Understanding the Consequences if a Neobank Fails: What You Need to Know

Imagine this: You have just signed up for a new neo bank, and all your finances are in one easily accessible account. From opening your account to managing all the transactions, you enjoy all the banking services online from the comfort of your home. You rely on the convenience of having everything together, but what happens if something were to go wrong with the bank? Imagine all the money you put into that account is frozen in an instant, leaving you without access to the funds necessary for daily life.

This is an unimaginable scenario but it's something every neo bank user should be aware of when signing up. If a neo bank fails, understanding the consequences ahead of time can help take the necessary precautions and prevent panic afterward. Having said that, let's explore how neo bank failure can impact you and what you should do to be prepared.

Understanding neo banks

Neo banks, or digital-only banking platforms, are online banks that offer all banking services virtually without a physical branch. These banks operate through their mobile app or website, allowing customers to carry out transactions and access their accounts from anywhere at any time.

Neo banks use modern technology and Artificial Intelligence (AI) to provide banking services efficiently and at lower costs. You can enjoy an instant online saving account opening process and many financial products like debit and credit cards. In fact, you can open a bank account remotely and submit the documents required for bank account verification online. Such convenience streamlines the entire banking experience.

Consequences if a neo bank fails

Though neo banks do not have a physical presence, they collaborate with traditional banks to market their services, falling indirectly under the regulatory purview of the Reserve Bank of India (RBI). Neo banks typically establish partnership agreements and must cooperate with external RBI audits. The RBI exercises direct or indirect oversight, depending on the financial product being offered by the fintech companies.

As a result, neo banks are also covered under the Deposit Insurance and Credit Guarantee Corporation (DICGC) which provides insurance for bank deposits up to Rs 5 lakhs. While it's rare, if a neo bank were to fail, customers may be eligible for compensation up to the insured limit. 

How to prepare for potential neo bank failures

Neo bank failure can be particularly inconvenient if you rely heavily on it for your day-to-day banking needs. To prepare for such situations-

• It is advisable to have an alternative bank account so that you have access to your funds all the time, even if the neo bank experiences issues.

When selecting a bank, take the time to research the features and benefits of savings account they offer. Look out for exclusive deals and discounts as they may add value to your banking experience.

• Keep track of how much you have deposited and how much interest you are earning. The DICGC offers insurance coverage for deposits up to 5 lakhs, so it's a good idea to make sure that you don't keep more money in your neo bank account than this limit.

• Keep an eye on the financial reports, news articles, and blogs that report the financial position of neo banks. Do not wait for the bank to announce a failure before you take action.

Start by withdrawing your funds from the bank and transferring them to another one with better savings account interest rates, minimum balance requirements, competitive fees, and other banking features.

Neo banks partner with traditional banks to provide digital banking services, thus minimising the risk of failure. However, being prepared for any unexpected situations is wise as protecting your hard-earned money should always be a priority.