Neo Banks in India: Features, Cost and Limitations

Banks dominated the traditional banking system in India for decades. You might recollect visiting the closest bank branch to open an account or for money transfers. But visits to physical branches were often frustrating due to long queues and slow processing time.

However, in the last 5 years, the banking sector saw the rise of Neobanks, fully digital banking platforms. These banks have emerged as a popular alternative to traditional banks – about 26% of the Indian population were using Neobanks in 2023 – especially among millennials and Gen Zs.

In this blog, we will tell you every essential detail about Neobanks you must know like the definition of Neobanks, their features, and advantages and disadvantages.

What is Neobank in India? 

Neobanks have brought in a new wave of banking services in India. The biggest differentiator with a traditional bank is the absence of physical branches. They operate entirely online and provide the usual banking services digitally without a single brick-and-mortar branch.

The term Neobank is made of two words "Neo" and "bank". The word "Neo" means New, however, they cannot be technically called as a "bank" because they cannot apply for a banking license from the Reserve Bank of India (RBI). The RBI doesn't allow 100% digital banking operations in banks. However, these Neobanks can tie up with traditional banks like IDFC and ICICI to provide banking services.

The lack of a banking license doesn't restrict Neobanks from offering a range of financial services similar to conventional banks. You can open bank accounts, avail credit, and engage in online investment options from a single digital interface. The Neobank's model cuts through the frustrations of traditional banking processes like lengthy documentation and offers a seamless experience - one of the prime drivers for tech-savvy customers to prefer Neobanks

What Are the Unique Features of NeoBanks in India?

Here's a list of five features that make Neobank popular:

No Physical Presence

Neobanks provide their services through digital banking that's why there are no traditional physical branch networks. This benefits customers as they can access any banking service from anywhere and anytime mostly using a mobile app.

Technology-Led Banking Services

One of the biggest reasons behind the rise of Neobanks in India is its technology-led banking services. These services are designed in a way that they match the digital lifestyle of the younger generation. For example, mobile apps are simple and have a clean interface similar to any other app. The learning curve is low, so the customer quickly learns how to open a savings account or transfer money from the app. Additionally, Neobank apps are secure with biometric authentication and offer integration with other digital platforms.

Personalized Services Through AI

Neobanks leverage AI and data analytics to analyze customer behaviour and offer personalized banking experiences like tailored saving plans or budgeting strategies. For example, the Neobank app might highlight the specific category in which you made frequent purchases last month so you can optimize the spending going ahead.

Lower Cost

Neobanks have a low-cost operational model because there is zero spending on maintaining physical branch location. This allows them to pass on the benefits to account holders like lower fees and competitive interest rates.

Spending Analytics

Most Neobanks have a built-in spending analytics feature that categorizes your expenses into different categories like groceries, entertainment, and travel. This allows you to visualize the spending patterns and take active steps to use money more effectively.

Short-Term Goal-Specific Investment

Neobanks cater to their clientele by providing an option to save money for short-term goals like a vacation or buying a new mobile phone and earning interest on the savings. Customers can create buckets for goals, track progress, and stay motivated. This savings mechanism inculcates a proactive approach to saving and financial discipline.

Cashback and Rewards Programs

Cashback and rewards programs incentivize customers to use their services. For example, a customer earns cashback using the Neobank virtual payment cards on certain purchases. Instead of a cashback, they might receive reward points which they can redeem later as discounts on future transactions. Such services enhance the banking experience and encourage customers to use the Neobank for more purchases.

What Are the Best Neo Banks in India?

Neobanking is one of the fastest-growing markets in India. It is expected to grow at a three-year compound annual Growth Rate (CAGR) of 50.5% in the fiscal 2025 and to reach $183 billion in valuation by 2030. The future of Neobanks is promising and you might expect to see more of them in the coming days, but here's a list of the biggest Neobanks presently operating in India:

Niyo

Niyo targets travellers and blue-collar workers offering them specialized services like travel cards and salary accounts with attractive benefits. Niyo's goal is financial inclusion by providing access to users unfamiliar with formal banking services.

Jupiter

Founded in 2019, Jupiter attracted more than 2 million users soon after its launch. It offers digital savings accounts in partnership with Federal Bank and provides debit cards and personalized spending insights.

Fi Money

Founded by ex-Googlers, Fi Money offers unique features like group saving goals and peer-to-peer payments

Freo

Freo is a credit-led Neobank that serves as a single place for customers to pay with UPI, buy insurance, invest in FDs, and take loans. It offers Freo card, a credit card in partnership with Yes Bank which has no joining or renewal fees and offers generous rewards and fuel surcharge waivers. Freo Pay is another product that lets you shop with UPI transactions, but pay the amount 30 days later.

Open

With the growth of SME founders, Open fills in the gap for modern banking solutions tailored to their requirements. Open allows business owners to connect multiple business accounts and track payments in one place seamlessly. It also allows them to create GST-compliant invoices to get paid on time.

Benefits of Neo Banks in India

Here are the four benefits of Neobanks that might convince you to give their services a try:

Convenience

Convenience is the prime reason why many opt for Neobanks over traditional banks. Imagine no long queues or visits to the bank to avail of a loan. Neobanks gives you access to the core banking services right from your home with a stellar customer experience.

Fast Service

Fast services like quick account opening and fast online transfers provide the freedom to concentrate on other important aspects. This is especially true if you are an entrepreneur. Using digital bank services, you can spend more time on growing your business than spending hours on simple banking operations

Lower Fees

Neobanks don't have to spend on traditional banking infrastructure keeping their overhead costs low. This gives them the leeway to offer banking services at comparatively lower fees. Zero balance facilities and minimal transaction fees are the most popular ways Neobanks keep its services cost-effective.

Unique Features by Leveraging Technology

Neobanks uses Artificial Intelligence (AI) to study spending habits and offer financial insights. With a rewards program, they incentivize users to spend responsibly. This makes banking more engaging and effective for modern consumers.

Disadvantages of Neo Banks in India

Neobanks also have disadvantages, here are the four most common:

Lack of Physical Presence

While a 100% digital banking experience is convenient for many users, it can be a major disadvantage for other customers. This group of customers prefer face-to-face interactions especially when need assistance with complex banking financial transactions.

Not RBI Licensed

Neobanks do not have banking licenses issued by the RBI. This might concern a few users as Neobanks do not fall under the strict radar of financial regulations.  A sudden RBI regulation to oversee Neobanks might raise many questions about their operations.

Limited Services Compared to Traditional Banks

In terms of services, most Neobanks are behind traditional banks. A wide range of loan products, wealth management services, and investment advisory are a few services that might leave some customer needs unmet.

Risk of Security Breach

As Neobanks operate only as a digital platform, they are more susceptible to cybersecurity threats. However, Neobanks take various security measures to protect customers from fraud. As a customer, you must remain vigilant while completing financial transactions online.

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