I’ve looked at a number of NeoBanks in recent years and passed on all of them. As I’m looking at the market today I’m not yet regretting that decision, but that may yet change.
The first of the NeoBanks I remember looking at was probably Joshua Reich’s Simple (at the time BankSimple), a company notable for its exceptionally good front-end design. It was the first in a long list of alternative financial services players that I decided not to dig into. Simple, a first mover, was acquired in 2014 by BBVA for $117M, I suspect in part because they found it tough to outcompete on UX alone.
Tough to activate new clients
The difficulty I see for all NeoBanks is as follows:
- Acquisition of any financial product customer tends to be expensive (typically $150 to $500 in the mainstream population) and trust hard to build, although this is where some of the NeoBanks shine and have achieved lower numbers through social and viral loops.
- The conversion path of a new customer is painful. First you need him or her to sign up, then you need card and account activation, then you need a (decent) balance transfer. That’s only the beginning of the journey though as you want to generate repeat usage, and experience shows old banking habits die hard. Real adoption comes when they move their salary over, at which point the cycle of adoption is complete. If you can’t run significant volumes through the system, making unit economics work is hard.
- Even if you have a customer using your system in anger, the battle isn’t over yet. The day that customer needs a mortgage or a loan, the advantage of the incumbents come into full force . For example, access to a mortgage product is a great opportunity for an incumbent bank to force your core banking back onto their platform, so churn is of great concern.
- Historically the onboarding processes were further hampered by some nasty breaks in the process. Ask any of the NeoBanks who tried to build without a banking license, e.g. on top of BankCorp, what the customer experience of opening an account was like.
- Great customer service is hard to achieve at scale. The startups may deride the big banks, but as they scale they will feel the pain (and cost) just like the others. My own experience (onboarding my mum on N26) was far from great.
The NeoBanks do have some clear advantages, but whether these are enough to generate a large number of fully active accounts I really don’t know:
- Completely digital banks built on proprietary stacks as opposed to the outdated infrastructure of legacy banks, meaning they have a real-time 360 view of the customer.
- Better customer experience because they don’t build on the rusty rails of the existing financial system, meaning for example real-time transfers and alerts.
- Better interest rates, lower fees, if any, and usually better service.
- Extra focus on helping individuals manage and understand their relationship with money (budgeting, bill splitting etc)
- With open API’s the ability to dynamically integrate third-party services helps with differentiation and a better customer value proposition (such as Siri integration for N26 and Monzo)
- Legacy banks are well know to make most of their money on fees and have turned that into an art form, fueling customer resentment
Competition between the NeoBanks is fierce, and in the list of great entrepreneurs building in this field is long: N26, Norris Koppel at Monese, Ricky Knox at Tandem, Tom Blomfied at Monzo, Anthony Thompson at Atom, Virraj Jatania at Pockit, Anne Boden at Starling and new ones like Barnaby Hussey-Yeo and Aleksandra Woźniak at AI-enabled assistant Cleo. We should also add Tink in Sweden, Lunarway in Denmark but also Loot (students), Osper, Ernit and GoHenry (kids), Tide and Civilized Bank (SMB’s).
The basis for differentiation appears slim. All NeoBanks sell on easy onboarding, lower fees and a mobile-first experience and are IMO getting hard to tell apart. Banks like Monese attack specific demographics with the ability for the newly emigrated to open accounts fast (no need for a UK address or credit record). This is an example of market segmentation indicative either of a very large market opportunity or of the pressures of hyper-competition, or both.
The extreme actions taken on fees are clearly great for the customer, but I suspect the CLTV calculations at many of these players must make one’s eyes bleed, with models predicated on selling ancillary services, making money on FX or overly aggressive retention assumptions. Getting new customers onto the service typically costs money too (although Stripe and co. are smiling all the way to the, hum, bank). As lack of monetization bites, how long before fees start creeping back in?
VC subsidisation means the NuBanks are all fighting on no-fee offerings, such as ATMs. But consumers are savvy and quick to switch when these offerings are pulled. I’m told the operational costs advantage is overblown.
Experienced operators will also tell you consumers with 5+ products are 10X more profitable than those with 3 or less. It’s incredibly hard to make money with too few products. And it’s not clear whether the cost of upselling these products is properly factored into the CACs.
In addition, the incumbents (take Santander as an example) have gotten close to par on the quality of their mobile and web offerings. They have also wasted no time in acquiring: Otkrytie acquired the Russian Rocketbank, BPCE acquired German “anti-bank” Fidor and Compte Nickel was of course acquired by BNP Paribas.
We should even add the card players (e.g. Revolut), the wallet players (e.g. Verse, Linda) and others (TransferWise, IBANFirst etc.) to the analysis as they ultimately fight for the same share of spend. Some of my favourite companies lie in that bucket (such as Verse or Shachar Bialick’s Curve). Companies like Curve (or Cleo), «no license bank re-intermediators» as Mariano calls them, should have better unit economics and may benefit from attractive distribution partnerships, provided they don’t fall into the lead-gen trap.
And let’s what Amazon / Google / Facebook / Apple decide to do.
The one that got away
My favorite in the space was without a doubt Compte-Nickel, a true anti-bank that had hacked the tobacconist channel in France. By turning the tobacconist into a banker, Compte Nickel overcame the trust problem and empowered local merchants to become local advocates in the sale of its service, creating an efficient and low cost acquisition channel. Its true anti-bank & debit only service worked incredibly well with middle to low income French customers, moving it away from an undifferentiated millenial / digital paradigm. I tried three times to get in, but the strong individual investor base did not make it possible to invest in good conditions, leaving only a small ownership opportunity for a venture fund. I was a bit sad to see the company sell early, but I think that fit the objectives of management and investors alike, so fair enough.
What you had here was a mass market value proposition combined with an incredible channel to market, and economics that worked year one.
Tough to pick a winner
I am sure that one or two of the NeoBanks will become big successes. In particular, the one that manages to scale its balance sheet to become a full service lender / mortgage lender will probably be able to solve the retention issue. For the others, I suspect we will see decent acquisitions based on the number of clients acquired.
The difficulty, as an investor, is in picking the right one. My money is on N26 at this stage, but who knows. Not a segment for the faint of heart.