Understanding Neo-Banking

Understanding Neo-Banking

Neo-banks are online-only fintech companies without physical branches. They are digital banks.

How are they different from traditional banks?

Neo-banks are revolutionizing the traditional banking system by leveraging artificial intelligence (AI) and technology. They offer personalized services to customers. Traditional banks have a physical and maybe a digital presence while neo-banks, led by a design thinking approach, tailor-make their products and services to make banking convenient for the end customer digitally.

Neo-banks are driven by innovation and technology and can develop partnerships and launch features quickly. They cater to small and medium businesses and retail customers.

History of neo-banking

The term neo-bank started gaining popularity in the year 2017 with the rise in the usage of smartphones and the internet across the globe. They are also known as ‘challenger banks’.

As per a report by KBV research, the market size of neo-banking globally is expected to reach $333.4 billion by the year 2026. The CAGR is a whopping 47.1%.

Despite the potential market size, the concept of neo-banks is relatively new in India. Some neo-banking firms have recently raised funding from global investors given the huge underbanked market potential that India has.

India’s top neo-banks include RazorpayX and Jupiter.

How do neo-banks work?

Neo-banks have a different business model than traditional banks. Since they are completely online, customer fees are slashed significantly. Being customer-centric platforms, they can devise personalized services through innovation and technology.

The decisions taken by neo-banks are data-driven. They use technology-led solutions to collect and analyze data and understand customer behaviours. This enables them to offer a wide window of advantages and opportunities to their consumers

What are the challenges faced by neo-banks?

The first issue they face is fostering trust. Customers might not be able to depend on them in case of issues/challenges, as there is no physical presence. Hence, they offer freemium subscriptions and memberships to allow users to experience the service before paying for it.

Due to the absence of regulations, neo-banks cannot offer lending products or accept deposits. Hence, some fintech firms have an NBFC as their parent company to engage in lending activities. They can also rely on bank partners to offer services.

Although India’s smartphone penetration rate is set to increase by 96% by the year 2040, financial inclusion levels are yet to improve.

Advantages of neo-banks

  1. Since the regulations are few, neo-banks can keep their costs low. Their products are inexpensive and have no monthly maintenance fees.
  2. They offer majority banking services through an app.
  3. It allows customers to set up accounts quickly and process requests. Processes that usually are time-consuming, can be done faster with the innovative strategies of neo-banks.
  4. Neo-banking apps provide you with smart reporting via an overview of your expenses along with a savings goal best suited for your needs. This enables better management of finances.

Disadvantages of neo-banks

  1. Since the RBI does not recognise neo-banks, customers may not have a defined process in case of an issue.
  2. Customers don’t have in-person assistance.
  3. Neo-banks have expertise in specific products.


The financial landscape is shifting towards customer satisfaction and experience. Neo-banks are attempting to fill that gap. They have the potential to be much more than just a buzzword in the fintech community and hopefully, in the years to come, they will change the face of banking forever!