What’s Next for NeoBanks?
Challenger banking is certainly here to stay, but not all banks are equal. As hype makes way for reality, differentiation and focus will be key to success, and here’s a few end game scenarios likely for participants in the near term.
In short, few will shine, few will fizzle, and a few will majorly surprise.
Horizontal Winners
This is the neobank for everyone, and success will look similar to that of large internet platforms. Scale is name of the game. The menu is simple — a checking account, a debit card and a few other adjacent services. The modus operandi is somewhat simpler too, raise a ton of cash, hit the gas on marketing, grow deposits and leverage the spread on income to fuel more marketing. All while maintaining great UX and customer service.
Chime already has 6M+ users. 3–4 others in the category have 1M+ users. There certainly may be a path to IPO for a few established franchises over time. In the intermittent, many will seek a banking charter, but many will give up pursuit after realizing the cash burn and scrutiny that compliance demands. Anyway, on the path to IPO, I’d take a bet Chime will get there first. And the rest will consolidate or go one of the many routes mentioned below.
Embedded into Popular Platforms
Low margin, vanilla products like a checking account are commodity services that work best to make existing platforms stickier. Platforms with user bases in the millions including Credit Karma, Pinterest, Discord, Snapchat, Shopify, Airbnb, Square, Robinhood as well as regional winners across the globe like Ola, Lyft, Jumia, Flipkart, Paytm are strong buyer candidates.
Independent products built by strong teams, displaying defensive and robust systems, matched with phenomenal execution and perhaps not growing fast enough to be dominating horizontal franchises like the previous category, will be scooped up for a discount to fall in this category. Expect even brick and mortar brands in categories like retail to show interest.
Niche Winners
This is my favorite segment, and one with a lot of leeway for disruption. There is plenty of unexplored room to replicate the success of horizontal players for narrow segments with specific user characteristics — think small business owners, independent vendors, teens etc. (In a follow on post, I will talk about immigrant banking). Current Bank’s play with teens is somewhat in this basket. Banks like Oxygen serve the 1099 segment exclusively. Leveraging specific data and behavioral insights, these banks can build defensible moats.
Naturally, these products have the strongest case for expansion into adjacent services like lending, which offers potential for healthy margins. For winners here, its less about how many millions of users you have but rather about maximizing ARPU initially with a mix of diverse set of products, and nailing edge cases for the segment.
Acquired by Traditional Banks
More and more boardroom discussions will be about the assault big banks are taking on the digital front. And it won’t be long before big banks take out the check book and look to put an end to the charade. There are nearly 5,000 FDIC insured banks in the US, and if one moves ahead with splashy buy, expect several to follow. If you look at the lessons from history, many inept banks will end up overpaying too.
Also, as funding dries up, neobanks that are left without a unique hook , a large user base, or a niche will be left scrambling for life. Moreover, expect CAC to keep skyrocketing, which would make unit economics hard. And frankly, this may be a phenomenal outcome for many. Even the most obscure banks in America are thoroughly resourced and having a resourceful parent could drastically cut down red tape, product launch times, breathing new life into targets. Only mismatch may be cultural.
Burnout
This may not seem like an imminent possibility in the current environment of cheer-leading, but several banks that lack an organic acquisition funnel will struggle to keep the lights on. I see top reasons for this outcome to be insufficient differentiation, gross underestimation of acquirable cash reserves, flawed business models, and the worst — consumer apathy.
Wildcard — Transformative Disruption
There will certainly be a few narrative violators that will push the envelope on innovation further, and change the banking segment forever. Problems with banking today are mostly around siloed systems, inconsistent operating standards and scrutiny, lack of transparency, failure to keep up with the pace of innovation etc. in addition to high fees and poor user experiences.
For example, a truly global digital bank. Despite global immigration being at an all time highs, true borderless banking is mostly wishful thinking. Allowing users to open an account from anywhere, moving money instantly, customer service through phone type of a model could be the beginning to a generational shift in the way banking works.
On similar lines is remittances — the $500B global movement of money by consumers could finally be a part of everyday banking. Or banking structured completely around healthcare (checkout Better Bank ). Banks specializing in global trade, digital businesses, etc. (large parts of the GDP) could drive massive impact, and such bold endeavors will stand out.
Other similar thoughts on challenger banking:
If you’d like to discuss more, feel free to reach out to me on Twitter.
