Collaborating for Growth: Exploring Neobank-Payment Provider Partnerships

This Indian Independence Day, we thought we’d take a look at an exciting development in the neobanking space, one that is aimed at boosting the financial freedom of players in a conventionally underserved segment – small and medium enterprises, otherwise known as SMEs.

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Much has been written about neobanks already, but deservedly so. Neobanks, which are contenders to conventional banking institutions, have long since moved beyond providing a challenge to large banks and financial institutions. From FinTech startups to traditional banks coming up with standalone mobile-first or digital-only offerings of their own, the rise of neobanking has occurred at an unprecedented pace worldwide. The growth we’ve seen is hardly surprising because neobanks have been reaching out to provide services to segments that were previously not given as much consideration as more conventional ones were.

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What’s more, neobanks offer innovative features and products different from traditional banks, including fast account opening, free debit cards, instant payments, cryptocurrencies, lower costs, mobile deposits, P2P payments, mobile budgeting tools, user-friendly interfaces, etc.

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That said, even today, with the proliferation of financial services enabled by players like neobanks, segments like SMEs remain inadequately served. Why is this a problem? Consider this: apart from being the lifeline of manufacturing, retail, agriculture, and other key industries, SMEs contribute massively to a country’s international trade. SMEs are also the largest contributors to company registrations in any economy and represent a massive pool of opportunities as the creamiest layer of companies from this segment – more often than not – go on to become pioneers in their areas. Yet, it would be fair to say that despite all these contributions to the evolution of the next-gen business landscape, SMEs have received the short end of the stick.

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Neobanks’ Solutions: Solving for SME Concerns

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What compounds this problem is that historically, SMEs have faced challenges in availing banking services, with the bank innovations being inclined towards large corporates due to their high profitability and large loan books. SMEs always had to make do with inefficient, limited capabilities of banking, which never really addressed some of the key pain points that they faced (e.g., accounting challenges, longer onboarding times, etc.).

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Now, challenger banks have already been making a mark on the consumer banking space with their great UI/UX and nimble, agile approach to banking. Neobanks, such as Open, help SMEs collect payments, do payouts, reconcile transactions, auto-generate accounting reports, manage expenses – all on a single platform. Then there’s Starling Bank, which enables SMEs to plug in services of their choice. E.g., Xero for receivables, TransferWise for cross-border payments, Kabbage for lending, Sage for tax, etc.

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When applied in the SME context, neobanks’ solutions seem to tick most of the boxes for this segment, solving many of their pressing problems. Accordingly, FinTechs in this space are increasingly providing a range of services: from ground-up capabilities around accounting/tax/payments, etc., to API-driven marketplaces, enabling SMEs to plug-and-play solutions of their choice on their banking platform. This is where FinTechs, especially neobanks leveraging technology, come in. Neobanks are tapping into the SME market globally, solving problems at scale.

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Neobanks have been offering these companies solutions that cater to their specific needs, different from those of larger enterprises (traditionally the preferred customer segment for mainstream banks and FIs). For example, when it comes to credit products, a neobank can provide these at lower charges and interest rates than traditional banks. Similarly, when it comes to expense management, a neobank can simplify this through its solutions for its customers.

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Indeed, FinTechs are fast disrupting the Corporate Credit Card & Expense Management segment. For example, Brex (in the corporate credit card segment) is valued at $2.6 billion, while Divvy and Pleo (in the Expense Management segment) have raised $200 million & $56 million in funding respectively.

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Against this backdrop, it would be interesting to look at some of the partnerships between neobanks and payment providers such as Visa and Mastercard, which are aimed at offering SMEs solutions, including – but certainly not limited to – corporate credit and expense management solutions.

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Payment Providers & Neobanks: Towards Profitable Partnerships

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When it comes to payment providers, Mastercard has indeed been engaging in such partnerships extensively, but companies like Visa are fast catching up. Some examples: Neobanks like Tide & Holvi have partnered with Mastercard to offer an expense management solution. On the other hand, two neobanks have partnered with Visa to offer an expense management solution – Azlo in the US market & Open in the Indian market.

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As we had mentioned earlier, Visa is fast catching up. Over the last few months, the company has been partnering with certain startups to introduce a whole range of products. For example, before its recent partnership with Ola (a ride-sharing company based in India), Visa had introduced NCMC cards that leverage contactless payment technology, offering a card that can be topped up for usage in commuter transit. In this vein, one of the most recent partnerships has been the one between Visa and Open, which provides a business banking service for SMEs and startups. This partnership is set to enhance both parties’ business banking proposition for SMEs. How?

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The partnership will enable Open to launch a suite of innovative products that include a business credit card for SMEs, payment gateway acquiring, and real-time payments. The business card from Open will be a first-of-its-kind card specifically designed to help startups qualify based on funding rather than credit history. The card comes with a suite of expense management tools that will help businesses manage their expenses & payouts and can be issued to employees with set limits. It also comes integrated with WhatsApp for seamless expense filing. Furthermore, the credit card comes with an innovative rewards program that lets startups earn points for spending, which can be redeemed for various software subscriptions, cloud hosting, and discounts on co-working spaces.

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According to Anish Achuthan Co-founder & CEO of Open, “This partnership will let Open leverage the leadership & expertise Visa have in the payments space to co-create and innovate new solutions on credit, expense management & payment processing for small businesses.”

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In addition to the business card, the partnership with Visa will enable Open to enhance the Open API banking suite called ‘Layer’ through new features like real-time payment settlements and refunds. Layer is a programmable bank account for developers to integrate banking into their business and product flows. The current account comes integrated with an advanced developer-friendly payment gateway with innovative features such as tokenization, real-time payment settlements, and instant refunds.

Visa’s outlook on the partnership is a highly positive one as well, with T.R. Ramachandran, Group Country Manager at Visa – India & South Asia, stating, “We believe that partnership and collaboration are key to creating new and innovative payment solutions for the thriving Indian SME community. Accordingly, this partnership with Open will allow us and our banking partners to empower small businesses by enabling safe, reliable, and convenient payment experiences for them.”

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Large financial institutions now realize that to not get left behind, it is crucial to partner with neobanks to leverage FinTech for servicing what were once considered ‘niche’ customer segments, such as SMEs. Going forward, we’re sure to see an increase in such partnerships, which can only bode well for SMEs, helping them move more quickly towards financial freedom. All thanks to the rising stars of the FinTech world, which offer products and services critical to their growth – the neobanks.

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