By Sanjana Parisaboina, a second-year BBA LLB student at Symbiosis Law School, Hyderabad.


Neobanks are privately held, completely digital banks having no physical presence. Neobanks are fintech firms that develop their own information technology systems from the ground up utilising cloud-based operating systems instead of depending on and buying existing ones. These firms use software and technology, such as artificial intelligence, to simplify and automate retail banking. Neobanks, also referred as Challengers, rely on smartphones to just provide services such as savings accounts, current accounts, insurance, loans, and credit cards.

They launched a few years ago in response to market demands for hyper-personalized and hassle-free mobile and internet services. Neobanks provide an improved customer experience in addition to quicker service with cheap costs, posing a threat to the conventional bank paradigm.

Neobanks have the potential to significantly destabilize the fintech and banking sectors, owing to their lack of cumbersome and long procedures associated with conventional banks. Multiple permissions, high rules, and mountains of paper labour force MSMEs and individuals in lower income groups and rural regions to seek banking services from other tiny informal sources. And this is the population that neobanks are attempting to serve; basically, they are attempting to bridge the divide between underserved areas and effective and smooth banking.

This article provides an insight into the digital banking sector while also examining the current scenario for the neobanking sector and the challenges neobanks face. Additionally, the neobanking space is examined in light of the Covid-19 pandemic and whether this global pandemic has acted as a catalyst for the such lending services.

Indian players and current scenario

In recent months, India’s neobanking industry has witnessed increasing activity, with companies such as Open, Niyo, and Razorpay receiving funding and ramping up different tie-ups with licenced lenders. Revolut, the world’s biggest Neobank, is also establishing teams in India to provide neobanking services to consumers. Tata is targeting this industry and may be the market’s newest entry. Tata intends to provide neobanking solutions via its super app. Tata also has an edge in that they currently own an asset management business, an insurance venture, and a non-banking regulated financial organisation, all of which could be consolidated under the Tata neobanking arm.

Pandemic as a Catalyst

Neo bank serves as a catalyst for the current financial system by expanding banks’ reach. The Covid-19 pandemic has become a catalyst for digital banking change. That so, much remains to be seen as far as Neobanks are concerned. Although conventional banks have maintained their position to a great extent, this may change when challenger institutions acquire momentum. On a worldwide basis, Neobanks’ development is an upward path. Neobanks will keep attracting consumers and investors because of their compelling value proposals such as cheap rates, personal financing and ease-of-use.

The pandemic is just a catalyst for digital transformation revolution. Neo-banks are challenging conventional mainstream banks. They are supported by digital backup licences and manage much of the value chain between the front and the back end. In the past, establishing an account with a conventional bank was a time-consuming and extremely restrictive procedure. However, establishing an account with a neo bank today eliminates the difficulties connected with conventional banking. Customers may establish accounts with neo banks without visiting a branch, which is more efficient and convenient in light of the COVID-19 epidemic.

As there is no need of going to the banks all transactions can be done online and due to the high level of digitization, the whole process is virtual and can be carried out efficiently. Unlike conventional products, those offered by this system are automated.

Challenges Neobanks face and ways to overcome them

Ambiguity of regulation: RBI does not fully acknowledge virtual banks or regulate neo-banks. Some neo-banks opt to serve as business correspondents (BCs) for traditional banks, usually seen as organisations promoting financial integration in distant regions. Companies should establish large retail locations to serve as BCs.

Security and technology: Conventional banks might require neo-banks to conform to globally recognised standards for infrastructure and security procedures before collaborating with those standards. Neo-banks should update their systems and procedures in order to increase their product portfolio and continue to provide specific services.

Privacy of data: Data confidentiality is the cornerstone of any effective digital service. Given the cheap costs for conventional goods, neo-banks would rely on client data and their capacity to retail items. Such capacity may be impacted by the adoption of an Indian GDPR Personal Data Protection Bill.

Regulation of Neobanks in India

Neobanks’ growth rate has accelerated significantly as a result of efficient financial services and cutting-edge technology; nevertheless, Indian laws only enable neobanks with a significant physical presence, not those that are completely digital.

While the RBI saw all kinds of cryptocurrencies as a danger to security, it outlawed this technological breakthrough in 2015, thus putting an end to all innovation. However, in 2019, the RBI implemented a new rule aimed at enhancing the tenacity of business models. While there are no particular standards for the functioning of neobanks, the current recommendations demonstrate the need of physical branches. The RBI’s release of rules for the functioning of neobanks is essential to limiting new entrants into the market and supervising this highly regulated sector.

Despite the epidemic, the Fintech revolution in banking experienced significant digitalisation and development

The Indian Fintech industry is expected to reach INR6207.41 billion by 2025, as per the Research and Markets study. Notwithstanding the epidemic and unpredictable financial environment, the Fintech industry in India has seen tremendous development. Last year, the Covid-19 epidemic was a serious blow to the world economy, along with many industrialised countries. We’ve seen repeated lock-downs, isolation, huge layoffs and company collapses across many sectors. Nevertheless, in the middle of the crisis the financial and business industries saw massive growth and upheaval. The Indian Fintech industry was invested enormously, and the social distance rule strengthened India’s cashless digital payment system. INR1,500 crores were given under the Union Budget 2021 to promote digital payments and drive innovation in the fintech industry in India and BFSI industry. Reports further indicate that, for digital payments in rural India, the Reserve Bank of India (RBI) has initially allocated INR345 crore and has also established an infrastructure development fund.

What Banks can learn from Neobanks

Banks are now under tremendous pressure to meet consumer demands for digitalization. Traditional banks must take action immediately if they want to prevent losing clients and income to neobanks. Banks must aim at transforming the entire banking experience towards a model that provides exemplary customer service solutions instead of just moving existing processes online.

Conclusion: What does the future of Neobanks hold?

Neobanks’ ability to disrupt the banking industry remains an open question. Neobanks, on the other hand, continue to encounter difficulties, as many conventional banks have responded by establishing their own digital banks under various names in order to enhance the customer experience. With the whole banking industry undergoing substantial digital transformation as a result of regulatory changes and changing consumer expectations, neobanks aim to challenge incumbents and seize market possibilities. With that being stated, serving disadvantaged regions would need not just require a shift in consumer mentality, but also a shift in behaviour. It will be fascinating to watch how neobanks assist neglected and unserved regions, particularly when people who are used to a physical presence for their trust and money are involved. However, not all neobanks that operate today will continue to operate in the future; only those that can maintain a high adoption rate while also accumulating sufficient experience will survive in the long term. In 2014, the RBI launched the payment banks, with the aim of offering modest bank deposits and transactions or transferring services via a “safe, technology-driven environment” to the underlying population.

Under the outbreak of the epidemic, RBI must investigate completely incorporating a digital or branch banking service, and subject such facilities with the supervision of the RBI to proper checks and balances.

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