One of the most anticipated questions in the fintech industry is: how are neobanks different from challenger banks? And are they even different entities? If you’re also new to the fintech world and looking for a clear comparison between these types of banks, then this blog is for you. Here, we will discuss what these are and how they are different from each other. Keep reading!
What is a Challenger Bank?
The challenger banks are the newly established digital banks in India that have a proper bank license. In other words, the word ‘bank license’ means these are RBI-approved completely regulated new banks and not the existing banks that have digitalized their operations.
What Are Neobanks?
Neobanks in India can be defined as companies or start-ups that offer certain financial services without being regulated by RBI. Simply put, neobanks are not regulated as a bank, but this doesn’t mean they are illegal or not regulated at all. Most of them are authorized on frameworks like e-money regulations.
Why is it Important to Compare Neobanks Vs Challenger Banks?
From a customer’s point of view, most people can not differentiate between challenger banks and neobanks. For most customers, using credit/debit cards, making balance transfers, viewing their accounts, etc. are some of the common interactions with their respective banks, and they get it from both neobanks and challenger banks.
However, there are some instances where you can find a difference between both types of financial instances:
- Getting a loan
- An overdraft
- Getting a mortgage
- If by any chance the financial service provider gets bankrupt
In the first three instances, these services can only be provided by challenger banks as they are authorized for providing lending activities. Moreover, customers of challenger banks also benefit from the NPF (National Protection Funds).
So, most customers look at challenger banks as neobanks but with more protection and more features. But does it mean, challenger banks are better and more favored than neobanks? Not necessarily!
This is where we need to discuss the business model of both banks:
A neobank is a pure startup. They mainly focus on providing a better customer experience through fast iterations, and product management, intending to gain more and more clients. They focus on the “faster, cheaper, and better” framework. This is possible because they are lightly regulated and focus on generating good returns just like tech companies.
A challenger bank on the other hand is a bank that is built with modern technologies but works like a traditional bank. From credit risks to asset liability management, it provides all kinds of services. The main objective of these banks is to maintain and grow their balance sheet.
This is the reason why neobanks are growing at a much faster rate than challenger banks. On the other hand, challenger banks focus more on growing their lending base and deposit.
Neobanks In India Vs Challenger Banks
Many people who are new to the fintech world confuse these two banks with each other. Some even use the names interchangeably. They may be offering similar services at some point, but they are quite different from each other. Below is a detailed comparison between the two banks:
- 1. Regulations: Challenger banks are regulated by the RBI, whereas Neobanks are not regulated by any bank but follow e-regulations.
- Business Model: Challenger banks are one-stop financial institutions that offer services of both neobanks and traditional banks. On the other hand, neobanks are more like tech startups but more technologically advanced.
- Recommended For: Challengers banks are ideal for all types of businesses and enterprises. However, the neobanks mostly serve small to medium-sized businesses. Because they offer affordable rates, they are greatly preferred by small startups and companies.
- Fees: Challengers levy more charges as compared to neobanks. But these charges are much lower than traditional banks. Neobanks on the other hand offer much cheaper services.
- Legal Remedies:In case of unfavorable situations, challenger banks offer defined legal remedies. But this is not the case with neobanks. They offer no such legal remedies for their customers
- Market Visibility: Challenger banks have higher visibility in the market and are greatly accepted by customers. On the other hand, the neobanks have lower acceptance and visibility in the Indian market.
Conclusion
This was all about neobanks and challenger banks in India. We have provided a detailed comparison between both types of financial institutions. As you can see, both types of banks work on different business models and are very different from each other. While challenger banks are widely accepted in the Indian market, neobanks are growing in terms of popularity and affordability. Some neobanks are even applying for licenses, which will ensure their growth and reputation in the fintech world. We hope this information helps!
