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Neobanks signs of failure – Industry roundup: 24 June

DBS Bank India acquires 9.9% stake in NBFC to deepen the MSME space

DBS Bank India Limited, an Asian-based financial services group in eighteen markets, has purchased a 9.9% stake in Svakarma Finance, a non-banking finance company (NBFC) that provides relevant financial solutions to micro enterprises through a combination of direct lending and co-lending. DBS Bank India's franchise expansion strategy envisions significant growth in small-medium enterprises (SME) and consumer businesses across 300+ locations and 500+ branches. DBS expects to support microenterprise lending in a cost-effective manner, both through its own expanded franchise and through partners.

Svakarma is has been know to target micro-enterprises through an “industry segment and cluster focused delivery model” that leverages smart technology and data.

RBI opposes non-bank credit lines for fintech PPIs

The Reserve Bank of India stated that prepaid payment instruments (PPIs) cannot be loaded using credit lines from non-bank lenders, confusing the wallet and buy-now-pay-later industries.

According to reports, some fintechs based in India collaborate with banks to issue prepaid cards. However, other fintechs, partner with a nonbank financial company (NBFC) to provide a credit line that is used to load money onto the customer's card. RBI's recent report stated that PPIs such as wallets cannot be loaded using credit lines issued by non-bank lenders. The central bank emphasized that any such practice should be discontinued immediately, and noncompliance may result in criminal prosecution under the Payment and Settlement Systems Act of 2007. Additionally, PPI is said to be loaded using a debit/credit card but not with an NBFC credit line.

The RBI expressed concern that fintech companies are increasingly using credit lines to replenish prepaid cards as a method to compete in the Buy Now, Pay Later (BNPL) market. The central bank made it clear that PPIs cannot be used as a credit instrument, raising concerns that fintechs have been aggressively extending unsecured lines of credit in various forms leading to the system's risk. According to reports, "fintechs have been using a PPI BIN (a bank identification number) to do a quasi-credit card literally, and RBI is not okay with it.”

CBDC development by Qatar Central Bank

Every nation is reportedly working to implement Central Bank Digital Currencies (CBDC), which have emerged as the next significant development in financial and technology innovation. Qatar is also in the preliminary stages in evaluating CBDCs. The Governor of the Qatar Central Bank (QCB), H E Sheikh Bandar bin Mohammed bin Saoud Al Thani, indicated during the Qatar Economic Forum that the bank is actively investigating the potential of a CBDC and researching the appropriate technology and platform.

Aside from discussing cryptocurrency and its potential use in Qatar, the QCB governor stated that, "currently, crypto are a technological innovation. It could usher in a new era of fast, cheap, and easily accessible financial services. However, crypto assets that are not supported by monetary authorities may be less credible.”

Reports indicate that Qatar is currently the focus of international media due to the country's hosting of the FIFA World Cup this year, which has also been linked to cryptocurrency for months.

Rapidly growing neobanks now show signs of impending failure

According to a recent research study conducted by Simon Kucher, less than 5% of the 400 neobanks around the globe are recovering costs. It is indicated that Chime and Varo, two US neobanks, also called opposition/challenger banks, have hit stumbling blocks. Chime shut down customer accounts as a result of scams, and Varo lost a significant amount of money, draining investors’ funds.

The Consumer Financial Protection Bureau (CFPB) is said to evaluate bank collaborations, also known as "rent-a-bank" or "rent-a-charter" programs, on which many neobanks rely for legitimacy and FDIC insurance coverage.

Additionally, reports state that challenger banks, like many other types of fintechs, have had their equity miscalculated.

Neobanks are often considered to be fintech start-ups that make banking simple and often affordable through well-designed mobile applications. In fact, they have been successfully expanding their user bases. According to Christoph Stegmeier, Senior Partner, Simon Kucher, a billion accounts have already been opened in digital banks worldwide, and in the last quarter alone, neobanks attracted close to six million customers. Currently, there are approximately fifty challenger banks in the United States. Chime now has over twelve million users and Varo with over four million.

How quickly neobanks can transition from scale to profitability is a key concern, according to Stegmeier. Startups that just concentrate on expanding will run out of money eventually. Stegmeier predicts that valuations will face significant upward pressure in the next 12 months. The profitability of neobanks will be under pressure as well as more potential for buyouts.

Many neobanks rely on the profits they make from interchange fees. It is expected that interchange costs will not decrease, the costs of acquiring new customers, running the underlying technology, and paying individuals remain high, according to Alex Jimenez, Managing Principal, EPAM, a consulting and innovation services firm.

Challenger banks must quickly advance to resemble traditional banks by providing not only payment choices but also credit and investment products in order to survive, reports indicate.

Most neobanks are said to use "hook products", such as no-fee overdrafts, to attract customers. However, traditional banks are now reducing overdraft fees in response to CFPB pressure. Other neobanks that focus on credit must constantly seek low-cost sufficient capital to fund their next loans according to reports.

According to reports, the future of many challenger banks is dependent on funding from equity capital firms. Additionally, Venture Capitalist (VCs) are expected to focus on fintechs with a more well-rounded business model than the ones that are more monoline. VCs are said to become “more diligent in assisting founders in focusing on profitable, scalable business models,” commented Jay Reineman, partner at Propel VC.

Norway's central bank raises its key policy rate to 1.25 percent

The central bank of Norway raised its key policy interest rate from 0.75 percent to 1.25 percent on Thursday, stating that "the prospects for a longer period of high inflation suggest a faster rise in the policy rate than projected previously."

According to reports, Norges Bank stated a larger-than-expected decline in unemployment and higher-than-expected inflation as factors in its decision. The bank further stated that "with rising wage growth and imported goods inflation, inflation is likely to remain above target for some time." 

Ida Wolden Bache, Governor, Norges Bank, predicts that interest rates would rise to 1.5 percent in August 2022. Bache further added that a rate increase now will lessen the likelihood that inflation will continue high and necessitate a more pronounced tightening of monetary policy in the future. According to the bank's prediction, the policy rate is expected to increase to approximately 3% by the summer of 2023.

Binance.US eliminates fees on Bitcoin trades

Binance.US, an American cryptocurrency exchange, no longer charges fees for buying or selling Bitcoin in US dollars, including eliminating fees on Bitcoin trades for the three most popular stablecoins: Tether (USDT), USD Coin (USDC), and Binance USD (BUSD). These stablecoins are pegged to the US dollar through the use of USD reserves or other highly liquid financial instruments.

Brian Shroder, CEO, Binance.US, commented that the change is "an opportunity to revolutionize the way fees are approached in our industry, increase accessibility to crypto, and help our market and customers in a time of need."

Binance.US is the first American cryptocurrency exchange to eliminate trading fees on multiple Bitcoin trading sets. It is said that this is a significant, yet a perplexing decision as the company’s primary business model is based on such fees and especially given the high volumes of Bitcoin and USDT traded on most days.

A spokesperson for Binance.US stated that “Bitcoin will serve as a test for the model, which could potentially be rolled out across other tokens and pairs down the line.” Similar to Binance.US, Jack Mallers, CEO, Strike, a Bitcoin payments app, reduced commission fees on Bitcoin purchases to 0.3% in 2021. Mallers expects future competitors to also join the race and lower fees.

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