News: The RBI (Reserve Bank of India) 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.

• They are kind of digital banks without any branches. Rather than being physically present at a specific location, they are entirely online. They provide customers a cheaper alternative to traditional banks.
• They use technology and AI to offer personalized services to customers while cutting down on operational costs.
• In India, they don’t have bank license of their own but rely on bank partners to offer licensed services.
• Examples of Neobanks include RazorpayX, Jupiter, Niyo, Open etc.

How do the NeoBanks operate?
• Non-licensed FinTech firms that collaborate with conventional banks to have a mobile/Web platform and a wrapper around their partner banks’ products.
• Traditional banks that are undertaking their digital initiatives.
• Licensed neobanks (usually with digital banking licences in those countries that allow it).

How are Neobanks different from Traditional Banks?
• The traditional banks have access to funding and possess more customer trust as compared to Neobanks. However, the former face the issue of adaptability to the growing needs of a tech-savvy generation.
• While the Neobanks may not have funds or a strong customer base, they do have ability to innovate. They can launch features and develop partnerships to serve their customers much more quickly than traditional banks.
• Neobanks can reach to places where a traditional bank may find it difficult. For example, Neobanks can cater to retail customers, small and medium sized businesses, which are generally underserved by traditional banks.

• The key to their success lies in fulfilling the needs of a segment of the market, and adopting the right technology, business strategy and work culture.
• Since the RBI doesn’t yet recognise neobanks as such, officially customers may not have any legal recourse or a defined process in case of an issue.
• Since neobanks don’t have a physical branch, customers don’t have access to in-person assistance.
• Neobanks generally offer fewer services than traditional banks.

Way Forward:
• Neobanking can work as an extension of measures undertaken to solve the challenges of financial inclusion and bundling banking services with other financial services—for example, services like opening of bank accounts for immigrants, facilitated through new onboarding procedures not based on traditional documentation of identification. With narrow targets initially, neobanks could expand by adding more functionalities and services over time.

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