Neobanks are financial technology (FinTech) companies that operate online without physical branch networks. They offer money management services digitally or via mobile apps.
Neobanks are similar to digital banks in terms of online operations. Digital banks are an extension of established physical banks, while neo-banks have no physical presence outside of their partnership with traditional banks. They offer a comparatively limited set of services. However, these AI-driven services come at a significantly lesser cost.
“Neobank is completely online. Therefore, they don’t have to spend as much on infrastructure, rent, electricity, etc., which enables them to offer services at a significantly lower price than traditional banks,” said Harsh Chhatrapati, founder of Galgal.
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“The Reserve Bank of India (RBI) has not signed off on fully-digital banking establishments yet, and therefore they provide a set of banking functionalities through their partnerships with licensed banks,” said S Anand, chief executive officer and co-founder of PaySprint. “One can open a savings account at neobanks, avail of all the usual banking services and get a physical credit or debit card. They provide users with sub-accounts for budgeting and organising their money, categorising their spending, monthly overviews, etc. Neobanks also provide personal and business loans driven by quick processing of applications.”
“It’s important to note that Neobanks perform all money management services without a banking licence, and as a result, they cannot offer some of the banking services,” said Chhatrapati.
Cost efficiency: The absence of physical branches reduces significant overhead charges. This enables Neobanks to reduce the prices of their services and offer higher interest on deposits. Dileep Seinberg, founder and CEO, MuffinPay, Crypto NeoBank, says, “The interest rate offered by these banks is higher and usually ranges between 3.5% and 7% per year, but this may vary on the sum and tenure of investment. Some banks may offer a zero-balance account.”
Convenience: Neobanking is entirely an online platform. All one needs is a smartphone with internet connectivity to access their account and make transactions from anywhere.
Lack of personal assistance: The absence of physical branches implies that there is no direct contact with customers. This can make some users hesitant about engaging with neo-banks, and there is a lack of trust and reliability.
Regulatory framework: “As per regulatory guidelines, neo-banks cannot function independently. The grey area of loosely defined protocols could spell trouble for the customers and institutions alike,” said Anand.
Mint take: Neo-banks are still nascent; hence, it is better not to open a primary account there. However, since all neo-banks have partnered with scheduled commercial banks, which are governed by RBI, one can open a secondary account with them. This way, you can avail of their ease of banking facilities and take advantage of some of the offers they may provide you on specific financial products, such as lower interest rates on credit cards, etc.