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What is a Neobank? Everything you need to know

Updated on: 4 Nov 2024

In the age of fintech, knowing the neobanks’ meaning is key as they very well may be the future of the online banking experience. In contrast to traditional brick-and-mortar banks, these provide digital-only banking services at lower costs and interest rates. Fuelled by this low-cost model for end consumers, the global market for neobanks may grow by a compounded annual growth rate (CAGR) of over 46%.

Read on to know what neobanks are, how they work, their benefits, and more.

What are Neobanks?

To get an answer to the question, ‘What is neobanking?’, you need to understand how these entities work. Here’s an overview:

A neobank exists solely online with no physical branches or independently or in partnership with any other traditional bank.
They are typically suited for customers looking for flexibility, convenience and ease of use
Since these banks don’t incur the cost of maintaining physical locations, they offer lower fees and interest rates on their products

What are the Types of Neobanks?

Here are the types of these banks:

Front-End Neobanks

These institutions don’t have an operating banking licence and function in partnership with traditional physical banks
These digital institutions also often operate on the traditional bank’s balance sheet

Digital Banking Units

These are standalone or independent units of established physical banks
An institution requires a virtual banking license to operate as a digital banking unit
The licence is offered once they ensure they have enough capital

Full-Stack Licensed Digital Banks

These institutions have all the required bank regulatory approvals
They provide many banking services, like issuing deposits and loans, as an independent financial entity
RBI has not yet legalised and regulated such financial institutions in India

Also Read: How to get a ₹1 lakh loan immediately?

How Do Neobanks Work?

Compared to traditional banks, these financial institutions have a distinct business model. Here’s how they work:

They don’t maintain a physical presence, which results in lower charges for customers
Neobanks offer tech-based personalised services and make decisions like loan approval through data analysis
Due to their online mode of operation, they can better monitor customer activity and preferences
Like conventional banks, they also make profits by issuing deposits and loans

Difference Between Neobanks and Digital Banks

With an answer to the question, ‘what is a neobank?’, here are the core traits that set them apart from digital banks.

Basis	Neobanks	Digital Banks
Establishment	These are new additions to the banking system	These can be physical banks that have moved to the internet or a new bank functioning digitally
Services	Neobanks provide a selected group of personalised banking services	Digital banks provide a wider range of banking services than neobanks
Physical Presence	They don’t have physical locations	They may or may not have physical establishments
Partnerships	These banks generally collaborate with traditional banks to offer services	Autonomous entities may establish collaborations with conventional banks

Advantages of Neobanks

Driven by their cutting-edge technologies and innovations, these banks provide several advantages to their customers. These include:

Lower Operating Costs

These banks save on overhead expenses, as they don’t have to maintain physical infrastructure
They pass on a part of these savings to their customers, effectively as lower interest rates and charges

Quick and Easy Processes

As a result of their tech-driven approach, they have made several improvements to the user journey
They have an easy-to-use API, letting you enjoy many of the banking services instantly
With their online account opening process, KYC procedures and other features, you can enjoy banking services from the comfort of your home

High Security

Since they rely totally on internet-based services, they ensure the complete safety of the user data
They employ updated technologies and have stringent measures for privacy and security

Fewer Restrictions

Since they are not yet regulated by RBI, they enjoy higher autonomy than conventional banks
However, doing business with unregulated financial institutions also has some associated risks

Access to More Financial Tools

Certain neobanks provide additional in-app tools to better manage your finances
Examples include budgeting and real-time spending insights with no add-on charges

The most significant advantage of the new-age digital solutions is that they allow you to access banking services anytime and from anywhere. Similarly, you can get a Fibe Instant Personal Loan of up to ₹5 lakhs online with no hassle.

You can get approval for a loan within a few minutes with minimal paperwork. Download our Instant Loan App or log in to our website to get funds at competitive interest rates and with flexible tenures.