4 ms·

Neobanking: The Golden Opportunity

41 points by jonhershman 3y ago

jonhershman 3y ago
There's a golden opportunity for tech led banking. 1) less barriers to entry, 2) more cost effective, 3) only need small customer bases. While neobanks and traditional banks offer most of the same products, their business models are different. I write about it more here: https://easilyamused.beehiiv.com/p/neobanks-vs-traditional-banks-different https://easilyamused.beehiiv.com/p/neobanks-vs-traditional-b...
- quirkot 3y ago
  > Since the Neobank doesn’t have its own FDIC insurance and bank charter, the neobank customer’s deposits actually sit on the sponsor bank’s balance sheet Are you saying that "neobanks" do not record the deposits as a liability? Or that they do not record the cash as assets? I don't understand what you are trying to say. Are there any public "neobanks" you can point to so that we can see the financials as you describe them?
  - cweagans 3y ago
    Getting a bank charter and FDIC insurance is a huge undertaking, so neobanks are usually not actually banks. They are technology companies that have partnered with banks or are customers of banking-as-a-service providers (Hydrogen, Stripe Treasury, and similar). The banking partners have their own bank charter and FDIC insurance, but the technology company itself does not. If you go to most neobank websites, you can scroll to the bottom and see a disclosure along the lines of "Banking services provided by The Bancorp Bank, N.A. or Stride Bank, N.A., Members FDIC".
    - quirkot 3y ago
      That doesn't have anything to do with financial statements. If you're Joe's Lawn Service and someone hands you money, it goes on your balance sheet. That's how accounting works, every penny gets (you know) accounted for. Otherwise how do these "neobanks" know who they owe?
      - cweagans 3y ago
        None of the deposits are on the technology company's balance sheet because the neobank doesn't actually handle any of the money. They are essentially UIs on top of APIs exposed by the bank. If you make a deposit into a neobank, you'll have a routing and account number, but the routing number belongs to the partner bank servicing that account. If you deposit cash or a check or whatever, it goes _directly_ to the partner bank.
  - tomrod 3y ago
    I think they are describing what is termed "brokered deposits" -- like your Starbucks gift card account isn't managed by Starbucks, but rather a (usually large) bank on the backend which treats brokered deposits differently than unbrokered (standard) deposits.
    - quirkot 3y ago
      Hmmm, possibly. However you are describing an operational reality and the author was using financial reporting terms. And specifically if something like "people gave a bunch of money to what they thought was us" isn't on the balance sheet, it's a big red fraud flag
chowells 3y ago
Ok, but my credit unions all offer all those "other services" that I use without fees. Where is there room to compete with them on cost?
- Scoundreller 3y ago
  Sometimes $0 is too high of a price and they could be paying you. (Your CU probably pays you indirectly. Mine gives me a $5 share yearly just for existing and I don’t generate any direct fees). Kinda like how stock brokers should be paying you to have your stocks on deposit with them because they make money loaning them out to others. Which is partly how “neo”-brokers could zero out trading commissions. Lending out meme stocks to short sellers is especially profitable.
- creer 3y ago
  If this is true, you are very lucky with your credit union. One of my traditional banks basically uses tech to try and convince me to switch away from them at every interaction. They are amazing. I'm sure that's also an extreme but the whole range exists.
nologic01 3y ago
I thought we have seen the end of the neobank era? https://www.forbes.com/sites/ronshevlin/2022/06/20/the-end-of-the-neobank-era/ https://www.forbes.com/sites/ronshevlin/2022/06/20/the-end-o...
fakedang 3y ago
Depends highly on jurisdiction. In Asia, almost every big bank has realized that neobanks just have a fancy UI built on their (big bank's) backend, so now they've begun developing everything inhouse with better terms and efficacy than neobanks. In fact, that's part of the reason many neobanks are getting shafted this downturn season: https://the-ken.com/the-nutgraf/two-regulators-usher-in-fintechs-dinosaur-era/ https://the-ken.com/the-nutgraf/two-regulators-usher-in-fint...
AdamH12113 3y ago
> A neobank is a technology company that provides banking services fully online. Not exactly a confidence builder, but go on. > Rather than having its own bank charter, a neobank relies on a partner bank or “sponsor bank” to provide the regulatory umbrella for the company to accept customer deposits and provide other similar services as a bank. So... it's a middleman providing a fancy website for a real bank, but under a different name with minimal regulatory obligations? Now I'm getting nervous. Does it at least work like a normal bank, where they directly benefit from being a secure place to store money? > Although the neobank brings in the deposits, through marketing and other channels, the sponsor bank is the main beneficiary of the interest income. Oh dear. Who's going to pay for those tech company profit margins, then? > Typically, Neobanks have to rely more on the non interest income: account fees, transaction fees, credit cards, debit cards, and interchange fees. Fees and predatory loans -- every bank account holder's favorite things! What do I get out of this? > To attract customers to their services, the neobank must offer the above services in a way that is above and beyond better than what is currently available. That’s where technology comes into play. So... a really fancy website? > Traditional banks do not have a strong track record of innovation, technology adoption, and digital transformation. Between regulatory concerns, legacy systems, and the costs / risks of switching vendors, large technology spend scares most bankers away. Yeah, there are good reasons for that. People become very unhappy when they can't get their money. > Neobanks do not have to worry about that. They probably should! > They can build something from the ground up, in a slightly different regulatory environment If there's one thing Silicon Valley is good at, it's rebuilding complex, decades-old systems from the ground up in a regulation-free environment without having to relearn lots of historical lessons the hard way. > and use technology to serve a smaller population needs. Is this "smaller population" credulous people who want to be nickel-and-dimed to death so they can receive targeted advertising while trying to send an ACH transfer?
