#1) Neobanks and Virtual Banking License

This week's jazz:

  1. Adoption of 'virtual bank licenses' across regulatory frameworks in Asia Pacific

  2. Introducing my weekly newsletter


Departing gift from 2019, Public Sector Banks add to India's macro-paranoia. Will neobanks be the white knights in shiny armor?

1/3rd of banking customers in India are dissatisfied with their banks 🤷‍♂️, reports ET Wealth from its recent survey of 1,300 respondents. Surprise much?

The past few weeks have been fairly perplexing and ambiguous for the 80% banked Indian populace. After the infamous meltdown of one of the top 5 cooperative lenders in India, Punjab and Maharashtra Cooperative Bank (PMC), Indian customers are questioning the very institution which symbolizes 'trust' and 'safe-keeping' - banks.

"India is a low-trust society", a phrase that we (Indians) have heard one too many times. A distilled definition of this phenomenon is societies that have their trust-radius limited to 'kinship'. Essentially, where trust is tainted between individuals and society, employee and employer, taxer payers and the Government; a fairly evident trust deficit. Here's how the aforementioned survey quantifies this 'low-trust' between customers and their banks:

  • 1 of 8 respondents is extremely unhappy with their banks

  • 67% are unhappy with their bank's grievance resolution

  • 72% are unhappy with their bank's investment advises; 39% of dissatisfied customers have felt misled from their banks

  • 31% complain about overcrowded branches

  • 22.8% face a lack of good online services

  • 23% fault their banks for hiking lending rates promptly but not deposit rates

I am sure the first 2 slides of every fintech pitch deck paints a much more vivid, if not a morbid picture, but the problem evidently exists. So what is the fix here? Will legacy banking institutions take an immediate 180 and solve for their shortcomings?

Enter, neobanks. Digital-first, entirely virtual banking platform for both retail banking purposes and other ancillary financial services.

The game plan is simple, unbundle financial products (payment gateways, loans, integrate multiple banks accounts onto a single platform, in-depth analytics of spends and payrolls) and make it a hyperbolic 100x more convenient, robust, and seamless than the traditional players.

Asia Pacific in general has a fairly massive 'under-banked' population and the advent of neobanks could be that precise light at the end of the tunnel, catalyzing a much more personalized and financially inclusive banking experience that should theoretically proliferate banking.

The global neobank market was worth $18.6B in 2018 and is growing at a CAGR of ~46.5% (PWC), yet the regulatory environments in some of the fastest-growing markets riding atop a massive tech proliferation aren't exactly the most conducive ones.

Advanced economic nations like US and Japan have had all virtual-banks for over a decade now. Heck, Japan Net Bank was operational since 2000 and has been serving as Japan's first internet-only bank since then!

Tech talent isn't enough, a nation's regulatory environment too needs to facilitate such shifts in the banking paradigm.

Neobanks require a Virtual Banking (VB) license to truly function as a stand-alone banking institution without any physical presence. Without a VB license, these new-age solutions have to leverage incumbents banks and their regulatory stack upon which they build their proprietary risk-algorithms to underwrite customers and offer diversified financial products.

The challenge then is that the 'ultimate' function of a 'neobank', which is to hopefully disrupt the traditional banking institutions and provide customers a one-stop shop, including a retail-banking experience of opening up 'savings' account to deposit and withdraw cash, etc, goes for a toss.

In that case, it's worth a quick glance into budding markets and learn about their regulatory dynamics and how they have been offering these 'virtual banking' licences:

  • China and Hong-Kong: 12
    Mybank (Alibaba), aiBank (Baidu), XWBank (Xiomi) and WeBank (Tencent) received their private banking license from Chinese Banking and Insurance Regulatory Commission (CBIRC) while HongKong Monetary Authority (HKMA) has issued virtual banking license to Ant Bank (Ant Financial), ZhongAn (large insure-tech) and 6 others (list found here).

  • Taiwan: 3
    Rakuten International Commercial Bank (Rakuten +IBF Holding), LINE Financial (Japanese LINE Group, Taipei Fubon Commercial Bank, and Standard Chartered), and Next Commercial Bank.

  • Singapore: 0
    The Monetary Authoritative Singapore (MAS) is accepting applications to authorize 5 new virtual banking licenses; 2 digital full bank licenses (wide range of financial services and deposits) and 3 digital wholesale bank licenses (to serve SMEs and other unorganized sectors).

    Interestingly enough Grab (Singapore's ride-hailing giant) and Razer (gaming hardware manufacturing company which surprisingly already has a payment arm - Razer Pay?!) have officially expressed interest in applying for licenses.

  • India: 0
    Virtual banking licenses in India still aren't provided and the Reserve Bank of India (RBI) stays strong on its stance of prioritizing physical presence in some shape or form. However, RBI earlier this year had introduced a Regulatory Sandbox (RS) to "foster responsible innovation in the financial services" (RBI) which still foreshadows an array into the possibility of 100% virtual banks.

  • Malaysia: 0
    Bank Negara Malaysia, the central bank in Malaysia plans on doling out some of the first VB licenses by the end of 2019.

Coming back to India and what would / should help in filling the trust gap that the society already has. The current startups positioning themselves as neobanks are every bit as exciting and promising as they seem to be. It'd be remiss of me to not highlight the massive challenges that RazorPayX, Open Bank, NiYo, Yelo, and others in the making are already addressing. From building a 'global forex card' to 'zero balance account for SMEs', the scope of innovation and thereby, the bullishness within the space is at an all-time high.

Will neobanks immediately solve for the trust deficit in already underbanked and high cash-transacting nations like India? No. But as the private market continues to pump capital into new-age solutions and the regulatory environments ease, neobanks just might be the perfect antagonists to all the PMC Banks out there.


"What do you need me fo, if you already know how to flow?" - Lupe Fiasco

This marks the beginning of my personal newsletter. Writing has been innate to me but over the past few years, I kept stumbling into self-inflicted inertia. The irony of consuming information across multiple avenues is that overexposure to it may drive you to believe that anything you write hereon would plainly be classified as 'redundant'.

"You do world a service when you make an important idea more accessible" - David Perell.

I had reached out to David over Twitter to pose the exact same conundrum I was going through. The response he solicited resonated with my colleagues who had been saying the exact same thing - "just write". So with this, I welcome you to my world, where on a weekly* basis I'll try to dive deep into whatever that has been keeping me busy, mostly around the tech space that I operate in.