Neobanks are sprouting up all over the world and South Asia is no exception. Though internet banking has been available for the past decade, there is a new kid in town who seems to be breaking the traditional barriers to entry in the finance industry.  Progressive attitudes and advancements in technology have now made it possible for a select set of services to be offered exclusively online. This has paved the way for the “neobank” – a service provider that offers the complete value chain of banking to retail customers and small and medium enterprises (“SME”) through the internet instead of physical branches. The global market for neobanks is set to grow from USD 18.6 billion in 2018 to USD 394.6 billion in 2026. Though the pie seems big, there remain major hurdles for these service providers to overcome; this includes establishing customer trust, gaining regulatory approval and accessing the needed growth- capital.

Neobanks will continue to pique the interest of investors in the coming years in this high risk high reward stage.

SadaPay, founded by Brandon Timinsky in 2019, is extremely bullish on the opportunity that Pakistan presents for the neobank. Speaking about his interest in the region, Timinsky believes that ‘a combination of factors makes Pakistan one of the best places for emerging fintech in the world, and [SadaPay is] excited to be a leader in that ecosystem.’  Timinsky set up SadaPay in 2019, when on a visit to Pakistan, he realised the great opportunity that the country presented for digitalisation. Pakistan has a young population and the potential to tap into a large segment that currently relies on cash as a primary method to complete transactions. SadaPay recently raised USD 7.2 million in seed-funding, the largest ever seed in Pakistan, in a round led by New York’s Recharge Capital. Partnering with Mastercard, Sadapay seeks to be a trailblazer in this sector offering its future customers a number of services including a virtual debit card, a numberless ‘smart’ debit card, and exemption from a number of fees such as ATM withdrawals, transfer fees, and Annual fees just to name a few. A close working relationship with the State Bank of Pakistan has already been established, and the State Bank is overseeing SadaPay’s private-beta testing of 1,000 initial users with keen interest. There are already 200,000 users who have signed up and are on a wait-list to be future customers; this augurs well for when SadaPay goes live and gains approval from the Pakistani Regulators. In a move to assist the development of the banking sector, on the 6th of April 2021, the Securities and Exchange Commission of Pakistan (SECP) announced that it was launching a second cohort to join its regulatory sandbox. This is a ‘tailored regulatory environment’ that enables applicants to conduct live tests of their products and services in a monitored environment and is an encouraging first step to help promote new business models in the country. The first cohort was open for applications between February and March 2020. The banking sector in Pakistan is currently dominated by local incumbents like Habib Bank Limited (HBL) who provide a great deal of competition for new players like SadaPay. 

Pakistan’s neighbour to the east, India, has a relative headstart in the space of neobanks. According to a report by KPMG, 2020 was the second-best year for fintech investment, with the country receiving USD 2.7 billion despite hurdles faced due to the pandemic. As expected, the RBI (Regulatory Board of India) mandates what services neobanks can offer, and the kinds of relationships they maintain in partnership with established financial firms (For the customer, banking services are conducted by the neobank, but monetary transactions are managed by traditional partner banks). As of today, Indian regulators do not allow for a 100% digital bank; branches that address customer concerns are still required in a prudent move to address accountability. A number of players have become leaders in this space and they include Yono, RazorPayX, Open and Niyo; all these players have established relationships with traditional brick-and-mortar banks in order to facilitate operations that comply with regulatory concerns. With over 40 million SME’s, a gig economy of more than 15 million people and a proactive stance towards fintech, this sector will see healthy growth in the coming years in India. 

Over in Bangladesh, the pace seems to be a lot slower. Bank Asia, a private sector commercial bank, is looking to form a neobank, which will allow customers to complete transactions through apps and online methods. This will be a first for the country in a bid to tap into a younger market that is increasingly using financial services, promote financial inclusion and make a move into digitizing processes. However, for now, it seems that only large and established incumbents are moving into this area in Bangladesh.   

Though there are great opportunities for neobanks, there remain vast challenges. Many ‘mature’ neobanks on the international stage have yet to attain profitability; with increased competition and natural overhead costs, new entrants are challenged to find differentiated value propositions or, for that matter, convince end use customers to switchover. Monzo, an established neobank, attempts to stay ahead by pro-actively engaging its online community. Then there is the possibility of a takeover by the old guard; First Direct ( a telephone and retail bank in the UK) was snapped up by HSBC like others. Finally, state regulations could prove to be an impediment to the growth of the new challenger on the scene. Neobanks, however, will continue to pique the interest of investors in the coming years in this high risk high reward stage. Clearly these are big markets with a lot of banked and unbanked customers. South Asia will see a lot of customers, particularly younger ones buying into the services exciting new startups provide. However, will neobanks need to launch services, such as Islamic banking to remain competitive or develop the services they currently offer? This is an exciting journey that remains to be seen.