between VISA and homegrown RuPay. These card networks had more than three years to comply with RBI's data localisation norms when it was introduced in April, 2018. VISA is the largest card network in India followed by Mastercard, Rupay and then the others. YES Bank, RBL Bank and Bajaj Finserv had 100% of their card programs with Mastercard. HDFC had 45%, ICICI 36% and so on. Those banks are probably scouring to switch card networks but it will take some time for sure. Interestingly, in Dec, 2020, RBI imposed a restriction on HDFC Bank, the largest private bank accounting for 24% of India's credit card market, from issuing new credit cards after RBI found its technology systems facing severe down times. The bank has struggled to change its systems till now and expects to use Zeta's card infrastructure platform but HDFC Bank's market share remains undisputed. Lastly, wonder if this restriction impacts Razorpay and Mastercard's recurring payment interface - MandateHQ, in any way.

3️⃣ Overview of Cashless Payments in SEA

A report released by ACI Worldwide gives a good overview of digital payment method adoption across SEA. In the Philippines and Vietnam, cash transactions account for 37% and 26% of all transactions, respectively – the highest levels in Southeast Asia. Thailand, Indonesia and Malaysia have lower cash usage, which makes up for 16%, 13% and 11% of all transactions, respectively. Unsurprisingly, Singapore has the lowest cash usage which account for just 2% of all transactions.

Takeaways: Was quite surprised by these numbers. Philippines has only 37% cash transactions! Vietnam 26%! Thought it would be much higher. Then again, SEA's mobile wallet market is the fastest growing market in the world! In India, paper-based transactions (cash, cheque etc.) account for 61.4% of overall transactions. That's huge despite India having UPI and among the most advanced payments infrastructure. Paper-based transactions are expected to shrink down to 28.3% by 2025 in India.

Looking for the news digest? Read all the week’s fintech news and updates in India and SEA over at This Week in Fintech - India and SEA Edition.

🏷️ Notable Nuggets

👋🏾 That's all Folks

If you’ve made it this far - thanks! As always, you can always reach me at connect@osborne.vc. I’d genuinely appreciate any and all feedback. If you liked what you read, please consider sharing or subscribing.

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