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Home >Money >Personal Finance >Things to know before opening a neobank account

Fintech platforms, which sometimes refer to themselves as neobanks, are increasingly making inroads into the Indian market. The need to go to bank branches has also come down steadily. Mint explains how neobanks work and whether you should open an account with one.

What is a neobank, and how does it work?

There is no such category of banks under the Reserve Bank of India (RBI) rules. Neobank is a term fintech firms that provide banking services use to describe themselves. These firms provide services such as savings accounts, instant loans, credit cards, mutual funds and fixed deposits. They do this via tie-ups with RBI-licensed banks. In the case of products such as wealth management, neobanks generally get investment adviser licences. Usually, the tie-ups are with small finance banks or small scheduled commercial banks. Some countries such as the UK have a formal regulatory licence for neobanks, but that is not the case in India.

What are the benefits of banking with them?

Neobanks are essentially tech platforms, hence they tend to have good apps. They are premised on the idea of banking without physical branches, a trend that has solidified after the coronavirus outbreak. Some neobanks have apps that help you analyse and track your spending. In addition, the tie-ups of neobanks with small banks also allow them to offer higher interest rates on savings accounts. A single neobank can tie up with multiple regulated banks, allowing it to offer a bouquet of products from different providers with one bank providing, say, savings accounts and another providing forex transfers.

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Can you deal with the back-end partner directly?

You can get the same benefits such as savings account interest rates. However, the back-end partner may not have as good a tech platform. Besides, if the neobank is aggregating different tie-ups, going to one partner means giving up the rest. NiYO has tie-ups with Equitas Small Finance Bank for savings accounts and with SBM Bank for foreign exchange.

What are the risks of banking with them?

The bank at the back-end can go bust. In such cases, deposit insurance will only protect savings balances or fixed deposits up to 5 lakh per customer. The back-end bank can also drop its interest rates at a moment’s notice. Third, the relationship between the neobank and the partner bank can sour and this can leave you marooned with the neobank app offloading older customers. The neobank will also attempt to cross-sell products such as insurance policies, credit cards, buy now, pay later loans and mutual funds that you may not need.

What precautions should one take?

Check who the banking partner at the back-end is and how financially healthy it is. Your account will be with that entity. Check if that banking partner has a branch within a reasonable distance from you. Even if you don’t need to go to a branch for most things, there may be cases like KYC updating that require physical verification. Check if the neobank’s core strength aligns with your needs. Some neobanks focus on lending, while others focus on savings accounts and wealth management. As a customer you may not need both.

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