- deleted 3y ago
  [deleted]
- paulddraper 3y ago
  > So... a really fancy website? Basically. Which isn't a high bar, if you've ever use a banking portal.
Daril 3y ago
Well ... perhaps we need an old bank system, with old values and principles. I have read recently a book about Amadeo Peter Giannini, the founder of Bank of Italy that later became Bank of America. A very inspiring lecture for me. In my opinion we don't need more technology or new financial structures and ideas, but instead some old values and ethics ... https://en.wikipedia.org/wiki/Amadeo_Giannini https://en.wikipedia.org/wiki/Amadeo_Giannini See also this brief introduction about the foundation he created : https://www.youtube.com/watch?v=XCYuARrz38c https://www.youtube.com/watch?v=XCYuARrz38c
- tempotemporary 3y ago
  I think instilling values and ethics on society is way harder than making a new technology. This is why I'm rooting for "trustless" nature of cryptocurrencies.
tlarkworthy 3y ago
Neobanks can specialize and handle money in a specific niche they happen to understand at a deeper level than a generic bank can. This is the point, the specialization and being about to do risk calculations on baroque asset classes. (I work for a ycombinator startup for customers including but not limited to neobanks https://www.taktile.com/ https://www.taktile.com/)
jjevanoorschot 3y ago
The assumption that neobanks always use a sponsor bank is false. Most European neobanks have a full banking license.
- NoboruWataya 3y ago
  I had never heard the term before but Wikipedia says this: > There were two main types of company that provided services digitally: companies that applied for their own banking license and companies in a relationship with a traditional bank to provide those financial services. The former were called challenger banks and the latter were called neobanks. That (as well as this article) seems to suggest that neobanks are by definition companies that do not have a banking licence. But I have no idea if that is the correct or current usage. Wikipedia also describes N26 (for example) as a neobank - N26 originally launched without a banking licence but now has one.
debussyman 3y ago
The problem with venture-funded neobanking business model today is that growth is expensive. CACs for traditional US banks have always been high (ever gotten an offer of several hundred dollars to open an account?), and it's even higher for an upstart with no brand equity. On top of the high CAC, the pressure for growth is strong for venture-funded businesses, leading to more spending on marketing. While the author does list opportunities to generate revenue, in my experience the annual revenue per user is at least 10x lower than CAC, meaning you can't generate a profit for decades, even discounting fraud losses as 0.
- creer 3y ago
  High perhaps but wasted for lack of creativity no? Which might be changing? When Transferwise started, it didn't need ANY cash offer to attract customers.
hgomersall 3y ago
I stopped reading at "Banks, at their simplest form, take in customers’ deposits and use those deposits (their source of capital) to make loans" which is laughably wrong. The loans make the deposits not the other way round, which is obvious when you stop to think where the deposits must have come from in the first place. Every deposit originates from a loan.
- cowthulhu 3y ago
  Could you elaborate more on what you mean by that? I haven’t heard that perspective before.
  - neilwilson 3y ago
    The Bank of England has a full paper about the process https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
    - influxmoment 3y ago
      So it's only true because the trend at the moment is money is created by central banks giving loans. Is a roundabout misleading statement from the parent comment
      - hgomersall 3y ago
        It's not the trend, it's how banks have always operated. There's no way within a double entry accounting system to create deposits without also creating the corresponding loan asset. If you know of a way to do so then all the politicians that obsess over the national debt would love to hear from you.
      - neilwilson 3y ago
        It's true as a matter of accounting. The bank takes your signed loan note as an asset and creates an advance against it on the liability side. A deposit is just an advance with the ownership tag changed. And that's how it has always been. As Reginald McKenna, former Chancellor of the Exchequer and Chairman of the Midland Bank, said in 1928[0]. "I am afraid the ordinary citizen will not like to be told that the banks or the Bank of England can create or destroy money. We are in the habit of thinking of money as wealth, as indeed it is in the hands of the individual who owns it, wealth in the most liquid form, and we do not like to hear that some private institution can create it at pleasure. It conjures up a picture of an autocratic and irresponsible body which by some black art of its own contriving can increase or diminish wealth, and presumably make a great deal of profit in the process" [0]: https://new-wayland.com/blog/post-war-banking-policy/ https://new-wayland.com/blog/post-war-banking-policy/
calderwoodra 3y ago
The graveyard of failed neobanks is crowded, but the front-runner of US neobanks is Chime, which has a strong culture of compliance and following regulations, while also being fee free. They only have 3 revenue streams: interchange, small dollar loan interest fees and tips. Interchange fees are paid by businesses, not customers. Loan fees exist to offset the cost of their interest payments/fraud risk giving out loans. Tips exist to offset the cost of their fee-free overdraft protection/"spot me" feature.
- calderwoodra 3y ago
  I'll also add that it's great they're able to exist, as a large portion of their customers are actually banned from traditional banks. A great resource/read for learning about the "unbanked" is "The Unbanking of America".

