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:
- How are FinTechs helping consumers access new financial products?
- Which firms are reinventing banking?
- 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.
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:
- 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.
- 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).
- 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.
|Startup||Targeted Persona||Focus||Core Value Proposition||Type|
|Acorns||Investing||B2C||Save & Invest For Your Bright Future||Investing|
|Arival||Startups||B2B||The First Fintech Bank For The Abnormal||Startups|
|Aspiration||Climate||B2C||You can change Climate Change||Climate|
|Betterment||Investing||B2C||Investing Made Better||Investing|
|BlueVine||SMBs||B2B||Better Banking For Your Business||SMB|
|Brex||Startups||B2B||All-In-One Finance For Every Business.||SMB|
|Chime||Millenials||B2C||Banking That Has Your Back||Millenials|
|Clair||Paid Early||B2C||Give That Payday Feeling||Paid Early|
|Current||Gen Z||B2C||We’Re Not A Bank. We’Re Better.||Gen Z|
|Daylight||LGBTQ||B2C||Rewards you for spending in line with your values.||Diversity|
|Dave||Low Credit||B2C||Banking For Humans||Low Credit|
|Empower||Low Credit||B2C||One Card With All The Right Moves||Low Credit|
|First BLVD||Diversity||B2C||Banking for Black America||Diversity|
|Greenlight||Children||B2C||The Money App For Families.||Children|
|Hatch||SMBs||B2B||Modern Checking For Small Businesses||Freelancer|
|HMBradley||Goal Setting||B2C||Simplify Your Finances. Reap The Rewards.||Goal Setting|
|Lili||Freelancers||B2B||Banking Designed For Freelancers||Freelancer|
|Mercury||Startups||B2B||Banking Built For Startups||Startups|
|MoneyLion||Low Credit||B2C||Banking That Gives You More||Low Credit|
|N26||Travelers||B2C||Mobile Banking The World Loves||Mobile|
|Nerve||Musicians||B2B||Introducing The First Banking App Created For Musicians.||SMBs|
|Novo||SMBs||B2B||Powerfully Simple Business Banking||SMB|
|Point||Millenials/Gen Z||B2C||The Debit Card That Does It All.||Millenials/Gen Z|
|Qapital||Goal Setting||B2C||Feel Happy About Money||Goal Setting|
|Revolut||Travelers||B2C||One App, All Things Money||Millenials/Gen Z|
|Rho||SMBs||B2B||Better Business Banking||SMB|
|Robinhood||Investing||B2C||Investing For Everyone||Investing|
|Sable||Low Credit||B2C||Inclusive And Effortless Banking||Low Credit|
|SoFI||Low Credit||B2C||An Account That’S In Your Corner.||Low Credit|
|Stash||Investing||B2C||Investing Made Easy||Investing|
|Step||Teens||B2C||Banking for teens||Teens|
|Trust||Ad Buyers||B2B||Grow Your Business, In Good Company||Ad Buyers|
|Varo||Diversity||B2C||A Bank For All Of Us||Diversity|
|Vergo||SMBs||B2B||Digital Banking for Contractors||Home Industry|
|Wealthfront||Investing||B2C||Make Wealth Your Own||Investing|
|Welcome Tech||Immigrants||B2C||Technology Powering Immigrant Success||Immigrants|
|Greenwood Bank||Inclusive||B2C||Mobile 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.
- 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.
- 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.
- 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.
- 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.
- 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.
|Company||Market Cap||Approximate Number of Users||Implied Value Per User|
|Bank of America||$350,000,000,000||75,000,000||$4,667|
|Correlation between Users and Implied Value Per User||35%|
|Correlation between Number of Users and Market Cap||78%|
|Average Implied Value Per User||$1,806|