Heavily funded Neobanks market themselves as the future of finance — mobile-first and customer obsessed. We could all use less Wells Fargo in our lives after all. However, Neobanks (Chime, N26, etc…) are not the only threat that banks should be concerned about.

Less heavily funded and heralded are autonomous finance apps (Albert, Astra, Northstar, etc…). These apps manage assets where they already reside, spread across existing accounts.

Personal finance manager apps pose a serious threat to banks by turning the deposit holding bank (Bank of America, Wells Fargo, etc…) into commodity services differentiated only by their yield or fees.

I came across Alice recently and love it. It isn’t only what the product claims to do, it’s how their business model aligns so well with their users and customers.

(FYI — I’m not involved with this company in any way. I don’t know the team or invested…although I wish I was an early investor!)

First, what it does.

It’s an app that employees connect to their credit cards which monitors their spending. When it identifies charges eligible to be reimbursed with pre-tax w2 dollars, Alice submits the deduction to the employer’s payroll system automatically.

This is ingenious because it…

Varo, a Neobank, announced this week that the FDIC approved their banking charter. This is a first for Neobanks, enabling them now to hold customer deposits and lend that money out.

You know, like a regular bank.

This will be a fascinating experiment, one that could make or break the thesis on the potential value of Neobanks.

To understand why, it’s worthwhile to explore the challenges Neobanks (Chime, Stash, etc…) face and how this charter potentially differentiates Varo.

The Problem With Neobanks

First, let’s understand what a Neobank actually is. You don’t deposit your money with a Neobank. …

(This post originally appeared on my blog, follow me there!)

Software has replaced relationship banking as the best way to acquire customers and sell new financial products.

This bodes well for the land and expand strategies of tech companies and not so well for the mythical personal relationship banks have with customers.

TL;DR

  • Changing customer attitudes and bank’s antiquated tech stacks are killing relationship banking, leaving banks vulnerable to competition from tech companies.
  • Fintechs have built modern and integrated tech stacks to better serve customer segments more economically.
  • Others (Uber, Shopify, etc…) are leveraging their vertical solutions to sell financial…

By Hansmeet Sethi on The Capital

Early stage financing has evolved radically, everything from the amount of capital available to the types of funds and their return targets.

It’s critical that founders think about company/investor fit as they choose financing partners, particularly in the earliest stages.

Why?

Choosing for company/investor fit enable founders to authentically build the company they envision. It also avoids misalignment between founders and investors along the way as critical decisions are made.

Early Stage Capital Explosion

A few trends have converged, creating an explosion of both capital (3x as more in the last 10 years) and types of funds managing that capital focused on early stage.

Regulation could help here…gulp.

Particularly in the US, our financial data should be more easily accessible and transportable. This would make it simpler for more applications to be built to give us views into our financial life (bank account, brokerage, etc…). That in turn would allow different segments of the population to be better served for their needs. Worried about overdrafts? Remittance fees? There’s an app for that.

Wait. Doesn’t Plaid make financial data easy for developers to access $5.3B different ways? And didn’t Mint begin this trend over a decade ago? Yes and yes.

Notice I said improve in…

Big news, $5.3B big. Everybody has takes, including Visa themselves, on why fintech infrastructure is more important than DTC fintech. We’re all geniuses in hindsight.

Unsurprisingly, Ben Thompson has one of the best explanations of the rationale [paywall]. It ties back to the power of a network that can not only provide read-only access to your money, which is what Plaid offers. The future is programmatic read and write access.

Visa today sits in the middle of a 3 sided network.

  • Merchants — who offer products and benefit from a network that extends credit and fixed payment terms
  • Consumers —…

This quote from Brian Armstrong holds the clue to an underappreciated threat to Coinbase.

…many of the companies we think of as cryptocurrency exchanges were actually brokerages, exchanges, custodians, and clearing houses bundled into one….I think we’ll see the cryptocurrency market structure evolve to more closely resemble the traditional financial world, with these functions being separated out…[Brian Armstrong]

TL;DR

  • Brokerages are an inevitable evolution of crypto-finance, abstracting investors from exchanges.
  • This is the new battleground in crypto and the winner holds the key to serving users with a full suite of financial products.
  • Coinbase faces a classic innovator’s dilemma. Their…

If you’re building a bank today, you’re in luck. Much of what you need is available via API so you can skip the months of legwork to find bespoke banking and compliance partners.

You can start building on day 1.

Here are a few of the things you can start building quickly by standing on the shoulders of g̵i̵a̵n̵t̵s giants-in-the-making.

Photo by Tim Evans on Unsplash

KYC/AML

To offer most financial products you’ll kneed to abide by Know Your Customer (KYC) and Anti Money Laundering (AML) rules. This will involve asking the user for personal and financial information and verifying it’s authenticity. …

Banks wage an ongoing war to hold your money. You’ve seen the tactics — higher interest rates and free credit reports are the modern free toaster to open a new account and setup direct deposit.

You get those free toasters because:

  1. Banks earn money by holding your money.
  2. There’s inertia to deposited money. You’re too busy to move it around optimally, it generally stays where deposited. The bank that gets it first gets to keep making money from it.

In the perfect world, your money would flow from paychecks to where it’s needed at just the right moment. It would…

Hansmeet Sethi

Tech Entrepreneur

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