As the world's financial system continues to evolve, India is quickly adopting the idea of branchless banking. Neo-banks—online-only banks without a physical presence—are at the center of this revolution, with the promise of quicker, more inclusive, and user-friendly financial services. Through technology, neo-banks seek to disrupt conventional banking models, focusing on underbanked communities, startups, gig economy workers, and digitally native users.

But with this digital-first shift, there are inherent challenges as well. Perhaps the most daunting one for neo-banking platforms is acquiring and sustaining user trust in a brick-and-mortar-less environment. That is where escrow accounts play a role, as a cornerstone trust-establishing and compliance tool in a branchless financial ecosystem.

The Rise of Neo-Banking in India

Neo-banking in India has expanded manifold over the past five years, fueled by a mix of UPI adoption, Aadhaar-based eKYC, and open banking APIs. As per a report by Zion Market Research, the neo-banking market worldwide is anticipated to grow to USD 722.6 billion by 2028 at a CAGR of 46.5% during 2021-2028. In India, popular players such as Jupiter, Fi Money and Open are defining the space for neo-banking, providing anything from digital savings accounts to current accounts with a focus on SMEs.

Reserve Bank of India (RBI) has responded cautiously but stepwise, over-regulating them through collaborations with licensed banks. But as the neo-banks grow and increasingly start to perform more sophisticated, high-value transactions, the imperatives for comprehensive fund management and compliance infrastructure never felt more exigent.

Why Escrow Accounts are Crucial for Neo-Banks

Escrow accounts, which in the past have been employed in real estate or high-value business transactions, are now becoming a central building block in the design of reliable digital banking. An escrow is a third-party hold account in which funds are left until stipulated conditions are fulfilled. In the new neo-banking era, these conditions may be KYC approval, transaction authentication, vendor verification, or milestone attainment in loan or payment flows.

Neo-banks can serve multiple stakeholders—end customers, vendors, lenders, and platforms. An escrow account ensures a middle ground, regulated environment to conduct multi-party transactions securely and transparently.

For instance, a neo-bank for the gig economy paying freelancers on behalf of clients can keep money in an escrow account until the job gets approved. This minimizes disputes, cuts down on fraud, and instills confidence in all parties concerned.

Regulatory Push Towards Escrow-Based Compliance

The RBI’s 2025 digital transaction guidelines strongly encourage the use of escrow accounts in multi-party payment ecosystems, particularly in cases involving customer advances, milestone-based payouts, and third-party service models. Escrow ensures that platforms remain compliant with KYC/AML norms, maintain a complete audit trail, and offer dispute redressal mechanisms as required by regulators.

This renders escrow not only a trust solution but a regulatory protection, particularly vital to neo-banks engaged in business lines such as lending, wealth technology, and cross-border payments.

Refer to the official RBI Guidelines on Escrow for further information.

Use Cases of Escrow in Neo-Banking

In neo-banking, escrow has varied applications across verticals:

Lending & Credit Products

Neo-banks that provide Buy Now, Pay Later (BNPL), credit lines, or invoice financing can employ escrow accounts to pay loans and receive repayments securely. Funds are made available only upon underwriting acceptance, invoice clearance, or milestone confirmation.

Vendor and Gig Economy Payments

Fintechs employing neo-banks for paying vendors or paying freelancers can keep client money in escrow until work completion is confirmed. This safeguards both parties from payment disputes and non-performance.

Wealth Management

Neo-banks that provide mutual funds, bonds, or other investment products can keep subscription money in escrow until the allotment of funds is accepted and thus maintain transparency and avoid misallocation.

Cross-Border Transactions

Remittances and cross-border transactions are simplified by escrow accounts by maintaining compliance with FEMA regulations and facilitating time-bound, conditional releases.

Subscription Models

B2B SaaS companies based on neo-banks can utilize escrow to keep subscription fees pending until SLAs are achieved for enhanced customer satisfaction and renewal rates.

Escrow vs Conventional Payment Systems

Escrow systems are very different from conventional payment systems, particularly when it comes to the control of funds, compliance, and trust. Funds are typically paid immediately to one party in conventional models, with possible risks of non-performance or fraud.

Escrow, however, holds funds in a secure position until all contractual terms are fulfilled, with a high trust, tamper-proof, and audit-friendly setting.

Quick comparison here:

• Fund Control: Conventional payments move money instantly; escrow holds it conditionally.

• Refund Handling: Manual and frequently disputed in conventional systems; rule-based and automated in escrow.

• Compliance: Low transparency in conventional systems; complete KYC/AML and RBI compliance in escrow.

• Audit Trail: Fragmented in conventional systems; integrated and tamper-proof in escrow.

• Trust: Moderate with conventional payments; high with impartial escrow infrastructure.

How Castler is Building the Escrow Infrastructure for Neo-Banks

Castler, the premier escrow infrastructure platform in India, has played a significant role in facilitating digital-first businesses, such as neo-banks, to implement escrow with ease.

With partnerships in key Indian banks and regulatory bodies, Castler provides:

• API-first integration to integrate escrow flows into digital banking apps.

• Regulated escrow accounts that are RBI and SEBI mandate compliant.

• Custom disbursal logic for milestone-based or real-time settlements.

• Real-time dashboards for tracking, monitoring, and auditing fund flows.

• Full-stack KYC and AML solutions for onboarded entities.

Conclusion: Trust is the New Currency

With neo-banking redefining India's economic landscape, trust, transparency, and compliance will be the building blocks of sustainable growth. Escrow accounts provide a ready-made framework for these values—lest branchless translates to lawless.

Castler sits at the nexus of innovation and regulation, providing plug-and-play escrow technology that enables neo-banks to grow faster, safer, and smarter.

As a neo-banking platform wanting to incorporate transactional confidence and regulatory compliance into your offerings, escrow isn't an option, it's a requirement.

Find out more about how Castler can assist you at www.castler.com.