NeoBanks: the future of Banking?

Rajat: Hello, everyone. Welcome to Matrix Moments. I am Rajat Agarwal, Director at Matrix. I lead our financial services and education investments. In today’s podcast we will discuss the trend of Neobank’s and Neocards that has taken the fintech world by storm. This space has seen over $5 billion of venture capital investment, perhaps one of the hottest place in fintech these days, with 50+ startups that have been funded globally. And we are seeing several unicorns already emerge in this space with Revolut, Moven. and Chime in most parts of the world doing this well.

In India too, we are beginning to see several interesting companies emerge. And today as guest we have to stellar founders who are attempting to script the Indian story in this super interesting space as well as Vikram, MD at Matrix.

So let me introduce our guest on the podcast. First up is Jiten, founder of a yet-to-launch neobank called Jupiter. This is his second podcast with us. And for those of you who don’t know him, Jiten is a serial entrepreneur, an ex-banker who then founded Citrus pay. Exited to PayU. One of the best exits that a fintech has delivered in India.

Then at PayU, he built LazyPay. Buy now, pay later and consumer lending proposition. And has recently moved out to build Jupiter.

The second guest on the show is Anurag Sinha. He is the founder of a neocard startup called OneCard. Anurag too is an ex-banker turned serial entrepreneur. He spent about a decade at - 13 odd years at ICICI where he ran pretty much most of their cards and payment related business over the years. Post which, he joined Walnut which is a personal finance management startup as a co-founder, helped build their lending business. And as recently started the OneCard business.

Last is Vikram. He is the MD at Matrix India and on the board of most our financial services investments. Over the last year or so, Matrix India has led investments in five different neobanks, perhaps many more to come. But, more today than so far – over the last year or so, Matrix India has led investments in five different companies in the neobank and the neocards space including both Jupiter and OneCard. And perhaps we have done more than any other VC in India so far.

Vikram: Yes. Hearing that introduction, I was just seeing these two elder statesmen of the industry who are my gurus in fintech and super excited about partnering with both of you guys. Thank you for doing this.

Jiten: Thank you, Vikram.

Anurag: Thank you, Vikram.

Vikram: I am really excited that you have taken the plunge and stop giving only gyan and now really starting to do. Actually both of you have also invested in a lot of early startup. So, would love to hear a candid conversation. And Rajat over to you.

Rajat: So to kick things off, question to each of you and perhaps we can start with Jiten. Neobanks and neocards is perhaps the most abused term these in the industry, right? Every other company that we are meeting wants to be the neobank of x or replicate the success of some of the global peers. So, how do you think about this space? And what are some of the underlying factors that in your mind make India neobank ready? And perhaps you can also then talk about what you are trying to build?

Jiten: Sure. Thanks Rajat and Vikram. I think let’s sort of understand that what is this neobank, why every fintech is thinking of neobank as a next business model. And the funding in the sector is the obvious one which is sort of luring all the entrepreneurs to think that this is the next big thing and maybe all the VCs are now swayed by this term rather than the lending which is now no more the hot term.

That been said, I think if we look at it, what’s happening is if we look at the fintech landscape, today the fintech landscape where the consumers are having a very transactional relationship with the companies operating in the fintech space. And fintechs are increasingly realizing that to make money over long run and to sort of reduce their CAC and then monetize their CAC into LTV and recover it sooner rather than three year – five year horizon, they need to build a trust relationship with the consumer.

And the trust relationship in today’s era is where the consumer is having the most amount of trust in the bank. And this is where a consumer keeps his money. And I think this where fintechs are realizing that by sort of remaining monoline and having a transactional relationship is no more the future. And it makes complete sense to move to multi line products and build a trust relationship with the consumer. And I think that’s the reason why fintechs are moving towards neobank.

