Overview from Fintech Snark Tank
In some ways, 2021 was a good year for Neobanks – also known as challenger banks, digital banks or online banks – such as Chime, Varo and Current.
According to Cornerstone Advisors, the 10 major neobanks in the US grew by a little more than 10 million in 2021 from 23.3 million to 33.5 million.
Looks – or in this case, evolution – can be deceiving though. Despite positive growth numbers, recent Neobank news has not been encouraging:
- Dave—a fintech, not some random guy—Told That capital constraints limited its ability to invest in the second half of the previous year.
- According to the Financial Times, MoneyLion faces investor skepticism as it burns cash.
- By the end of the year, Varo Bank’s money may run out. according to fintech business daily“With a $32 million salary and $38 million of marketing expenses in Q1, costs far exceeded non-interest income.”
- In May, Chime confirmed reports that it was delaying its planned IPO in light of declining fintech stock valuations.
Case against Neobanks
It would be easy to blame the negative Neobank press for the overall fintech funk that pervades the industry right now. But the market factors influencing Neobank closing the doors of the new Neobanks coming into the market are:
1) Megafintech has better economics and business models
Cornerstone’s research found that only half of the top 10 Neobank customers—17.6 million consumers—call their account with those fintechs as their primary checking (or spending) account.
In contrast, over 15 million consumers call the PayPal or Square Cash app their primary checking or spending account provider. Americans have this a tiny percentage of the roughly 272 million accounts with these “megafintechs”.
Do the math: To get a primary spending account customer, NeoBank must acquire two customers.
Fintech Business Weekly reported that Varo’s customer acquisition cost is $45. This means that it costs Varo $90 to acquire a primary (ie, engaged) customer.
Megafintech, on the other hand, already counts nearly every smartphone-carrying US adult under the age of 55 as an account holder. Their cost of increasing engagement must be less than $90 per existing customer.
An important point here is that Neobanks not only compete with existing banks – they compete with Megafintech, whose platform business models give them scale and revenue diversity.
2) Interchange is not a reliable revenue source
Speaking of revenue diversity (or lack thereof)…
I don’t know if it was a good idea to rely on interchange for revenue, but in every argument I’ve had with a Neobank supporter where I’ve brought up the shortcomings of an interchange-dependent business model, the response has generally been,” They will expand to other revenue sources at some point in time.”
We have passed “some point”.
Relying on interchanges runs against consumer behavior trends:
- Merchants Mobile App. In any given week, Americans have about $10 billion sitting in merchants’ mobile apps waiting to be used. And when it is used, it is one less transaction that a neobank (or traditional bank, for that matter) generates interchange revenue.
- Buy now, pay later. BNPL may be at the top of the list of things ruining civilization, but it is eating up traditional and neo-exchange revenues of banks. Square (via Afterpay) and PayPal have been heavily promoting BNPL, and now Apple has announced its plans to offer the service.
- Embedded Banking. A survey by Cornerstone Advisors asked consumers about their participation and interest in accessing financial services from non-financial brands. Results show a strong pattern of interest in product categories such as gaming, electronics, home fitness, fashion, pharmacy, home improvement, automotive and general retail.
I wrote that Chime should expand beyond financial services to diversify its revenue sources and sell other digitally distributed products and services—e.g., cell phone damage protection, subscription management, identity theft protection—.
fintech brain food The newsletter echoes this call for revenue diversification, suggesting things like tips, real-time payments, subscriptions and lending.
So what are Neobanks waiting for?
3) Niche Affinity Play is played
I have been a proponent of the specific affinity approach for Neobanks, where community fintechs such as Kinley, Deloitte and Panacea Financial address the unique financial needs of specific consumer segments. This approach requires Neobank to:
- Identify the unique financial needs of a segment. easier said than done. Be a witness to the coming and going of this century of online banks for women. no one was able to define woman Unique Financial needs—in no small part because “women” is not a marketable, fixed segment (it is an aggregate of several segments).
- Be the prime intimacy. Neobanks’ claims of how large their affinity groups are are misleading because most of us belong to multiple affinity groups. If you’re a gay African-American doctor, do you bank with Kinly, Daylight, or Panacea?
end of the Neobank era
I’m not sure when the term “Neobank” became popular. In January 2013 I published a blog post titled neochecking accountsAnd I know that the word was not in use at the time.
Whenever it was introduced, 2022 marks the end of the Neobank era.
Today’s neobanks just aren’t going away.
They may have won the first battle with existing banks, but a new wave of competition is coming from megafintech and non-financial brands.
It’s hard to imagine that the venture capitalist will continue to fund an infinite list of Neobank startups planning to go after increasingly smaller market segments with an interchange-dependent revenue model.
Lending is not a panacea. Neobank customers are primarily sub-prime borrowers who are not the best candidates for lending.
This May Change Over Time, But Do Neobank passed Time?
The forerunners of the Neobank era—Simple, Moovan, Monzo, etc.—are to be celebrated. But the days of a general-purpose, digital-first, retail bank—like a fintech that doesn’t lend and has no charter—is over.
Credit: www.forbes.com /