41 points by jonhershman 3y ago

There's a golden opportunity for tech led banking. 1) less barriers to entry, 2) more cost effective, 3) only need small customer bases. While neobanks and traditional banks offer most of the same products, their business models are different. I write about it more here: https://easilyamused.beehiiv.com/p/neobanks-vs-traditional-banks-different https://easilyamused.beehiiv.com/p/neobanks-vs-traditional-b...

quirkot 3y ago
> Since the Neobank doesn’t have its own FDIC insurance and bank charter, the neobank customer’s deposits actually sit on the sponsor bank’s balance sheet Are you saying that "neobanks" do not record the deposits as a liability? Or that they do not record the cash as assets? I don't understand what you are trying to say. Are there any public "neobanks" you can point to so that we can see the financials as you describe them?
- cweagans 3y ago
  Getting a bank charter and FDIC insurance is a huge undertaking, so neobanks are usually not actually banks. They are technology companies that have partnered with banks or are customers of banking-as-a-service providers (Hydrogen, Stripe Treasury, and similar). The banking partners have their own bank charter and FDIC insurance, but the technology company itself does not. If you go to most neobank websites, you can scroll to the bottom and see a disclosure along the lines of "Banking services provided by The Bancorp Bank, N.A. or Stride Bank, N.A., Members FDIC".
  - quirkot 3y ago
    That doesn't have anything to do with financial statements. If you're Joe's Lawn Service and someone hands you money, it goes on your balance sheet. That's how accounting works, every penny gets (you know) accounted for. Otherwise how do these "neobanks" know who they owe?
    - cweagans 3y ago
      None of the deposits are on the technology company's balance sheet because the neobank doesn't actually handle any of the money. They are essentially UIs on top of APIs exposed by the bank. If you make a deposit into a neobank, you'll have a routing and account number, but the routing number belongs to the partner bank servicing that account. If you deposit cash or a check or whatever, it goes _directly_ to the partner bank.
- tomrod 3y ago
  I think they are describing what is termed "brokered deposits" -- like your Starbucks gift card account isn't managed by Starbucks, but rather a (usually large) bank on the backend which treats brokered deposits differently than unbrokered (standard) deposits.
  - quirkot 3y ago
    Hmmm, possibly. However you are describing an operational reality and the author was using financial reporting terms. And specifically if something like "people gave a bunch of money to what they thought was us" isn't on the balance sheet, it's a big red fraud flag

chowells 3y ago

Ok, but my credit unions all offer all those "other services" that I use without fees. Where is there room to compete with them on cost?