Coming specifically to me, I think the reason I sort of gravitated towards this business model is I had the same realization that after doing this two stints with Citrus and LazyPay that I think if you sort of provide a full stack solution to consumer in financial services space, there is a large amount of value creation which you can do. So, today if we look at it be it payments or lending which I have been involved in in the last two stints, I think there is still some amount of CAC versus LTV issue. Payments sort of nowadays become more of an entry point. Lending is going through its own set of challenges. And as far as consumer is concerned, consumer is confused that, oh, which entity is the best for me for which kind of product while they expect their bank to be the best among all for all their financial services requirement.

And I think that I feel that this business is a business which can sort of survive for next 25 years, 30 years, 40 years. And this is not a five-year gig or a seven-year gig. So from that perspective when I was thinking that what will make a business sustainable on its own without depending on the funding requirement forever, I felt that a low cost deposit access with the ability to build relationship with the consumer is going to be key and that’s where I gravitated towards this space.

Rajat: Got it. Thank you Jiten. Anurag, over to you. What’s your view on this? And given that you have taken a more credit first approach to building this out, would love to get your thoughts.

Anurag: Yes. Agreeing to few points which Jiten said that I think all of us apart from things that Jiten spoke, a very large untapped opportunity is also another point that the current providers be it banking, savings, credit cards, loans the under penetration across every category is very large. And I think the way our economy is moving and young Indians are joining the workforce and they want simpler product, much more digital oriented product. So from a bank to neobank theory I think gets much more fructified when we match these two trends together.

Coming back to our approach, and I agree that this is a trust business, of course product differentiation, consumer experience, risk management, you got to build those IPs if you want to build a long term company here. However trust is extremely important. And what we saw that given that there is a large untapped opportunity in credit, probably it was easier for us to build a trust for the user and we are giving out money rather than taking their money.

Eventually all these model have to converge where we are holding a large product penetration of the same customer so that we can capture not only the trust and the attention of the user, of course make multiple revenue lines for us.

As a company, we are targeted to build a neocard which is essentially building a new age credit card experience for young Indians where they can manage the entire experience of credit card through mobile in a smart way and also help them not only manage this card but the overall credit experience for them. Make sure they stay on course as they build their credit history for their life. So that’s what we are going after.

Vikram: So I can add little bit of thesis in why we’ve been bullish about this space. I think the difference with India versus other markets is banks are pretty good in India. They are actually more tech first than most of the banks. Both of you guys built tech for the banks.

Jiten: That’s right.

Vikram: So banks are pretty good. Their NPS is actually much better than European or UK counterparts. So what’s the real opportunity there? I think the opportunity for me is sort of three structural factors. So the first is that suddenly over the last 3 - 4 years, there is an explosion of bank accounts. And so the infrastructure and the bank brands are not able to keep up with that exposure and able to serve them well. So one is suddenly like Anurag said there is this huge opportunity where there are all these bank accounts and they are either underserved or their relationships are not okay or the trust hasn’t been established so there is that opportunity.

The second is IndiaStack plus deMon plus explosion of payments, suddenly digital banking is a pull product and not as a much push product. So CAC has suddenly gone down for some of this stuff. I think the third is for these consumers both savings behavior as well as spend behavior is just not formed. And I think the opportunity for all of us is to actually nudge them towards the right savings and spend behavior, and truly, the right behavior for the consumer not just for the company. And I think that’s the role that neobanks can really play. And I do think that they will co-exist along with the banks. I think the Indian banking is pretty good and it will co-exist. And I know both of you guys are partnering deeply with some of the established banks.

Anurag: I think completely. In fact, right now if you see we always keep answering this question why now? And I think while I agree with whatever Vikram said, I think there also a big realization amongst bankers that, okay, they would love to partner with our platform products to reduce the time to market and also learn fast. And one other thing we bring to the table as you rightly said most of the Indian banks the technology is hardly 10-15 years old. So they all started with core banking. They have internet banking, mobile banking. Transactions are moving from branches to digital platforms, it’s all there.

