Neobank Market Analysis: My Perspective on Who is Building Future Banking Products and Why

I recently read Haymaker Ventures’s excellent FinTech Quarterly Update. It cites data pertaining to changing consumer behavior. The report notes: “Fintech app downloads outperformed banks by over 10x as the pandemic continues to shake consumer …

I recently read Haymaker Ventures’s excellent FinTech Quarterly Update. It cites data pertaining to changing consumer behavior.

The report notes: “Fintech app downloads outperformed banks by over 10x as the pandemic continues to shake consumer finances. According to figures from the mobile analytics platform App Annie, finance apps were downloaded 4.6 billion times in 2020, with consumers spending 16.3 billion hours scanning their mobile devices to check their finances.”

These are big numbers and big trends and led me to ask the following questions:

  1. How are FinTechs helping consumers access new financial products?
  2. Which firms are reinventing banking?
  3. Why are Neobanks forming?

Neobanks: Firms Reinventing Banking

According to Forbes, Neobanks, sometimes referred to as “challenger banks,” are Fintech firms that offer apps, software and other technologies to streamline mobile and online banking.

These Fintechs generally specialize in particular financial products, like checking and savings accounts.

I was unable to find a broad list of Neobanks by segment type so worked with Vergo’s Founder and CEO, Rich Kane, to create, organize, and format a small database of Neobanks.

While this list is not exhaustive (seemingly Neobanks are popping up weekly) it serves to represent a mix of Neobanks by targeted persona, focus, core value proposition, and type.

Note: we did not classify each Neobank based on its core classification, though we could have. In general, there are three classifications of Neobanks:

  1. Independent Neobanks. Formed from scratch on their own through large financial investments. Initially, they don’t have a client base but attract customers through favorable financial offers or service charges. Prominent representatives of neobanks belonging to this category are Revolut, Chime, and Monzo. Transfers and payments generate the bulk of the income for these banks. The expansion of the customer base is done through lending.
  2. Neobanks from traditional banks. Some neobanks are subsidiaries of traditional banks. The main advantages of Neobanking are ease of use, no paperwork, quick account opening, artificial intelligence (handling 90% of client communications), great propositions (no global withdrawal fees, interest on the balance, etc).
  3. Established Tech Neobanks. Such Neobanks are established by major multinational companies such as Google Alibaba, and Apple. They are characterized by large client bases, high ratings, and trust of clients.

I hope that this list can help you quickly find examples of interesting Neobanks and their core offerings. These are largely independent Neobanks.

StartupTargeted PersonaFocusCore Value PropositionType
AcornsInvestingB2CSave & Invest For Your Bright FutureInvesting
ArivalStartupsB2BThe First Fintech Bank For The AbnormalStartups
AspirationClimateB2CYou can change Climate ChangeClimate
BettermentInvestingB2CInvesting Made BetterInvesting
BlueVineSMBsB2BBetter Banking For Your BusinessSMB
BrexStartupsB2BAll-In-One Finance For Every Business.SMB
ChimeMillenialsB2CBanking That Has Your BackMillenials
ClairPaid EarlyB2CGive That Payday FeelingPaid Early
CurrentGen ZB2CWe’Re Not A Bank. We’Re Better.Gen Z
DaylightLGBTQB2CRewards you for spending in line with your values.Diversity
DaveLow CreditB2CBanking For HumansLow Credit
EmpowerLow CreditB2COne Card With All The Right MovesLow Credit
First BLVDDiversityB2CBanking for Black AmericaDiversity
GreenlightChildrenB2CThe Money App For Families.Children
HatchSMBsB2BModern Checking For Small BusinessesFreelancer
HMBradleyGoal SettingB2CSimplify Your Finances. Reap The Rewards.Goal Setting
LiliFreelancersB2BBanking Designed For FreelancersFreelancer
MercuryStartupsB2BBanking Built For StartupsStartups
MoneyLionLow CreditB2CBanking That Gives You MoreLow Credit
N26TravelersB2CMobile Banking The World LovesMobile
NerveMusiciansB2BIntroducing The First Banking App Created For Musicians.SMBs
NovoSMBsB2BPowerfully Simple Business BankingSMB
PointMillenials/Gen ZB2CThe Debit Card That Does It All.Millenials/Gen Z
QapitalGoal SettingB2CFeel Happy About MoneyGoal Setting
RevolutTravelersB2COne App, All Things MoneyMillenials/Gen Z
RhoSMBsB2BBetter Business BankingSMB
RobinhoodInvestingB2CInvesting For EveryoneInvesting
SableLow CreditB2CInclusive And Effortless BankingLow Credit
SoFILow CreditB2CAn Account That’S In Your Corner.Low Credit
StashInvestingB2CInvesting Made EasyInvesting
StepTeensB2CBanking for teensTeens
TrustAd BuyersB2BGrow Your Business, In Good CompanyAd Buyers
VaroDiversityB2CA Bank For All Of UsDiversity
VergoSMBsB2BDigital Banking for ContractorsHome Industry
WealthfrontInvestingB2CMake Wealth Your OwnInvesting
Welcome TechImmigrantsB2CTechnology Powering Immigrant SuccessImmigrants
Greenwood BankInclusiveB2CMobile banking experience made for Black/Latinx customers.Black/Latinx

How are firms helping users access new banking products and solutions?

How these (and other) Neobanks will impact the ways in which consumers interact with incumbent banks and their products is worth reflecting on.

Understanding vertical and horizontal banking can help us understand the future of banking and how Neobanks are shaping the market.

