No RBI licence, all digital: Can you really trust neo banks with your money?

Neo banks (digital-only banks) in India face unique cybersecurity challenges compared to traditional banks. While the Reserve Bank of India (RBI) has established a comprehensive cybersecurity risk supervision framework for traditional banks, neo-banks often operate in partnership with licensed banks or NBFCs, making their compliance and risk management frameworks less mature. Here’s a detailed comparison of the frameworks and the cybersecurity gaps neo-banks face.

Traditional banks in India operate under a well-defined and stringent cybersecurity framework mandated by the RBI. At the core of this framework is board-level oversight, where all cybersecurity policies must be formally reviewed and approved by the bank's board of directors, ensuring accountability at the highest level.

In the event of a significant cyber incident, banks are required to report it to the RBI within a tight window of 2 to 6 hours, enabling swift regulatory intervention and containment. The framework also mandates the implementation of baseline security controls, such as endpoint protection, access management protocols, robust data encryption, and regular vulnerability assessment and penetration testing (VAPT) to identify and address potential threats.

To maintain resilience in the face of cyberattacks, banks must have comprehensive business continuity planning (BCP) in place, including effective data backup and recovery strategies. Further reinforcing these measures, traditional banks are subject to regular cybersecurity audits conducted by RBI’s Cyber Security and Information Technology Examination (CSITE) cell, and they participate in periodic cybersecurity drills to test their preparedness. This layered and proactive approach underpins the cybersecurity posture of India's traditional banking sector.

The Gaps and Challenges with Neo Banking

Neo banks in India have emerged as agile, digital-first financial platforms, operating by partnering with licensed banks or NBFCs. However, this model creates significant cybersecurity gaps, primarily due to the absence of direct regulatory oversight. Unlike traditional banks, neo-banks are not directly monitored by the RBI, since they function under the licenses of their partners. As a result, they do not fall under RBI’s cybersecurity framework, leading to limited accountability in the event of data breaches or financial fraud. This dependency on partner institutions for security policies is problematic, as those measures may not always align with the needs of a fully digital platform. Without direct supervision, these entities become more exposed to cyber threats.

Saurabh Bansal, Founder of Finatwork Investment Advisor, a SEBI RIA (Registered Investment Advisor), says, "Neo Banks have gradually started to get the attention of consumers in India. Jupiter, Niyo, RazorpayX, Fi Money, etc have aggressively started to promote their services. However, trusting your money with them requires careful consideration."

"Neo banks do not have their own banking licenses yet. They partner with traditional banks to offer banking services, ensuring regulatory compliance. The RBI has guidelines for digital banking, emphasising the importance of physical presence for customer support and grievance redressal," said Bansal.

Another major vulnerability stems from their dependence on third-party APIs for services like payments, credit scoring, and KYC verification. These APIs, while essential for smooth integration, open up multiple points of entry for cyberattacks. If not properly secured, these interfaces can be exploited for unauthorized access or data breaches. Moreover, neo-banks often lack direct control over the security practices of these vendors, and inadequate monitoring further compounds their exposure. In many cases, encryption and authentication controls at the API level are insufficient.

Data privacy also remains a grey area. Neo banks handle vast amounts of sensitive customer information—KYC details, and financial records—usually stored on cloud platforms. However, the lack of tailored privacy regulations creates ambiguity about how this data should be protected. Data sharing with third parties without proper consent mechanisms only raises the stakes. With the introduction of the Digital Personal Data Protection Act of 2023, neo-banks may face significant compliance hurdles, especially around data localization and encryption standards.

According to a spokesperson having knowledge in the field seeking anonymity, said, “The RBI has been tightening its leash on online lending and neobanks by making sure that only licensed operators touch customer money. This is a safety net, but there's still a need for specific regulation around neobanks. Until that happens, the consumer needs to be vigilant read the fine print and understand who's actually holding your money.”

Incident response is another critical gap. These banks lack a uniform, standardised framework for reporting breaches. Unlike traditional banks, they are not obligated to inform the RBI directly, leading to potential delays in addressing and disclosing security incidents. This reliance on partner institutions for reporting only adds another layer of opacity.

Finally, in most of the neobanks customer awareness and fraud prevention mechanisms are often lacking. The drive to offer a seamless user experience sometimes comes at the cost of robust security features. Weak authentication protocols and limited user education on cybersecurity best practices leave customers vulnerable to phishing and social engineering attacks. Without stronger multi-factor authentication and behaviour-based security measures, neo-banks remain exposed on multiple fronts.

Security in Neo Banking

Neobank ensures communication between the user's device and the neo bank's server is fully encrypted, maintaining confidentiality and integrity of data during transactions. "Neo Banks have an extra layer of security to account access, requiring a second form of verification, such as a one-time code sent via SMS or biometric authentication. They have processes in place to Identify and respond to suspicious activities immediately, analyse user transaction patterns, and block or verify unusual transactions. They have to adhere to strict security regulations and standards, ensuring transparency, and responding quickly to security incidents," said Bansal.

While Neobanks run on digital infrastructure and have a compliance process, they don't possess banking licenses. Most collaborate with RBI-regulated banks, meaning your funds end up in the traditional banking system—just with a tech-oriented interface.

“Look beyond the app experience itself—see which regulated institution the Neobank is affiliated with, how open its communication is, and if it has customer support beyond chatbots. If a platform explicitly mentions its banking partner, has transparent T&Cs, and has grievance redressal options, it's a positive sign,” said a spokesperson having knowledge in the field seeking anonymity.

Additionally, Bansal said, "The consumer should research the partner bank and parent company of Neo Bank. A well-established partner can guarantee the bank's ability, integrity, and goodwill. Also, evaluate the bank's customer support channels, such as online chat, phone support, or email."

As India's fintech landscape evolves, neo-banks must bridge critical cybersecurity gaps to earn consumer trust. Regulatory clarity, stronger oversight, and proactive security frameworks are vital. Until then, digital convenience must be balanced with caution—users must stay informed, vigilant, and aware of who truly safeguards their money behind the screen.