Why is everyone a bank?

Kaushik Tiwari
Nov 18, 2019 · 4 min read

Everybody is a bank nowadays. Why?

SoFi launched a bank. Robinhood launched one. Acorns launched one. Google is launching one too.

You can be forgiven for wondering if we didn’t have enough of *these* banks already. Is it Big Tech’s death wish to invite more regulatory scrutiny? Or the final coup de grâce to being the masters of the universe — steal the lunch of the finance bros who in turn stole it from you.

Regardless of where you stand on that ideological point, Fintech is on the boil. And debit cards are where it’s hottest.

So why is everyone launching a debit + checking combo?

It’s all about the eyeballs, baby!

Engagement is king, and checking accounts offer exactly that!

Regardless of which payment app, credit card or online brokerage you use, your checking account is the nerve center of your financial life. Your paycheck shows up there, so do your bills and for a large credit scarred portion of the populace, it’s their primary spending account!

It also happens to be an incredibly sticky product. Think of the last time you saw an overdraft charge on your statement and swore to yourself that this was the last straw — you are taking your business elsewhere only to be confronted with the downstream effects of moving your “financial address” — telling HR where to send the next paycheck, calling up each utility company, changing autopay for each credit card bill and so forth!

People move between checking accounts very infrequently with only 4% of customers switching banks last year, the consumer lifetime rivaling SaaS metrics. Incredibly high LTV + engagement makes for a quicker payback period and a strategic foothold to expand into other parts of your financial life.

Americans aren’t saving but they are spending! (on their debit cards)

The job market is on the upswing, unemployment is at its lowest and it’s easier than ever to get a gig — just download an app! All this means that while Americans might not be saving or building long term wealth, they are still spending at a good clip!

Trends in non-cash payments, 2000–17 Federal Reserve Payments Study (FRPS)

As the graph above shows, debit cards are where a lot of that spending happens especially for a credit averse population. It’s the dominant payment method when it comes to everyday expenses — think milk and diapers at the supermarket or a quick bite at the corner deli. And because of a quirk of regulation aka the Durbin Amendment, debit cards issued by smaller financial institutions still command a hefty interchange rate compared to those issued by their larger counterparts.

Gross interchange revenue for smaller vs big bank debit cards

Capturing that spend could amount to a substantial revenue channel with no visible upfront cost to the consumer. The boards of any of the “FANG” companies who face quarterly pressure to match and exceed revenue expectations would kill to add $100 in annual revenue, similar to Facebook’s annual ARPU for North America!

Fintech stars in the past decade haven’t lived upto their valuations.

Debit + Checking is on fire today. In the past decade, both P2P lending (think SoFi) and Robo-Investing (think Wealthfront) had similar gold rush moments. Many of these bets are a decade old by now and have largely failed to live up to their valuations and aren’t able to IPO.

P2P lending failed. The promise of efficient marketplaces that transparently match borrowers and lenders was strong but that sheen has rubbed off.

LendingClub’s stock between its lifetime high in Dec 2014 and current levels!

Now, they are origination platforms for unsecured debt at hyper-competitive APRs — which means little to no loyalty among customers and high acquisition costs. One look at Lending Club’s stock price is enough to send the board of any online lender planning an IPO scampering back to the drawing board!

Robo-investors similarly deal with a long tail of low-balance investment accounts. Some of this is structural, a larger majority of Americans have little long term wealth and most of it is locked away in pension funds, think of a 401(k) invested in a Fidelity or Vanguard Index Fund out of the reach of your typical Robinhood or Betterment. More importantly, everyone in the space realizes that money FIRST comes into a checking account, and then goes anywhere else (whether to invest, make loan payments, or spend). Owning the checking account relationship gives you the key to a customer’s financial nerve center.

These folks need another play to dominate their target customer segments and weave a winner-take-all story for the public markets, and checking accounts are prime real estate!

Ultimately it’s the engagement value of checking accounts, the hunt for interchange revenue and the larger backdrop of bigger Fintechs companies realizing that owning the checking account relationship is the key to a customer’s financial nerve center that makes them the new “in” thing.

We are building something interesting at betterbank.app — will write about it soon!

Kaushik Tiwari

Written by

Founder, betterbank.app | Thiel Fellow | Columbia Engineering’17

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