Neobanking is getting all the love on Dalal Street, but here’s why you should choose wisely

An emerging segment of the banking sector leaves consumers and investors spoiled for choice. Neo-banking or fintech firms – which offer software and technology to streamline digital banking – have not only disrupted the commercial banking space, but also forced conventional lenders to expand their operations to counter additional competition.

Most experts say it creates synergy across the entire banking industry by pushing every player, big or small, to innovate and engage the consumer with better service and experience.

So what’s in it for the investor? Just like consumers, investors have a multitude of options for adding fintech to their portfolios, but experts have one advice: choose wisely.

“There will be exciting times ahead as fintech companies transform banking… Profit pools will shrink, unbanked customers will receive new offerings and be integrated into the financial system, and banks will be forced to providing better service and better price-value equations to customers,” market expert Ajay Bagga told CNBCTV18.com.

“It’s good for the whole ecosystem,” he said.

His remarks come at a time when most banks have consistently reported signs of healthy loan growth, even though the RBI has started to raise the cost of money after keeping the repo rate – the benchmark rate – at a low. record level for two consecutive years. years to fight the COVID pandemic.

So what does neobanking bring to the table?

These players promote better customer reach for lenders and enrich the customer experience for the end user. Investors have basically two categories to choose from: relatively new entrants offering pure fintech gaming and existing banks getting into fintech.

India’s equity benchmarks have continued to struggle in a corrective phase since October 2021 amid sustained selling by foreign institutional investors and wild swings in global markets, amid fears that aggressive interest rate hikes will continue. interest in the era of the pandemic will cause an economic downturn.

How to consider neobanking as an investment avenue

Many experts, while positive about the space, suggest caution when choosing from the many options for playing the theme.

Investors looking to tap into the fintech space need to be careful and selective, Tanushree Banerjee, co-head of research at Equitymaster, told CNBCTV18.com.

“Among the large number of fintech startups in India today, few have a profitable and viable business model… Commercial banks are certainly well positioned to tap into the space given their lending experience and network well built…Investors need to keep a close eye on cash flow and balance sheets,” she said.

And that applies not only to investors who approach the segment as pure betting, but also to those who find large-cap lenders relatively safer to bet on fintech indirectly.

Many experts say countering the disruption is no easy feat for conventional lenders, be they banks or shadow banks.

“Banks will be challenged to refresh their legacy systems and tackle fintechs. They will either acquire fintech competitors or have to build fintech (operations) within their legacy operations,” added Bagga, who is of the view that compliance and risk management are going to be key for fintech players to survive and thrive.

Then there are those who believe that regulation which is a headwind for fintech companies should work in favor of banks.

“There’s a lot of excitement around fintech markets, but we don’t think they’ll affect banking…Banks and financial institutions are big, they have scale, they’re hugely profitable, and they’ll be able to ‘provide simple and seamless banking convenience,’ said Raj Vyas, portfolio manager at Teji Mandi.

For example, the RBI’s decision to ban fintech companies from loading prepaid instruments with credit lines is expected to have a positive impact on banks, which have a large base of credit card users, he said. He underlines.

Vyas is one of many positive analysts on the banking basket as a whole.

He sees an improvement in loan demand as well as borrower creditworthiness alongside the coming economic growth.