A vertical market is a market in which vendors offer goods and services specific to an industry, trade, profession, or other group of customers with specialized needs. A horizontal market is a market in which a product or service meets a need of a wide range of buyers across different sectors of an economy.

Do incumbent banks go wide or deep? I recently read Bank of America’s 2020 Annual Report.

The report states:

“In Consumer Banking, we ended 2020 with 39.3 million digital customers…They connected with us nearly 11 billion times. Our roughly 13 million active Zelle users, both consumers and small businesses, sent approximately $141 billion in transfers in 2020. To put that into perspective, that’s almost 50% of the payments made by our 38 million consumers and small businesses using their credit cards.”

Having 40 million customers is a sign that Bank of America is taking a horizontal approach to market capture. In short, they want all users.

This stands in contrast to Neobanks that generally want very specific types of users.

Is there room for Neobanks to try a different path to helping consumers? Will the rise of Neobanks lead to reduced market share for incumbents?

The future remains to be written.

It does seem plausible, however, that the rise of Neobanks will lead to fewer larger banks, or a decreasing in size (assets, balance sheets, number of clients) for incumbents.

Haymaker Ventures correctly notes that “banking is fragmented, with three or four big banks in most countries, plus lots of smaller ones…disruption creates another opportunity.”

Why are Neobanks forming?

According to Payments Cards and Mobile, there were 60 neobanks worldwide in 2018. And at the beginning of 2021, the number of digital institutions had risen to 319 active ones.

It can be challenging to keep up with the rise of Neobanks – there are many firms in the space and new ones are seemingly popping up on a weekly basis to target specific markets and consumer segments.

Why is this the case?

In short, I believe that Neobanks see market entry as attractive and frankly, not that challenging.

Capital is flowing to Neobanks. New company formation is accelerating.

Incumbent banks make products that overlook the specific needs of various user sub-segments.

  1. Threat of new entrants (ie. low barriers to entry): From the view of current incumbent banks, profitable markets that yield high returns will attract new firms. This results in many new competitors and eventually decreases profitability for all firms in the industry. Unless the entry of new firms can be blocked by incumbents, the abnormal profit rate will tend toward zero (also known as “perfect competition”). From the perspective of new entrants, low barriers to entry mean that the capital costs of getting into the industry make it easier to compete with current incumbents. I think that is exactly what is happening between Neobanks and incumbents.
  2. Threat of substitute products or services: The existence of products outside of the realm of the common product boundaries, which fulfill the same need, increases the propensity of customers to switch to alternatives. This should not be confused with competitors’ similar products; it is instead a different product that fills the same need. Take digital saving accounts as an example.
  3. Rivalry: For most industries, the intensity of competitive rivalry is the major determinant of the competitiveness of the industry. This involves how many firms are in the industry and how their competitive dynamics reduce profitability. Banks have extremely high rivalry, for example.
  4. Bargaining power of buyers: The bargaining power of customers is also described as the market of outputs. It is the ability of customers to put the firm under pressure, which also affects the customer’s sensitivity to price changes. Picture a supply and demand curve: if the supply greatly outstrips the demand, the buyers have more power than the suppliers. The banking industry relies heavily on the weak bargaining power of consumers. For instance, individual consumers, especially those in the retail banking marketplace, have relatively little bargaining power. That’s because the loss of a single account basically has minimal to no impact on the company’s bottom line. In the US there are four major banks: JP Morgan, Citibank, Bank of America, and Wells Fargo. Each offers some combination of retail banking, commercial banking, corporate banking, and asset management. By playing the banking field horizontally, these banks try to maintain their edge.
  5. Bargaining power of suppliers: The bargaining power of suppliers is also described as the market of inputs. When there are few substitutes, suppliers of raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the firm. Suppliers can refuse to work with the firm or charge excessively high prices for unique resources. Similar to power of buyers, this bargaining power relies on scarcity and basic economics of supply and demand. There are two main suppliers for a bank. The first group comprises of depositors who supply the primary resource of capital, while the second is its employees, also known as the resource of labor. The threat from individual depositors is minimal, just the way it is with the bargaining power of consumers. Major corporate customers, high net-worth individuals, and large groups of depositors, though, tend to be a big threat. Neobanks tend to have fewer employees and fewer users.

What are the user unit economics of banks and Neobanks?

Chime recently announced their latest financing round valued at $25B.

Here are comps for 12 Neobanks and incumbents to directionally understand how private and public markets value firms, and by extension, users.

There is a strong correlation between the number of users a firm has and market cap; there is a weaker correlation between the number of customers a firm has and the value of each customer.

CompanyMarket CapApproximate Number of UsersImplied Value Per User
Bank of America$350,000,000,00075,000,000$4,667
Westpac$70,000,000,00017,000,000$4,118
Wells Fargo$206,000,000,00072,000,000$2,861
Revolut$33,000,000,00015,000,000$2,200
Current$2,200,000,0001,430,000$1,538
SoFi$12,000,000,0009,000,000$1,333
Citigroup$150,000,000,000115,000,000$1,304
Chime$25,000,000,00020,000,000$1,250
Wise$10,000,000,00010,000,000$1,000
Greenlight$2,300,000,0003,000,000$767
Varo$550,000,0001,000,000$550
Green Dot$2,500,000,00030,000,000$83
Key Metrics
Correlation between Users and Implied Value Per User35%
Correlation between Number of Users and Market Cap78%
Average Implied Value Per User$1,806

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