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Neo banks – Digital Banking Revolution

Neo banks – Digital Banking Revolution

Published on 03 September 2021 .Views 112 .Comments 1
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In today’s article let’s explore Neo Banks, their advantages over traditional banks, and major players in this segment.

The RBI (Indian Banking Regulator) grants two kinds of banking licenses in India - Universal Bank Licences (given to regular/traditional banks) and Differentiated Bank Licences (for niche banks). These niche banks cater to the needs of a certain demographic segment of the population. In August - September 2015, the Reserve Bank of India (RBI) granted in-principle approvals to 11 entities for setting up payments banks (PBs) and 10 for Small Finance Bank (SFB). SFBs and PBs are examples of such niche banks.

So, what are Neo banks — the new disruptor on the block

Neo-banks are fully digital entities without any tangible and physical network. They are usually mobile-first and leverage new-age technology to minimize operating expenses and offer a user-friendly platform & interface. They don't have their own licenses and rely on bank partners to provide bank-licensed services. Essentially, these are Fintech firms that provide digital and mobile-led financial services & solutions.

Although neo-banks may function through a variety of operating models, these predominantly fall under three major categories:

  • Non-licensed FinTech platforms/firms that collaborate with traditional licensed banks to have a mobile/web platform and a name label around their partner banks’ products & services
  • The traditional banks in India provide financial services to their customers online. These banks operate by themselves and do not collaborate with any other firm
  • Licensed neo-banks usually with digital banking licenses in those countries that allow it

Upcoming FinTech start-ups are launching neo banks especially for retail clients in the country to make banking user-friendly, comfortable, and meaningful. They usually partner with traditional banks and offer efficient solutions with the use of technology such as AI (artificial intelligence) and ML (machine learning). Initially, only business clients were targeted by the neo-banks that were introduced in India.

There is a range of top-class financial industry software applications offering smarter benefits at competitive prices.

The benefits of e-banking have compelled customers worldwide to accept neo-banks. The major characteristics of neo-banks are convenience, cost-effectiveness, various banking and financial functionalities under one umbrella, and personalization/customization. Also, FinTech platforms create specialized offerings that focus on the under-served demands of salaried employees and MSMEs, which is the way forward.

However, there are major pain points of neo banking that include: tedious IT legacy; data architecture; increasing cost management; and organizational resistance.

Neo banks offer greater choices and better overall experiences with the following features:

  • a new account online can be opened in just a few minutes
  • linking of existing bank accounts
  • send/receive payments immediately with integrated payment gateways
  • pay bills through multiple biller options

According to Zion Market Research, the neo-bank sector worldwide was worth $18.6 billion in 2018 and was projected to grow at a CAGR (compounded annual growth rate) of 46.5% between 2019 and 2026, generating about $394 billion by 2026. This is surely going to accelerate further due to covid 19.

Although foreign banks are offering digital-only services through their Indian subsidiaries, virtual banking licenses are still not issued in India. The RBI recently strengthened the criteria for providers of digital banking services, giving priority to a physical presence, considering the demographics of the country.

Currently, there are 10 neo banks in India, and a few more are in the process of entering the market. ICICI Bank partnered with three neo banks: Free, Instant Pay, and Yelo, thus taking the lead in the segment.
The bottom line margins of neo banks are thin, and the regulators are encouraging more competition. There is less room currently, and rivals have started to merge & consolidate. More M&A activity is expected as the neo sector matures. Neo banks are expected to see good growth in the SME segment.
Neo banks are AI & ML driven and include the entire financial portfolio onto a single interface. It keeps you abreast of your entire banking operations — receipts, payments and transactions — 24x7, all year, and in real-time. Trust is necessary for innovations like these. If the thought of app-based banking leaves one anxious, be rest assured that the regulators have set in place stringent regulations, much like for other financial institutions.
Working of Neo Bank
Neo banks are very different from the usual banks in every aspect.
Neo banks are customer-oriented and provide personalized/customized offerings. As they are fully online, technology plays a key role in their working model. They primarily work on the decision-making model which is driven by data-based insights.
They collect and analyse data, understand the trends & patterns, expenditure habits try to infer how their customers behave, and then create insights & predictions to drive sales.

Neo bank vs Traditional Bank

  • Neo banks have no branches whereas traditional banks have a branch banking model
  • Traditional banks need additional overhead costs (ongoing costs on rents, electricity, etc.)
  • Neo banks consumer support relies on a combination of chatbots and AI, providing flexible, virtual, online support whereas traditional banks rely on in-person or telephone for customer support
  • Any banking approval process (opening account, etc.) is lengthy in case of the traditional bank as it is manual. Neo banks make this tedious task automatic, seamless, and quick.

Advantages of Neo banks over traditional banks

User experience: Neo banks don’t really offer any new banking services. Their services are akin to those of legacy banks, but with a more enhanced and personalised user experience. They have leaner business models and advanced technologies compared to traditional banks, thus providing ease and efficacy in services, i.e., fast & seamless account creation, 24x7 customer service through chat bots, real-time inter country payments, and AI (artificial intelligence) and ML (machine learning) - enabled dynamic accounting, treasury and budgeting services.

Easy Integration of APIs: Most neo banks have great API integration to banking, accounting and payment infrastructure.

