The Rise of Digital-Only Banks and Neobanks

According to a report, around 26% of Indians used digital-only banks in 2023, and the number is constantly rising. It has become possible as, over the past decade, the banking industry has undergone a deep transformation. The traditional banks are now being challenged by new entrants that operate digitally.

These digital-only banks and neobanks (also called "neobanks") are reshaping how people access financial services, offering greater convenience, leaner cost structures, and technology-first experiences. Due to smartphone penetration, easy internet access, and ever-changing consumer preferences, the neo-banking models are fast catching up.

In this article, we will explore what digital-only banks, also known as neo-banks, are and how they are experiencing exponential growth and which are the best neo-banks in India.

What is a Neobank in India?

A neobank in India is a bank or a financial service provider that operates digitally. It can be operated through mobile applications, APIs or web portals. Additionally, these banks often do not have physical branches. Their goal is to offer banking-like services (such as payments, accounts, transfers, and lending) in a more agile, tech-driven manner.

However, it is essential to note that many neobanks, particularly in India, do not hold complete banking licences themselves. Instead, these organisations partner with traditional banks or act under banking-as-a-service or API models to offer regulated services such as deposit accounts.

Thus, neobanks often focus on a subset of financial services (such as payments, savings, small credit, and budgeting) rather than being full-spectrum banks from the outset.

What is the Difference Between Neobanks and Digital Banks?

The terms "digital-only bank" and "neobank" may seem similar and are often used interchangeably, but they are quite distinct from one another. Here is the difference between neobanks and digital banks:

Digital-Only Bank:

A digital-only bank is typically a financial institution that offers all banking services and products exclusively through digital channels. They may have a physical presence and also hold a banking licence.

Neobank:

A neobank in India is a newer, fintech-led, and branchless platform that does not have its own licence but mainly relies on partnerships.

In practice, many neobanks evolve or aspire to become fully licensed digital banks. Some analysts view neobanks as a subset of digital banks (i.e., "digital banks built from scratch") rather than digital arms of legacy banks.

Neobanks vs Traditional Banks: Key Differences

India's growth history is legendary in many aspects, and the banking industry in India has come a long way from long queues, passbooks and paperwork. It has now moved on to instant account opening and app-based financial management. Neobanks represent the new wave of digital-first banking, built on sleek technology platforms that eliminate the need for physical branches.

Traditional banks, on the other hand, are fully licensed institutions with decades of service and trust, as well as extensive branch networks.

Let us look at neobanks vs traditional banks:

The Reason Behind the Rise of Neobanks

The exploding technological advancements, dynamic customer preferences, and regulatory shifts have led to the rapid growth of neobanks. Let us dive deeper into the different factors behind the rise of neobanks:

Smartphone and Internet Penetration

The widespread adoption of mobile devices and cheaper data has put banking in everyone's pocket. People are using smartphones more than ever, which has opened up new touchpoints.

Regulatory & Fintech Enablers

Concepts such as open banking, APIs, and regulatory push for digital financial inclusion help neo-banks plug into banking infrastructure. Also, some jurisdictions make it easier to launch digital-first banks or fintech partnerships.

Changing Consumer Behaviour

Consumers today prefer seamless and instant digital services, including banking services. They hesitate to use cumbersome legacy systems, and neo-banks offer frictionless onboarding and use.

Cost & Efficiency Gains

Since neobanks have no physical branches, they incur fewer operating costs. This will result in lower fees, better interest rates, or more opportunities to invest in technology and service improvements.

Partnerships & Banking-as-a-Service (BaaS)

Rather than building everything from scratch, many neobanks plug into existing banks' balance sheets, compliance, and regulatory frameworks via APIs and platform models. It helps in reducing entry barriers.

Data & Personalisation Capabilities

With the help of data analytics, AI/ML, and behavioural tracking, neobanks can offer tailored financial products, predictive insights, and several personalised features.

Benefits of Neobanks

Neobanks are not simply online or digital banks; they are designed to address the long-standing pain points in traditional banking services. By harnessing technology, they are able to offer faster, more affordable, and user-friendly financial services tailored to today's digital-savvy consumers.

Here are the key benefits of neobanks in India:

Seamless Digital Experience: Whether it is opening an account or applying for a credit card, neo-banks can complete the process in minutes, eliminating paperwork and long queues.

Lower Costs: With no physical branches, neobanks reduce overhead expenses, often resulting in lower fees, zero-balance accounts, and better interest rates.

Personalised Financial Insights: Neobanks utilise AI-powered analytics to provide insights, budgeting tools, and smart alerts that facilitate better financial management.

Fast Transactions: Instant payments, UPI integration, and quicker approvals for services like loans or credit make them attractive to individuals and businesses alike.

Accessible 24/7: Now, consumers can avail banking services at any time. They can transfer money, pay bills or even check balances anytime, anywhere.

Inclusive Banking: Whether you are a gig worker, freelancer, or someone who finds traditional banking cumbersome, you can easily use neo-banks.

Global-Friendly Services: Some neobanks offer multi-currency accounts, low-cost international transfers, and global debit/credit cards, making them ideal for freelancers, travellers, and startups.

Top Neobanks in India

In India, several prominent neobanks operate, providing a great digital banking experience. Here are the best neobanks in India:

Conclusion

As financial services evolve at a rapid rate, the concept of neobanks, or digital-only banks, is also gaining traction. Today, customers need speed, transparency, and convenience, which neobanks and digital-only banks can fulfil. In India, the growth of UPI, smartphone adoption, and a young, tech-savvy population have created fertile ground for their expansion.

Traditional banks still hold customer trust, along with regulatory backing; nonetheless, neobanks are carving out their niche by providing customer-centric, innovation-driven solutions that are also affordable.

FAQs About the Rise of Digital-Only Banks and Neobanks

What is a neobank?

A neobank is a digital-only financial institution that operates entirely online, without any physical branches. It utilises mobile apps and web platforms to offer services such as savings accounts, payments, money transfers, and financial management tools.

Are neobanks regulated in India?

Currently, the RBI does not allow fully licensed digital-only banks in India. Neobanks operate in partnership with licensed banks and NBFCs to offer services, ensuring compliance with existing financial regulations.

Why are neobanks becoming popular in India?

India's surge in smartphone usage, UPI transactions, and demand for hassle-free banking has created the ideal environment for neo-banks. Their speed, transparency, and low fees appeal especially to millennials, freelancers, and startups.

Who can open an account with a neobank?

Almost anyone with valid KYC documents can open an account with a neobank. Many of them also cater to niche groups, such as SMEs, gig workers, and young professionals, who may face hurdles with traditional banks.