A neobank is a bank account that exists only as an app, with no branches of its own. It is also called a digital bank. You open the account on your phone in a few minutes. In the same app, you get a debit card, UPI payments and sometimes a credit line, which is an amount you may borrow whenever you need it.
In India, most neobanks are not banks in the legal sense. Only a company with a banking licence from the RBI may hold customers' deposits. So a neobank works with a licensed partner bank. Your money is held in an account at the partner bank, and it is recorded in the partner bank's core banking system. The neobank builds the app, the design and the extra features on top. This arrangement is called banking as a service.
The neobank also needs a card for its customers. It usually launches the card through a card issuing platform, instead of building the card software itself. It also connects the account to UPI. So you can pay from the account with any UPI payment app.
Neobanks try to offer what large banks do not. Consider a family from Guwahati on a holiday in Singapore. They pay for meals and tickets in Singapore dollars with a normal Indian debit card. On each payment, their bank usually adds a fee on top of the exchange rate. This fee is called a forex markup. Some neobanks offer a zero-markup card, which adds no fee of its own. With such a card, the same holiday would cost the family less.
A neobank without a licence has limits. It cannot hold deposits itself, and it must lend through a partner bank or an NBFC. An NBFC, or non-banking financial company, is a company licensed to lend money but not to take ordinary deposits. The page on NBFCs and banks explains the difference. So some neobanks are now getting licences of their own. For instance, slice began by lending to young people through a card. It then merged with a small finance bank, a type of bank licensed by the RBI to serve smaller customers.
Outside India, some neobanks offer other services as well. In the United States, one offers earned wage access. It lets a worker take out pay that they have already earned, before payday.