NEO BANK- WHETHER AN E-COMMERCE ENTITY? - MMJC

What is the exact nature or business model of a Neo Bank is a question in the minds of many stakeholders.

A Neo-bank is an online service provided by Fintech firms by partnering with traditional banks.

Let us try and understand whether a Neo-bank will fall under the E-Commerce Sector of NDI Rules.

What is E-commerce?

Let us first understand what is E-Commerce in terms of Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 (“FDI Rules”)

“E-commerce” means buying and selling of goods and services including digital products over digital & electronic network

Here, the essential element is providing a platform over a digital or electronic network.

How does a Neo-Bank Function?

Banking services or any other services which require a license are regulated by the Reserve Bank of India.

However, neo-bank is a service or provides such a service that does not fall under Banking service or any other licensed service and therefore is not regulated by the Reserve Bank of India.

These neo-banks only have online existence unlike the traditional banks. It provides an online platform to its customers. Since these banks are customer-centric, they focus on giving the customers a feel of banking services through their online presence. It is a digital layer of service that is provided by a Fintech firm.

These are bundled services due to which they are more convenient to use and are preferred by the millennial crowd and working professionals over traditional banks.

Why E-Commerce?

A Fintech Entity may be a software company or an E-commerce entity.

If the entity develops software and sells it to its customers for their use that this would not trigger E-Commerce.

But if a software company creates software and provides it to any other entity as a platform for facilitating the sale of the latter’s products and services, then such service provided by the software company will attract compliance of conditions of the E-Commerce Sector.    

From the functioning of a Neo-Bank, we understand that a Neo Bank is just a platform that partners with licensed banks to provide banking services.

As stated above, the essential element of e-commerce is providing a digital or electronic platform to other businesses for the sale of their products or services. Similarly, a Neo-bank also provides a platform to two parties:

1. To Banks by partnering with them to provide their services online; and
2. To the bank customers for carrying out hassle free banking transactions online. 

Hence, such an entity will fall under the E-Commerce sector and will have to comply with the conditions laid down in the said sector.

Now the next question that arises is whether a Neo-Bank will also fall under the Financial Service Sector as it indirectly provides banking services. Let’s explore this in our next write-up.