Scoundreller 3y ago
Sometimes $0 is too high of a price and they could be paying you. (Your CU probably pays you indirectly. Mine gives me a $5 share yearly just for existing and I don’t generate any direct fees). Kinda like how stock brokers should be paying you to have your stocks on deposit with them because they make money loaning them out to others. Which is partly how “neo”-brokers could zero out trading commissions. Lending out meme stocks to short sellers is especially profitable.
creer 3y ago
If this is true, you are very lucky with your credit union. One of my traditional banks basically uses tech to try and convince me to switch away from them at every interaction. They are amazing. I'm sure that's also an extreme but the whole range exists.

nologic01 3y ago

I thought we have seen the end of the neobank era? https://www.forbes.com/sites/ronshevlin/2022/06/20/the-end-of-the-neobank-era/ https://www.forbes.com/sites/ronshevlin/2022/06/20/the-end-o...

fakedang 3y ago

Depends highly on jurisdiction. In Asia, almost every big bank has realized that neobanks just have a fancy UI built on their (big bank's) backend, so now they've begun developing everything inhouse with better terms and efficacy than neobanks. In fact, that's part of the reason many neobanks are getting shafted this downturn season: https://the-ken.com/the-nutgraf/two-regulators-usher-in-fintechs-dinosaur-era/ https://the-ken.com/the-nutgraf/two-regulators-usher-in-fint...

AdamH12113 3y ago

> A neobank is a technology company that provides banking services fully online. Not exactly a confidence builder, but go on. > Rather than having its own bank charter, a neobank relies on a partner bank or “sponsor bank” to provide the regulatory umbrella for the company to accept customer deposits and provide other similar services as a bank. So... it's a middleman providing a fancy website for a real bank, but under a different name with minimal regulatory obligations? Now I'm getting nervous. Does it at least work like a normal bank, where they directly benefit from being a secure place to store money? > Although the neobank brings in the deposits, through marketing and other channels, the sponsor bank is the main beneficiary of the interest income. Oh dear. Who's going to pay for those tech company profit margins, then? > Typically, Neobanks have to rely more on the non interest income: account fees, transaction fees, credit cards, debit cards, and interchange fees. Fees and predatory loans -- every bank account holder's favorite things! What do I get out of this? > To attract customers to their services, the neobank must offer the above services in a way that is above and beyond better than what is currently available. That’s where technology comes into play. So... a really fancy website? > Traditional banks do not have a strong track record of innovation, technology adoption, and digital transformation. Between regulatory concerns, legacy systems, and the costs / risks of switching vendors, large technology spend scares most bankers away. Yeah, there are good reasons for that. People become very unhappy when they can't get their money. > Neobanks do not have to worry about that. They probably should! > They can build something from the ground up, in a slightly different regulatory environment If there's one thing Silicon Valley is good at, it's rebuilding complex, decades-old systems from the ground up in a regulation-free environment without having to relearn lots of historical lessons the hard way. > and use technology to serve a smaller population needs. Is this "smaller population" credulous people who want to be nickel-and-dimed to death so they can receive targeted advertising while trying to send an ACH transfer?

deleted 3y ago
[deleted]
paulddraper 3y ago
> So... a really fancy website? Basically. Which isn't a high bar, if you've ever use a banking portal.

