In my experience while observing the Indian fintech space as a law student, neo banks aren’t just another trend—they represent a generational shift in how financial services are consumed and built. However, this new breed—unlike their brick-and-mortar predecessors—find themselves operating in regulatory grey zones, exposing both the promise and pitfalls of India’s evolving fintech story. Through this article, I aim to explore what sets neo banks apart and why our current legal framework must evolve if India wants to embrace financial innovation without compromising consumer safety.
Definition and Functional Structure of Neo Banks in India
At its core, a neo bank is a technology-driven financial institution that delivers banking services exclusively through digital platforms without any physical branch presence. Unlike traditional banks, neo banks do not hold banking licenses but leverage technology, user experience, and data analytics to offer customers a variety of banking products and services. Originally, a neobank was defined as a bank that had no physical presence and functioned completely online while interacting directly with the consumer. This definition has evolved as neobanks have tried to differentiate themselves from online banking services offered by incumbents and shifted from being centred only around digital banking to focusing on providing a superior customer experience. The following are the key features of neo banks :- Fully digital onboarding and service delivery, user-friendly mobile apps and web platforms, real-time notifications, expense management, and savings automation and instant credit assessment and digital lending
The following are the Major Neo Banks in India:
- Jupiter which has partnered with Federal Bank as well as SBM India. It offers digital savings, UPI and analytics
- Fi has partnered with Federal Bank and offers insights on spending, smart deposits, etc.
- RazorpayX which has partnered with RBL Bank as well as ICICI Bank. It offers customers business banking, payouts
- Niyo which has partnered with Equitas as well as DCB Bank. It offers forex cards, salary accounts, etc.
Notably, none of the entities possess an RBI-issued banking license. Their operational legitimacy hinges on partnerships with licensed commercial banks.
India’s Regulatory Approach to Neo Banks: Ambiguity and Indirect Oversight
A) RBI Framework
India’s neo banks operate within a fragmented yet evolving regulatory environment, shaped by a mix of indirect RBI norms and emerging policy discourse. The RBI’s Master Direction on Prepaid Payment Instruments (2021) allows neo banks to issue wallets or prepaid cards via licensed partners, enabling digital savings and payments services—but falling short of full-fledged banking. The 2022 Guidelines on Digital Lending further limit neo banks from lending independently, mandating that all credit must flow through a regulated entity. These rules tighten disclosure norms, restrict First Loss Default Guarantee (FLDG) models, and impose strict data localisation requirements, impacting embedded lending fintechs.
Moreover, the 2023 RBI Guidelines on Outsourcing of Financial Services impose compliance obligations on the partner banks through which neo banks function, indirectly extending regulatory pressure on these digital entities.
B) NITI Proposal
The NITI Aayog’s 2021 Discussion Paper on Digital Banks presents a clear vision: a two-stage digital bank licensing framework that could formally integrate neo banks into India’s regulatory fold—a proposal still pending adoption.
C) Indirect Oversight
Instead of framing explicit rules, the RBI encourages neo banks to operate as “correspondents” or digital overlays for existing partner banks. Actual banking operations—account opening, deposit-taking, money movement—happen inside the established regulatory perimeter of RBI-licensed banks. Some neo banks augment their business by acquiring NBFC licenses or by operating PPIs, but these licenses limit their banking scope and do not equate to full-service or deposit authorization. While this approach has fostered innovation, it means that the RBI’s oversight of neo banks is only as strong as its regulation of the underlying partner banks. Neo banks themselves exist outside the full glare of regulatory scrutiny, raising questions about operational risk, governance failures, and consumer protection in case of disputes or insolvency.
The following are the consequences of RBIs approach:
- Limited Oversight: RBI’s regulatory power is exercised primarily via the partner bank; the neo bank entity remains outside the direct regulatory perimeter.
- Accountability Gaps: In case of consumer disputes, the responsibilities of the neo bank versus the partner bank are ambiguous.
- Innovation with Unchecked Risk: Neo banks can roll out features rapidly, but without direct prudential norms or risk management scrutiny.
- The result is a landscape where technology innovation advances ahead of regulatory safeguards, creating new consumer vulnerabilities and market imbalances.
To me, it feels like the law is lagging behind the innovation curve, leaving consumers to navigate an exciting but uncertain fintech landscape.