Transparency: Neo banks are transparent and update the users with real-time notifications and explanations of any charges and penalties incurred by them.

Automation: Neo banks provide automated and real-time accounting & reconciliation services for ledger, balance sheets, income statements and taxation services such as GST-compliant billing, tax record keeping and reconciliation, on web/mobile platforms at affordable costs.

Valuable insights: Neo banks offer dashboard services with enhanced interfaces along with lucid and deep insights for services such as payments, trade payables & receivables, and bank statements. It’s super beneficial for entities with higher expenditure and higher employee strength. This reduces overhead expenditure and boost productivity and revenue.

Road ahead

Neo banking can work as an extension of measures undertaken to overcome the difficulties & challenges of financial inclusion and bundling basic banking services with other financial solutions—for example, opening of immigrants’ bank accounts facilitated through modern on boarding processes which are not based on traditional documentation for identification. With lesser targets in the initial phases, neo banks could expand by incorporating additional functionalities and services over time.

Though neo banks are gaining traction, most of them are yet to show consistent profitability. However, they have huge potential to be market disruptors in banking & financial services, and one thing in becoming profitable would be to make sure that traditional banks invest in modern technology and re-engineer processes to offer seamless user experiences.

Moving ahead, a hybrid model comprising of both neo banks and traditional banking is the gold spot for India, and that indeed is in the best interests of customer services and the overall financial inclusion.

Major Players

Below are some of the top digital-only banks in India for individuals & businesses that are here transform the financial & banking space.


InstantPay delivers full stack banking services to individuals and businesses of all sizes. The bank is believed to process around a million of transactions daily. With personal, business and inclusive banking solutions, InstantPay provides instant activation, money tracking and cash deposit features. It also has provisions of 24x7 customer support, 365 days a year. InstantPay can be used on the web and mobile platform. Businesses can integrate InstantPay’s API with their business applications or accounting/ledger systems. Its API banking platform is a super scalable cloud platform that auto-scales from zero to a million transactions in a single day.

Its Indian banking partners are ICICI Bank, Axis Bank, IndusInd Bank and Yes Bank. Individuals can open a digital account with InstantPay which is a good alternative to digital wallets and traditional bank accounts. Startups and SME businesses can open a Smart Bank Account. Large enterprises can avail scalable and cost-effective solutions offered by InstantPay. The InstantPay Digi Kendra service offers basic banking, insurance, and travel booking facilities, among others.


Since its inception in 2015, Niyo caters to the needs of over a million customers across blue-collared sectors and to Indians that travel globally. It targeted salaried employees and created products & solutions to help them get the most out of their monthly salaries.

Users can pay bills, transfer funds, make purchases online, access ATMs anywhere in the world, and track their spending habits, etc., which is supported by the bank’s digital platform. With a strength of over 800 employees, Niyo team includes bankers, technocrats, and subject matter experts.

The Niyo - IDFC First bank is an account, an app and a card. The bank offers a slew of features like interest rate provided on a savings account, 0% commission on mutual fund investments and 0% on forex.

In May 2020, the neo bank announced its ‘Niyo Pathshala’ initiative for India’s labour force to provide financial literacy & inclusion. The company is educating individuals on the benefits and features of branchless banking & e-banking, as part of the digital initiative.


Open, based out of Bangalore began its journey in May 2017.  Open is a neo bank that offers small businesses and start-ups an online bank account and a credit card that combines banking, payments and accounting in a single place. Open resolves the pain points business owners go through with the current banking system.

By setting up an account on Open, businesses can get an online bank account and a business credit card and a bank account to start collecting payments within few minutes. This account enables SMEs to start collecting payments instantly without any limit on the collection. Invoices can be generated and payment links to customers can be sent.

Open’s payment gateway API can easily be integrated with the website of client businesses where consumers can pay during the checkout phase. E-commerce firms can integrate Open’s plugins to their websites for payment collection.

In June of 2019, Open raised $30 million in its Series B funding round from Tiger Global, Tanglin Venture Partners, among others.


RazorpayX is the neo banking platform of India’s unicorn Razorpay. The neo bank has served over 10,000 client businesses in their payroll processing, expense payment through Corporate Card, and real-time vendor payment.

Fully functional current accounts on RazorpayX can be easily opened by customers and operated. RazorpayX Current Accounts come with standard banking facilities such as checkbook issuance, debit card, and account statements. The platform has functionalities such as API banking, approvals workflow, along insightful reports.

With RazorpayX, e-commerce start-ups can make real-time & instant refunds to cards, UPI ID, and bank accounts. Also, businesses can automate the refund process by opting for refund requests through API or the Dashboard.

RazorpayX automates refunds of CoD (Cash on Delivery) orders with Payout Links. Payout Links helps the entire process of making a refund to a customer efficient and fast.


Neobanks and the next banking revolution, PWC

India Fintech Report 2nd Edition — Executive Summary, Medici

What is a Neo Bank, Lyra, May 2020

Rise of Neobanks in India, Outlook India, April 2021

The future of Neobanks in India, Economic Times, April 2021

Deloitte: Banking on the Future, 2020

Savings Account, Bank Bazaar

Payments to Neo Banks, Moneycontrol, December 2019

Neo Bank disruption, Business Line, March 2021

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