RBI lens on neobanks amid rapid growth in customers

What is the News?

The Reserve Bank of India(RBI) is taking a hard look at the neobank business model where fintechs plug into a conventional bank’s network and become customer-facing banking service providers.

What are Neo Banks?

Neo-banks are online-only financial technology (fintech) companies that operate solely digitally or via mobile apps. Simply put, neo-banks are digital banks without any physical branches.

In India, neobanks don’t have a bank license of their own. Instead, they count on bank partners that are regulated to provide bank-licensed services.

RazorpayX, Jupiter, Niyo, Open etc are the examples of top Neobanks of India.

What is the difference between Neo Banks and Traditional Banks?

Firstly, Traditional banks have many advantages over neobanks, such as funding and most importantly customers trust. However, they find it difficult to adapt to the growing needs of a tech-savvy generation.

Secondly, Neo-banks are disrupting the traditional banking system by leveraging technology and artificial intelligence (AI) to offer a range of personalized services to customers. On the other hand, traditional banks follow an omni-channel approach i.e. having both physical (through branches and ATMs) and digital banking presence to offer a multitude of products and services.

What is the difference between Neo Bank and Digital Bank?

A digital bank and a neo-bank aren’t quite the same. Digital banks are often the online-only subsidiary of an established and regulated player in the banking sector while neo-banks exist solely online without any physical branches independently or in partnership with traditional banks.

What are the advantages of Neo Banks?

Low cost: Neobanks can also afford to slash customer fees by a significant amount since they don’t have to bear the expenses of running physical locations.

Convenience: These banks offer customers the majority (if not all) of banking services through an app.

Speed: Neobanks allow customers to set up accounts quickly and process requests speedily. 

What are the challenges of Neo Banks?

Digital illiteracy: Since neo-banks are highly digital-focused, they may not be able to cater to the banking needs of non-tech-savvy consumers or people from the rural parts of India. 

Services offered: Neo-banks offer only a small range of products and services as compared to a whole gamut of services that traditional banks offer. 

Customer trust: Unlike traditional banks, neo-banks don’t have a physical presence, so customers cannot literally bank upon them in case of any issues/challenges. 

Recognition: Neo-banks are yet to be recognized by the RBI. 

Source: The post is based on the article “RBI lens on neobanks amid rapid growth in customers” published in TOI on 13th June 2022.