What Are Neo Banks? Should You Open An Account With Them?

The financial industry is ever-changing, introducing new products and services. With digital banking on the rise, there is a new category of banks known as "neo banks," which have definitely not overtaken the traditional banks but have caught the interest of many entrepreneurs and investors.

As a consumer amid the coronavirus pandemic, looking for good mobile and online banking service options for your day-to-day needs, you could look at Neo Banks to keep you technologically ahead.

What are Neo Banks?

To put it simply, Neo Banks are digital banks with no physical branches. They only exist online. At least that is what it means globally.

However, in India, regulations don't permit 100 percent digitised banks and these neo banks may also be referred to as fintech companies.

These companies generally offer services that are built on top of traditional banking services, tieing up with traditional banks and helping build a technology-driven banking system that is fast, customer-friendly and cost-effective.

In India, there are startups like Niyo, Open, Razorpay X, Yelo, InstantPay, etc that are partnering with traditional banks to offer better banking solutions by using artificial intelligence (AI) and other machine learning methods.

Neo banks have a mobile-first approach and emphasize on digital operating models. Some traditional banks like SBI have their YONO system, that could come close to the neo bank model of operating completely online, almost eliminating a customer's need to visit a branch.

While these neo banks are being supported by traditional banking infrastructure through partnerships, they, in turn, offer partnered banks to utilise their state-of-art technological know-how to customise reports, process bulk transactions, identify failures in the system, automate payment schedules, etc.

A digital bank is often an online-only subsidiary of an established entity while neo banks do not have any physical branches and exist in partnership with traditional banks in India, to comply with RBI regulations.

Apart from infrastructure aid, some neo banks are partnering with traditional banks for retail products like a savings account.

For example, a neo bank called "ABC" ties up with a traditional bank called "XYZ." The savings bank account product offered by them in partnership will display "XYZ" name on the card as well as account, with latest features such as instant online opening of an account with a higher interest rate, cashback offers on shopping, zero forex markup on international transactions, etc, which are otherwise not offered for other savings accounts by the XYZ bank.

The account will come with additional technologically advanced features like generating reports on spending behaviour, recommend investment plans and may offer a metal card than a plastic one.

They also offer extensive use of AI to manage finances like sending an alert when the customer's card is used to spend an amount higher than he/she does on an average, giving these neo banks an edge over traditional banks.

Should you open an account with them?

Neo banks are for the tech-savvy customers, however, it is about money and the concept might seem intimidating to some. If you like the prospects of these tech-driven, fast and new-age banking models, you can try to open an account on a trial basis and conduct small operations with them. As mentioned before, these banks are partnered with an existing traditional commercial bank, which is governed by RBI.

If you are comfortable with the names of their partners (that is the traditional bank), you can try their product or service but avoid making it your primary bank account.