The rapid digital transformation of India’s financial ecosystem has significantly reshaped the banking sector, leading to the emergence of neobanks as innovative, technology-driven alternatives to traditional banking institutions. This study presents a comparative analysis of service quality between neobanks and traditional banks in India, focusing on key dimensions such as reliability, responsiveness, convenience, assurance, and customer experience. The findings reveal that nearly 26% of India’s population, representing over 350 million users, has adopted digital-only banking services, driven by increasing smartphone penetration and rising digital literacy. Neobanks demonstrate superior performance in customer-centric parameters, with satisfaction levels reaching around 91%, ease of use at 94%, and service speed at 93%, significantly outperforming traditional banks. Their ability to offer instant onboarding within minutes, real-time service delivery, and AI-driven personalization highlights their competitive advantage. However, traditional banks continue to dominate in trust and security perception, with scores ranging from 89% to 91%, and maintain strong rural penetration of 75–80%, ensuring financial inclusion and stability. Despite the rapid growth of neobanks, challenges such as cybersecurity concerns and regulatory limitations persist, while traditional banks face issues related to slower digital adoption and operational inefficiencies. The study concludes that the future of banking in India will not be characterized by replacement but by convergence, where a hybrid model integrating the technological agility of neobanks with the institutional strength and credibility of traditional banks will play a crucial role in enhancing service quality, customer satisfaction, and sustainable growth in the evolving financial landscape.