Comparative International Approaches: UK, US and Singapore Models
A look at global models illustrates that India’s hands-off stance is perhaps not the most prudent. A study of global practices reveals a sharply different regulatory philosophy in the other jurisdictions, underlining the lacunae in Indian regulation. The United Kingdom, home to Monzo and Revolut, issues direct digital bank licenses via the Financial Conduct Authority (FCA), combined with tiered capital requirements and regular scrutiny. In the United States, fintechs like Chime still mostly depend on partnership arrangements but have seen instances, such as Varo, where a federal banking charter has been granted. Singapore’s Monetary Authority (MAS) pioneered a bespoke licensing regime for digital banks, permitting entities like Grab and Sea to provide retail and wholesale banking in a fully regulated environment. These global systems encourage digital banking innovation but always under a well-defined and enforceable legal umbrella, unlike India’s current indirect, patchwork framework.
The global trend is clear: Leverage technology, but couple it with fit-for-purpose regulation. India’s patchwork approach, by contrast, risks both under-protection for customers and under-preparedness for regulators in crisis scenarios.
Consumer Protection Challenges in the Absence of Direct Regulation
Operating in unregulated territory brings significant downstream risks for India’s growing digital consumer base:
1. Data Misuse = The extensive collection and processing of personal and financial data by neo banks, in the absence of robust data protection oversight, creates substantial consumer vulnerabilities. This regulatory vacuum increases the likelihood of unauthorized data sharing, weak cybersecurity compliance, and poor accountability in the event of breaches. Unlike traditional banks, which are subject to the RBI’s stringent IT and cybersecurity guidelines, neo banks currently face no such direct compliance mandates.
2. Financial Loss and Redressal Issues = Customers may not clearly understand whether they are dealing with a regulated bank or an unregulated intermediary. In cases of service disruption, fraud, or insolvency, the liability veil between the partner bank and the neo bank confounds legal recourse for customers. Deposit insurance and grievance mechanisms may be ambiguous or unavailable.
3. Ambiguous Product Disclosure = Frequently, neo banks market financial products with aggressive claims—such as “zero fees” or “instant loans.” Without regulatory vetting, these may border on mis-selling or create unrealistic expectations. The very absence of regulatory guardrails that enabled rapid innovation now threatens to undermine user trust, especially as instances of cyber fraud and digital scams rise in India’s fintech sector.
Lacunae and Unique Perspectives: A Case for Direct Regulation
The Indian regulatory posture on neo banks, while designed to foster controlled experimentation, is increasingly outdated:
- Structural Ambiguity: Neo banks are neither fully financial entities nor pure technology providers. This ‘liminal’ existence means neither RBI nor sectoral regulators like SEBI or the Data Protection Authority claim direct jurisdiction.
- Enforcement Asymmetry: Partner banks bear the compliance risk, but neo banks have significant operational autonomy, prompting a misalignment of risks and controls.
- Stalling Innovation: Leading fintech entrepreneurs now face a paradox—rapid growth and VC funding, but an uncertain pathway to regulatory legitimacy, especially if/when RBI seeks to tighten norms.
- Erosion of Public Trust: Regular headlines about fintech mishaps invite closer regulatory scrutiny, threatening to lump responsible neo banks with riskier digitized NBFCs.
- Missed Opportunity for Financial Inclusion: The lack of a clear regulatory path limits neo banks from offering broader credit and savings solutions to the underserved.
India’s current approach rewards innovators but burdens users when things go wrong—something that simply cannot work long-term if the system is to scale responsibly.
Conclusion: Towards a Fit-for-Purpose Legal Framework for Neo Banks in India
With fintech adoption surging and consumer expectations rapidly evolving, India’s current regulatory grey zone for neo banks is proving to be a fragile compromise. The time is ripe for the Reserve Bank of India and the government to transition from reactive oversight to a forward-looking, structured framework that grants neo banks a clear legal identity. This would involve crafting a bespoke digital bank licensing regime—one that draws on lessons from global pioneers like the UK’s Financial Conduct Authority and Singapore’s Monetary Authority. Such a framework must balance innovation with accountability, mandating tiered capital thresholds, enforceable consumer protection norms, robust data governance standards, and periodic regulatory audits. A sandbox model could allow existing neo banks to operate under transitional licenses while they build compliance capabilities, eventually graduating into fully regulated digital banks. This gradualist but firm approach would ensure that fintech players do not remain shadow entities dependent on partner bank shields, but rather emerge as full-fledged institutions capable of being held directly accountable. Only by giving neo banks this structural legitimacy can India ensure that the fintech revolution is inclusive, resilient, and safe for the millions now entering the digital economy. Without such reform, India risks undermining the very innovation it seeks to promote—trapping its most agile financial players in a limbo of ambiguity, neither fully free nor fully regulated.
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The author is a fourth-year B.A. LL.B. (Hons.) student at National Law University Odisha, with a strong academic interest in fintech regulation, banking law, and corporate transactions. She has previously published on competition law, mergers & acquisitions, and contingent contracts, and is particularly focused on the evolving intersection of financial innovation and regulatory frameworks in India.
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