BCG report finds potential, pain-points of digital challenger banks business in India

BCG report finds potential, pain-points of digital challenger banks business in India
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10 Jun, 2021

In terms of revenue pool of the global digital challenger banking (DCB) business, India is an order of magnitude larger than other South East Asian markets, per findings of a new report. 

The report, ‘Emerging Challengers and Incumbent Operators Battle for Asia Pacific’s Digital Banking Opportunity,’ released by Boston Consulting Group (BCG) on Wednesday, said that the Indian subcontinent has so far seen the emergence of three types of players in the space – banks’ own attackers such as 811 by Kotak Mahindra Bank and Digibank by DBS, new attackers such as Niyo, Fi, Open, and Jupiter, and ecosystem players such as Paytm and Razorpay. 

However, there aren't any pure challenger banks with no legacy and a full universal banking license in the underbanked populous of a market, BCG added. The second type, new attackers that compete by providing a completely modern customer experience for financial services products, often acquire limited purpose licenses but rely on partner banks for majority of products. 

The ecosystem players, with large customer base and multiple use cases who focus on finance as an added feature, often also have limited purpose licenses and distribute products of other institutions. 

While strong digital capabilities are common across the board, there are choices over which party warehouses the risk originated digitally versus which one acquires and presents the front-end to the customer, BCG said.  

Indian banks are rapidly adopting micro-Application Programming Interface (API) architecture for both risk and transactions, with emerging players attempting industry-wide standardization, BCG added. 

“The local Indian market is large enough for domestically-focused, balance-sheet-led Digital Challenger Banks to create value, while the substantial local technology talent provides a welcoming pathway for technology-driven operators,” the report said. 

Gaining a digital banking license is a critical step for DCBs. BCG identified six qualities that an applicant should exhibit to regulators -- innovative, committed, relevant, sustainable, prepared. 

On the other hand, Indian regulation has made it critical for unregulated pure-play fintech operators to team up with regulated entities to access key national protocols such as eKYC, as well as certain products such as savings and current accounts and cash transactions, thus ensuring greater collaboration. 

“In financial terms, there remain considerations around currency depreciation and its impact on dollar-denominated returns. However, these considerations are true for multiple other developing economies. India’s attractive demographics and high growth potential needs to be built into the return expectations to form a comprehensive view of local market opportunity,” the report added. 

Apart from India, five key markets in Southeast Asia -- Malaysia, Philippines, Indonesia, Vietnam -- are countries to consider while launching successful digital challenger banks. The countries offer potentially fertile ground for growth, framed by positive market moves and encouraging demographics, BCG said. 

The Asia Pacific (APAC) region is home to about 20% of the gobal count of 249 digital challenger banks as of the end of 2020. Over 70% of them were established between January 2016 and December 2020. Of the 13 global players enjoying profitability, ten are based in the APAC region, the report found. 

The report was prepared by BCG Singapore managing director (MD) Jungkiu Choi, BCG India MD Yashraj Erande, BCG Singapore marketing specialist Yang Yu and Camille Jasmine Aquino, and developed in partnership with LinkedIn India.