What is a Neobank? Everything you need to know

  • Published on: 7 Mar 2024
What is a Neobank? Everything you need to know

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:

  • It is a fintech company that allows you to access financial services online through a mobile application or website
  • 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
  • As of now, the Reserve Bank of India (RBI) doesn’t allow fully digital banks, and therefore, these neobanks offer other banking services by partnering with physical banks

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 licence 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. 

BasisNeobanksDigital Banks
EstablishmentThese are new additions to the banking systemThese can be physical banks that have moved to the internet or a new bank functioning digitally 
ServicesNeobanks provide a selected group of personalised banking servicesDigital banks provide a wider range of banking services than neobanks
Physical PresenceThey don’t have physical locationsThey may or may not have physical establishments
PartnershipsThese banks generally collaborate with traditional banks to offer servicesAutonomous 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. 

FAQs on the Meaning and Working of Neobanks

What is an example of a Neobank?

Here are some popular fintech neobanks in India:

  • Kotak 811
  • Razorpay
  • Jupiter 
  • Fi Money 
  • Finin 
  • Open Money 

What are the advantages of Neobank?

These fintech banks provide the following benefits to their end customers:

  • Lower charges
  • Convenience and ease of use
  • More personalised experience  
  • Enhanced security

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