But I think Indian consumers are still looking for much deeper simpler experience that’s where the iterative process of a startup ecosystem or a setup is much better suited to get to the right product faster. And that’s where we see that the partnership which we have with bankers now including regulators is much more forthcoming than probably 3 – 4 years back. Jiten can add to it.

Rajat: Just double click on that also which you answer this Jiten which is what – everybody ask me what is neo about it. Iss mein naya kya hai? And this happens from the bank. So you do you define neobank.

Jiten: I think it’s an interesting question what you are asking because I think if you look at the consumer behavior today, which his primarily emanating from mobile phones, on one side the consumer are used to Flipkart, Swiggy, Amazon, Zomato kind of experience. And on the other side, there are these banking apps which has been there on their phones since 2008 or 2009. And it’s an expectation which has changed from a consumer side and rather than I would say that banks are doing bad job. It’s just that the consumers have fast forwarded their expectation. And they are expecting a similar experience, similar service similar kind of consumer first approach when they deal with their bank. And I think this is the neo thing if you ask me as compared to what banks are not doing right.

Rajat: Anurag?

Anurag: I think just to add to the app thing is that typically banking apps they are thinking is like a super app. Typical bank app will have some 150 – 170 services to offer. And it’s really complicated for people to understand. So what I think what all of us are trying to do, okay, probably make it whatever the user need right now and user is happy to – I mean the Indian users what we have learnt is quite discerning. I mean like ecommerce he needs three ecommerce app. Even for food delivery they need three food delivery app which is very different in lots of other developed markets where you would see a single brand owning this.

I think opportunity for us is to they won’t say that, let the complexity be under the hood, you offer me [indiscernible] user experience.

Jiten: I will extend the argument saying that so - and I keep using this example very often so in 2008 we had this Nokia phone and if anybody asked you that are you happy with your phone, you would say that yeah, it works. I am able to make and receive calls. There was no issue. But at the same time, everybody moved to smartphone later because they found there is somewhat better experience other making and receiving calls they could do multi more things.

I think today if you look at the apps in the financial services space and I would not call just banking, I think they are menu apps. There are apps where everything is available for sure. But what is not there is what consumer – how consumer would like to consume. So if you look at let’s say Amazon like Amazon gives you that, oh, you bought this, people in your segment also bought this. And people in your segment gave reviews like this.

So that experience is what consumers are used to now vis-à-vis, okay, this is a menu. Banks of financial services institution expect that consumer is supposed to know what he wants to buy which is not the case. Consumer wants to discover what he wants to buy rather. Or, he wants to learn in terms of financial literacy. And I think that’s the big gap which could be sort of bridged by introducing these new things.

Anurag: Just to add we will give you a design tip. Why those menus exist because most of these apps are built to migrate customers from branches. If you go to branches, we have counters. That’s why we have menus. So if you go to branch, loan counter, you go to a cards counter, you go to a bank – that’s how the apps or internet banking interfaces are built to help people migrate. So they don’t see much change from what they have been used to. That used to be one of the big design principles in all the banks by the way.

Rajat: It’s very interesting. What you guys have just said is more on the frontend user experience side. What’s happening in the backend because I know both of you are actually thinking of choices on thin stack versus full stack on the backend tech as well.

Vikram: And I would just add to that question if you look at sort of the neobank, there is the frontend which is relationship management, new products innovation as well as sort user experience which you can change into a new. But then there is the risk management, there is a core banking system, their interaction with CASA, how does all of this sort of come together?

Anurag: Yes, I think that’s probably one of the biggest differentiation of the current crop of neocards and neobank as we are talking about because we are going beyond just the user experience. And we are actually integrating with much deeper stacks or building our own stacks so to say depending on the situation. Now this is where in fact a pure play ecommerce player versus fintech player, so the bank’s expectation is that if you are asking for such a large partnership, then what are you investing in this in terms of risk management? So, for example, compliance, KYC, security. Security is extremely important because you are performing a lot of function on behalf of bank. And you are the interface of the choice. And hence – so I think we are investing heavily into that. Our stack is compliant day zero, it goes through certifications. It goes through different audits of departments of the bank. There are other parties, regulatory bodies, they do certification. So, I think we are moving towards that.

