If technologically inclined, you might be doing your banking through digital-only platforms. But is the online model bang for the buck? Here’s our assessment
“Banking is necessary, but banks are not,” said Bill Gates way back in 1994.
Here, we look at offerings by neobanks targeting retail users and highlight aspects that you must consider before deciding on signing up for their services.
What are neobanks?
While there is no standard definition for neobank, the term describes fintech platforms offering financial services without any physical branches. They enable this through tie-ups with licensed banks at the back-end and attempt to offer the latter’s products in a more user-friendly format. For the banks, these platforms help acquire customers without the brick-and- mortar structure.
For this, the platforms earn a customer acquisition fee from banks, interchange fee when a debit card is used by its customer and possibly revenues from cross-selling other financial products to the user.
For the customers, the advantages of a neobank vs a traditional bank are two-fold. One, banking services can be availed without having to step into the bank. Two, the user interface is designed to better customer experience. And these come with the safety net of the bank at the back-end. However, note that while an account created with a neobank will make you an account holder of the back-end bank, the reverse is not possible.
The on-boarding process with neobanks is quick, with KYC done online by submitting registered Aadhaar card number and/or PAN along with some basic personal details. Almost all of them provide zero balance accounts with no annual maintenance charges. Some of them offer attractive interest rates, courtesy their tie-up with small finance banks that generally offer higher rates. For e.g., neobanking platforms such as Niyo and Freo (coming soon) tied up with Equitas to offer interest up to 7 per cent per annum on savings bank account.
Neobanks can be categorised into two buckets: savings-led and credit-led. While the former may offer solutions for expense management, investments, money transfers and forex payments, the latter offers money lending options.
Neobanks, which are savings-led, provide most of the savings account related services digitally. From payments infrastructure (IMPS/NEFT/RTGS/UPI), providing cheque books/demand drafts, statement of accounts, to adding nominees to the accounts, these neobanks offer most services that a savings account with a traditional bank offers. Live transaction updates and detailed transaction history log too are available.
Neobanks also typically offer co-branded debit and prepaid cards in partnership with banks. In case of cash withdrawal or deposit, one can use either the ATM card issued by the neobank or go directly to the bank branch.
Most of these neobank platforms help analyse and track customer spending and come up with smart solutions. Take Fi Money, launched by Google Pay in collaboration with Federal Bank. This neobank has created an automated bot which makes it easy to save. For instance, every time you order from Swiggy or shop from Amazon, the bot will ask you to keep ₹50-100 aside as savings.
Jupiter Money, another savings-led neobank, has created in-built money management features where one can set aside money for their goals. The money gets pocketed separately in the savings account towards the goal but will still continue to earn interest.
Some neobanks also offer wealth management services. Niyox, an offering from Niyo, allows you to invest in direct plans of mutual funds through its platform from the savings account opened with them. Kaleidofin’s Kaleido Cash, which focusses on providing financial services, asks you to choose amounts that you would want to save for your goal and nudges you to save every month. The amount will further be invested in mutual funds/FDs/RDs/insurance based on AI-based financial planning.
A few of these platforms are in the beta version mode and one may need to register to be in waitlist to experience their neobanking services.
Of course, there could be some limitations with these neobanking services compared to traditional ones currently. Not all neobanks (for now) may allow you to give standing instructions to auto-debit the amount towards expenses or investments. Further, some of the financial products that are available with the traditional banking platform, such as opening a PPF account, are still out of bounds.
Quick loans from credit-led banks
In credit-led neobanks, the loan processing could be quick and entirely online. All that the user may have to do is submit a photo ID, Aadhaar number, take a selfie for authentication, and submit relevant documents.
