IIFL, Open Financial Technologies Enter JV, Launch Neobank For MSMEs

Non Banking financial company IIFL Finance Ltd and Open Financial Technologies, Asia’s largest SME focused neo-banking platform today announced a joint venture (JV) to launch India’s first neobank that would cater to banking and credit requirements of Micro and Small Enterprises (MSMEs).

Initial capital of the joint venture company will be Rs 120 crore. The JV composition between IIFL Finance and Open is 51:49. The name of the joint venture would be IIFL Open Fintech Private Limited.

On Monday, Open became the 100th unicorn as IIFL led a $50 million series D funding along with existing investors Temasek, Tiger Global and 3one4 Capital.

For the JV entity (IIFL Open Fintech Private Limited) created there would be no technology capital expenditure as the same is being Offered by Open on a per customer basis. IIFL Finance’s existing customer and branch network would be utilized for customer acquisition leading to lower customer acquisition cost. This would also give a head-start to the JV compared to all other newer neo banks. The JV would be earning a revenue fee from IIFL Finance for offering lending services. Additionally, transaction revenue from all payments, cards and value added services would accrue to the JV.

The JV is expected to be a profitable fintech in the first year itself with 1 million customer mark reached within a year’s time and $2 billion lending book is likely to be created in 2 years, said the statement from the companies.

Nirmal Jain, Founder, IIFL Group and Managing Director, IIFL Finance said, “We are excited to announce this joint venture which can genuinely transform banking and borrowing experience of millions of MSMEs. The unfulfilled credit need for such customers is estimated to be Rs 37 trillion. What these MSMEs need is simplified banking and what banks need is verified transaction and business data. The neo-banking that this JV proposes to offer, will meet requirements of both sides and drive financial inclusion and economic growth at bottom of the pyramid.”

The joint venture will enable customers to open an account in less than two minutes without visiting any physical branch and access all banking features on the app itself. "The best part for the customer is that accounting and reconciliation will be auto-matched. Its unique structure of technology and credit underwriting for a variable fee, can potentially make it profitable from the first year itself,” added Jain.

Open has over 2.3 million small and medium business merchants on boarded on its Open Money platform. It was founded in 2017 by Anish Achuthan, Mabel Chacko, Deena Jacob and Ajeesh Achuthan and has a strong technology stack, used by banks across India. Through this JV, Open would get a recurring annual SAAS fees per customer for offering technology services to the JV. Additionally, they would also be able to leverage the lending book and infrastructure of IIFL Finance to offer innovative lending solutions to the merchants on their platform. The lending solutions can be offered by Open without taking any lending/First Loss Default Guarantee risk. Open would get incremental revenue from fees generated for lending solutions provided.

IIFL Finance has over 8 million customers and presence in 3000 locations. Over 95% of IIFL Finance’s loan book caters to micro enterprises. With this JV, IIFL Finance would be able to offer neo-banking services to its all its customers. Banking, Accounting, Billing and Reconciliation services would be offered at a click to IIFL Finance’s customers. This would help in getting complete insights into user’s business transaction leading to better underwriting decisions. Additionally the credit solutions to Open’s existing 2 million merchants would lead to incremental lending book formation.

The unique proposition of this neobank is an innovative User Interface (UI) system made exclusively for small merchants -- a first of its kind in India. It will offer an alternative experience to traditional banking by providing simple interface for banking and integration with accounting, finance and payroll etc. in a seamless way. Moreover, customers will have access to credit from IIFL Finance at one click. These customers will also have access to savings, insurance, payment, card and other solutions, customized for their needs.

Anish Achuthan, Co-founder and CEO, Open said, “We have always felt that the needs of micro businesses are a lot different than the current MSMEs which we cater to at Open and Open has never been focused on the consumer neo-banking space. Further the joint venture can add a lot of synergies to Open as we are getting ready to launch innovative products like revenue-based financing, early settlement, working capital loans and business credit cards on the Open Money platform."

There are 63.3 million MSMEs in India of which 99% are micro enterprises. The banking and business needs of this segment are a lot different than that of medium enterprises. This segment remains largely unserved as large financial institutions have never focused on this segment.

One of the reasons for this is inadequate data for credit assessment. The demand for credit in this segment continues to remain high and supply of financing through formal channels is low. Additionally, there is a very thin line of difference between personal finance and business finance needs of this segment. To cater to this, IIFL Finance will leverage Open’s consumer neo-banking platform to offer additional services to its clients. IIFL Finance and Open aim to target the financial needs of this segment. The JV is a win-win for all stakeholders.