Good news is there is also overarching changes happening in the ecosystem like, for example, while still full clarity is not there for KYC using Aadhar, but the account aggregators are coming in a big way to drive open banking. Hopefully next three to six months, this will improve UX for the entire industry not only for us. But of course, we would be the first one to capture the value through that because we can ride on that.

Jiten: As you rightly said that the technology is one of the important differentiating factors other than the frontend user experience. I think why it is so because if you look at it, now it is not changing in decades. Technology is changing in every two or three years. So fortunately when you are sort of building technology, you have the ability and flexibility to think that what makes sense to build a mobile first technology, what is the backend behind it, what are the systems you need to build so that you can manage risk in more intuitive way rather than saying that, okay, give me this paper. Let me see this transaction manually and all of that. So, I think that is the beauty of building a bank in 2020 I would say.

And I think that’s the thing which is the biggest differentiator I would say. And that naturally gives the advantage in the frontend side because today if you look at it and I keep talking to banks for them to make any change, it takes them like 3 to 6 months because they are saying our backend, we need to speak to the vendor, we need to sort get them a request change, and then the new feature can be launched only after six months. So I think that is the backlog plus the weakness which the existing technologies have.

And when you build new, you can sort of factor in based on the issues which was seen last five years I would say. And that gives a natural advantage in terms of what new experience you can deliver to the consumer.

Anurag: In fact, Vikram you mentioned that a lot of Indian banks have good tech because they have been built in recent past. I think two important trends which are happening right now which is affecting the cycle what Jiten spoke about really important. One is I think the need of personalization. The Indian consumer is right now used to personalization across every platform. And, the way most of the banking systems have been built is they want make sure that everybody sees the same.

There have been attempts made like for wealth management should have a black color or privilege banking. But people are going beyond that. I want my card, my offers, my lines, my rate, my rewards. [indiscernible] if I have done this, you should be able to guess my next transaction and [indiscernible]. And that’s the level of customization difficult to do in the current tech structure.

Second thing is I think iteration. As we said, from the time a customer complains then go to product management, then go to tech desk, then go to tech desk, then go to implementation, it’s six to nine months cycle. By that time, the user changes. I think those are the things where our kind of approach can do better. In fact, I am now see most of the interaction - most of these bankers are not looking at us to reduce cost. We will reduce cost anyway. What they are looking at we can actually manage risk better. We can probably drive more adoption, more engagement, in a way more revenues. And that’s the shift which has happened from a tech vendor to reduce cost to basically drive proposition.

I think that’s the biggest change we have seen in the way we interact with bankers now. We have been on other side, so we understand the difference, change of mindset which bankers are going through [indiscernible].

Vikram: Maybe you want to move to regulation.

Rajat: Yes, actually both regulations and the bank partnership given that both of you have taken bank deep partnership approach. How does this whole cooperation/competition scenario play out in your minds? And what are bank saying and what are regulator saying? Are you guys thinking about licenses? Is that going to happen in India?

Jiten: I think if you look at it globally the trend, the regulators globally are realizing that the today’s consumer has different needs and different way of consuming services over mobile. So in UK or in Hong Kong or Taiwan and Korea, the regulators have come out with the virtual banking licenses. In India if you look at it, the regulator has been quite progressive that way. They have come out with the category of licenses like payment bank or small finance banks and all of that.

I think when it comes to moving to the internet only banks or the virtual banking licenses for that matter, I feel we are not far away. I feel like we are three to four years away. And I think that would definitely be a boon for all the tech entrepreneurs who have aspiration to create a bank.