Freo’s Moneytap offers faster approval of credit line from ₹3,000 to ₹5 lakh subject to the customer’s credit profile. Moneytap provides personal loans to salaried employees with minimum salary of ₹30,000 per month at interest rates starting from 13 per cent per annum for a period of three to 36 months. Freo also has Freo Pay, which promotes buy-now-pay-later (BNPL). Freo Pay gives you a zero-interest mini-credit limit (₹500 to ₹3,000) that can be instantly used through UPI transactions with different merchants (local traders such as bakers, grocers, shopkeepers, etc.).
The neobanks usually tie-up with an NBFC or any other financial institution to provide loans. Their partnership for the credit services need not be with the same bank they have tied up with for providing a savings account. For eg, Freo has a tie-up with Equitas Small Finance Bank for savings account while Freo’s credit lending platform, Moneytap, has partnered with financial institutions such as HDB Financial Services, DM Finance and Apollo Finvest India. The platform has also tied up with RBL Bank to offer credit cards.
One can also obtain the credit-related services online from the digital lending apps in the market. The difference between the lending fintechs and neobanks is that the former is a subset of the latter’s broad-based banking services. Also, if you have a savings account with a neobank, it will build a credit profile based on the usage of the account, which could help in quick sanctioning and processing of loans.
This apart, most neobanks seek access to your contacts, gallery and details of other apps in your mobile phone, on installation, to assess the credit-worthiness of customers who don’t have a proper credit score. While all these features can be tempting, one must remember that easy access to credit can be a double-edged sword too.
Regulations, grievance redress
The banking regulator in India, unlike in a few other nations, does not recognise virtual banks and thus, does not expressly regulate neobanks. Therefore, there is a lack of direct supervision by the RBI on neobanks.
However, the RBI has mandated the requirement for digital banking service providers to have some physical presence. Thus, neobanks have tied up with banks or any financial institutions that are directly supervised by RBI. So, money in any account opened with a neobank, backed by an RBI-regulated bank, will also be insured up to ₹5 lakh under the DICGC Act, since customer funds are parked with an underlying bank
In terms of payments, as per Niyo, neo-banks are all mandated to follow the same set of regulatory requirements, such as two-factor authentication for card-based transactions.
In case of grievances relating to the account backed by a bank/NBFC, one can contact the neobank as well as the bank/NBFC for redress. One can also file a complaint on the RBI’s Sachet website (https://sachet.rbi.org.in), if the issue is not resolved within a reasonable time frame.
Given the neobanks’ user-friendly interface, transactions can be carried out with comfort and convenience. But neobanks do have their drawbacks.
Some of the reviews for these neobank apps claim that balance in the app doesn’t get updated quickly and the customer support is poor. If this is the case, the purpose of having a neobank app, which promises seamless transactions, may not be fully served. Since neobanks are digital-only platforms, there is always the cloud of cyber security incidents and privacy breaches. Also, as some of the services being provided by these platforms are based on access granted (app permissions) to the user’s data, any data protection laws/regulations could impact some functionalities.
Customers need to check whether a particular neobank fits with their needs. For instance, a customer looking for a better banking transaction experience may not require credit-led neobanking services. Besides, the whole premise on which neobanks are built is to cross-sell products such as mutual funds, insurance and credit-related services. Slick user interfaces could woo customers to adopt a service they are not looking for or sign up for a product that they don’t require.
An account with a neobank cannot be a complete substitute to having one with a traditional bank. One can only consider this as a secondary account for faster and better banking. Unlike banks, neobanks do not have the benefit of tried-and-tested infrastructure and knowledge of risk management, and compliance.
If a neobank fails, while the impact on the customer may not be direct due to the fact that your account is actually with the bank or the NBFC, the dependence on these platforms may disturb the banking experience. Banks too are upping the ante on online and app-based services these days, especially after Covid-induced ‘stay at home’ trends. SBI’s Yono and Kotak’s 811 offer most of the services that these fintech neobanks are offering and are better alternatives than the new-age fintech platforms. For financial advisory, there are other reliable service providers outside the neobanking system as well.
If you are looking for quick loans, instead of neobanks loans, you can consider gold loans or loan against FD or other financial assets that are better regulated.