Daril 3y ago

Well ... perhaps we need an old bank system, with old values and principles. I have read recently a book about Amadeo Peter Giannini, the founder of Bank of Italy that later became Bank of America. A very inspiring lecture for me. In my opinion we don't need more technology or new financial structures and ideas, but instead some old values and ethics ... https://en.wikipedia.org/wiki/Amadeo_Giannini https://en.wikipedia.org/wiki/Amadeo_Giannini See also this brief introduction about the foundation he created : https://www.youtube.com/watch?v=XCYuARrz38c https://www.youtube.com/watch?v=XCYuARrz38c

tempotemporary 3y ago
I think instilling values and ethics on society is way harder than making a new technology. This is why I'm rooting for "trustless" nature of cryptocurrencies.

tlarkworthy 3y ago

Neobanks can specialize and handle money in a specific niche they happen to understand at a deeper level than a generic bank can. This is the point, the specialization and being about to do risk calculations on baroque asset classes. (I work for a ycombinator startup for customers including but not limited to neobanks https://www.taktile.com/ https://www.taktile.com/)

jjevanoorschot 3y ago

The assumption that neobanks always use a sponsor bank is false. Most European neobanks have a full banking license.

NoboruWataya 3y ago
I had never heard the term before but Wikipedia says this: > There were two main types of company that provided services digitally: companies that applied for their own banking license and companies in a relationship with a traditional bank to provide those financial services. The former were called challenger banks and the latter were called neobanks. That (as well as this article) seems to suggest that neobanks are by definition companies that do not have a banking licence. But I have no idea if that is the correct or current usage. Wikipedia also describes N26 (for example) as a neobank - N26 originally launched without a banking licence but now has one.

debussyman 3y ago

The problem with venture-funded neobanking business model today is that growth is expensive. CACs for traditional US banks have always been high (ever gotten an offer of several hundred dollars to open an account?), and it's even higher for an upstart with no brand equity. On top of the high CAC, the pressure for growth is strong for venture-funded businesses, leading to more spending on marketing. While the author does list opportunities to generate revenue, in my experience the annual revenue per user is at least 10x lower than CAC, meaning you can't generate a profit for decades, even discounting fraud losses as 0.

creer 3y ago
High perhaps but wasted for lack of creativity no? Which might be changing? When Transferwise started, it didn't need ANY cash offer to attract customers.

hgomersall 3y ago

I stopped reading at "Banks, at their simplest form, take in customers’ deposits and use those deposits (their source of capital) to make loans" which is laughably wrong. The loans make the deposits not the other way round, which is obvious when you stop to think where the deposits must have come from in the first place. Every deposit originates from a loan.

cowthulhu 3y ago
Could you elaborate more on what you mean by that? I haven’t heard that perspective before.
- neilwilson 3y ago
  The Bank of England has a full paper about the process https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
  - influxmoment 3y ago
    So it's only true because the trend at the moment is money is created by central banks giving loans. Is a roundabout misleading statement from the parent comment
    - hgomersall 3y ago
      It's not the trend, it's how banks have always operated. There's no way within a double entry accounting system to create deposits without also creating the corresponding loan asset. If you know of a way to do so then all the politicians that obsess over the national debt would love to hear from you.
    - neilwilson 3y ago
      It's true as a matter of accounting. The bank takes your signed loan note as an asset and creates an advance against it on the liability side. A deposit is just an advance with the ownership tag changed. And that's how it has always been. As Reginald McKenna, former Chancellor of the Exchequer and Chairman of the Midland Bank, said in 1928[0]. "I am afraid the ordinary citizen will not like to be told that the banks or the Bank of England can create or destroy money. We are in the habit of thinking of money as wealth, as indeed it is in the hands of the individual who owns it, wealth in the most liquid form, and we do not like to hear that some private institution can create it at pleasure. It conjures up a picture of an autocratic and irresponsible body which by some black art of its own contriving can increase or diminish wealth, and presumably make a great deal of profit in the process" [0]: https://new-wayland.com/blog/post-war-banking-policy/ https://new-wayland.com/blog/post-war-banking-policy/

calderwoodra 3y ago

The graveyard of failed neobanks is crowded, but the front-runner of US neobanks is Chime, which has a strong culture of compliance and following regulations, while also being fee free. They only have 3 revenue streams: interchange, small dollar loan interest fees and tips. Interchange fees are paid by businesses, not customers. Loan fees exist to offset the cost of their interest payments/fraud risk giving out loans. Tips exist to offset the cost of their fee-free overdraft protection/"spot me" feature.

calderwoodra 3y ago
I'll also add that it's great they're able to exist, as a large portion of their customers are actually banned from traditional banks. A great resource/read for learning about the "unbanked" is "The Unbanking of America".