From today’s scenario, the partnership perspective I think banks have matured. Banks are like no more feeling insecure that, oh, if I partner with this guy, this guy is going to take my revenue share or this guy is going to take my customer away. Rather, they feel that let me learn. Let me sort of see that how things can be done differently. And fintech entrepreneur is like, okay, there is a guy who is expert who is doing very good job at managing regulator, regulatory risk, compliances, KYCs and all of that and let me leverage that.

So I think there is a beautiful relationship between company like us as well as a bank where both the guys gain from each other and each other experiences, and then create a long term franchise for consumers.

Rajat: And it seems like the top banks in the country are doing this.

Jiten: That’s right.

Anurag: I think one thing for sure, if you are building a serious play like this in fintech, regulations they are there and you got to work with them. So that is one. Second thing I just agree to what Jiten said the banks are realizing that they are seeing this as a learning opportunity to learn and reorient their own business models. They are of course progressing on their own strategies as well, but this is an additional input to that.

Secondly, I think we all have to remember one thing that I spoke [indiscernible] large under penetration. Even the largest banks leave aside the SBI, the markets are less than 10%. There are banks which are valued very high having 3 to 4% market shares, very large lending companies are operating at 2% - 3% market share, so it’s a very large opportunity and that is what actually makes exciting for all of us. So banks are saying we are going to learn and we are going to reorient our own model. We are looking at okay, are we going to work with them, learn, and then build our own model. So I think that’s where we stand.

Vikram: I would add and agree with Jiten, that the regulators are actually very progressive. And if you look at how fast both the regulator, different entities have adopted things like whether it’s UPI, whether it is the way data is getting used for the IndiaStack, actually it’s very progressive. And if they make mistakes, they correct them very quickly.

I think the most important thing that the overall banking system and regulator wants is that A) Access. And all companies are providing more and more access to financial services for a large set of consumers. And the second is that they are good trusted custodian of money. And they are able to protect consumer interest.

To me, I don’t if it is three – four years and so on, but it is incumbent on all of us to say that we can do those two things well. And that’s I think why we need to make sure that we all build these companies in a measured way. And if you build it in a measured way, I think the regulator will respond very fast.

Jiten: So actually, Vikram, that is my biggest worry as well if you ask me. So when Rajat started this podcast saying that today every company on the street wants to become a neobank, I think that’s my worry. The worry is not about that there is increased competition. The worry is that the one guy acting bad or one guy making mistakes which sort of shakes consumer’s trust, is going to spoil the whole industry, spoil the whole ecosystem. And I think that’s why I sort of - I am like super paranoid not just keeping our business model work, I am also sort of meeting at their entrepreneur and saying, what not to do and how to watch themselves, so that the risk is not being created in the ecosystem.

Anurag: Completely agree. I think that’s the only thing we I am like be it regulation, security and also trust because in this area once you break the trust, it’s very difficult to gain back. Look at the banks we might argue that they don’t have digital interfaces, but still they have customers because people still keep money with them. They can trust them. So trust is an extremely important factor in this industry across all products.

Rajat: Okay. Moving on, how do these companies make money given what’s happening in the whole MDR, UPI regimen? If I look at global neobank, lot of their money comes from just debit card MDR, so where does all this stack up in India?

Vikram: After making all these investment, I also want to know.

Jiten: I think it’s a factor of trust again I would say that. So the investors need to keep in their portfolio companies. but at the same time, I think this model by the way I have to admit that this model is not easy. This model has a longer gestation period, has its own set of execution challenges. But that being said, I think if this model is sort of - can be continued for next 10 years, it has a definite high rewards for investors as well as for consumers as well as for entrepreneurs because I think what you are doing is you are creating a consumer franchise where consumers are trusting you to avail or provide them financial services not just one monoline product, but across the financial services.

And if you are able to do that, the whole issue around CAC to LTV all of that go away. So definitely patience is the key.

Anurag: Yes, I just want to add that long term vision is extremely important. There is no shortcut gains here because in long term you have multiple revenue lines, interchange is one, MDR is one. But beyond that you can build lots of engagement oriented products, credit products, and [indiscernible] there, other fees are there. Services are there. And as long as you are keeping the relationship with you, you can cross sell multiple products. So I think in long run, everything is fine.

But we need to traverse the short run. Make sure that we get to the right customer to choose us, stay with us. In my opinion that’s much more difficult problem to solve for us right now.

Vikram: So, I will give you the investor perspective. From an investor perspective, this business has a lot of moving parts. So there is balance sheet plus regulatory partnership, there is product innovation. And then there is business innovation which is business model innovation rather. So, for us the only security is actually founding teams. And one of the reasons that we backed very seasoned founding teams in this business who have done different parts of this at different points of time is actually that.

And Jiten, I am already [indiscernible] you already have my money. But I would say there is a trust that you can actually build these models if you are able to scale consumer trust.

Anurag: I think we will have our own models. If we look at products in Europe, mostly they were built around cross [indiscernible] at the first product because that was the big problem to solve. If you look at products like in US mostly they were credit focused because that was a big opportunity. If you look at Lat Am, they [indiscernible] full bank proposition. They do savings account, credit cards, loans, because they see okay, can we remodel the entire experience across all products. I think we will have something of our own which we will get there. I still have very early days for us to make assumptions.

Rajat: Great. Thank you everyone. I think we can keep going on and on and it’s a personal area of interest for all of us. And we are very excited about this space. We truly believe this can be game changing for India fintech.

However, it’s still early days. And there are several risks. Some of which we have talked about today. There is consumer adoption race. There is scaling risk and so on. But, yeah, I think the opportunity is exciting. And we are seeing great entrepreneurs coming to this space. And the role of regulators and banks is also critical and important as we scale this up, and for any of these companies to truly succeed.

So here’s hoping for the best. And thanks to Jiten, Anurag, Vikram, and all of listeners for tuning in today - before we wrap up quick - I wanted to get in a few rapid fire questions for all our guest today. So, quick one or two line answers for each of this. If there is one thing that you really wish for that could help your business or as a founder, what could that be, Jiten, Anurag, and even Vikram?

Jiten: Wow, so I would say actually regulatory wise the virtual banking licenses if it comes, that would be a game changer.

Anurag: I would agree with that. That kind of gives us a very long term – it aligns with our long term vision of building these businesses.

Vikram: A more near term wish which is mass switch of high quality talent from other areas to fintech and new line startups.

Rajat: Yes, okay. Distribution versus product, which is more important?

Vikram: Founders.

Jiten: I would not say either/or. I would say both. Both are super important.

Anurag: I agree. But if I had to choose, I would choose product first.

Rajat: One advice for fintech founders?

Jiten: Stay put longer.

Anurag: Yes, and figure out your differentiation because you cannot just build business just on payment, just lending. It has to slightly more much differentiated.

Rajat: Vikram?

Vikram: Product first is your strength and risk can be a weakness.

Rajat: One advice for VCs?

Anurag: Long term vision.

Jiten: Yes, patience. Patience is the key.

Rajat: One advice for LPs?

Anurag: I am not going to answer that.

Rajat: One book recommendation?

Jiten: I am actually reading right now the Good to Great. So I am liking the book.

Anurag: I like this book that’s Irrationally Irrational, Dan Ariely. And we know we are building a lot of things about changing consumer behavior. It has been the predominant one in India, so I love that.

Rajat: Vikram?

Vikram: Trillion dollar coach, just reading Bill Campbell’s book.

Rajat: Super. Thank you everyone. It’s been a fantastic podcast.

Jiten: Thanks Rajat. Thanks Anurag.

Anurag: Thanks Rajat.

Vikram: Thanks guys for doing this. Appreciate it.