Ben Soppitt

Not The Neobank You Are Looking For

Customer segmentation has come a long way in a very short time — up to about a decade ago your age, job, sex and address maybe some lifestyle stuff was all the information companies had to drive product and marketing insights.

Technology and especially the use of mobile channels has enabled an extraordinary diversity of contextual and dynamic real-time data feeds for companies to use to deliver highly targeted and dynamic content and services.

Location — where you are now and where you have been tracked by your mobile phone; your last interaction with a brand and history with it; what devices you use and the things you search for and spend time with online; buying history; credit score; social media activity and more.

It’s not all good to be sure — that feeling of being tracked online can be super creepy unless it’s delivering something you were actually looking for — Amazon generally gets the kudos for doing this the best. When it goes wrong it can be funny or even disturbing.

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With one major exception, consumer products companies have become highly proficient in segmenting their customers and creating a personalised and dynamic product, services and communication strategies for them.

The great exception is Banking and especially so Big Banks — walk into a Chase or Bank of America branch earning $25K and walk-in earning $250K and you get pretty much the same products and services. The top 1% get personal banking but for the rest of us we are in a customer segment of “everyone else”.

Whether you get access to specific products or price points is determined largely by a single number — your FICO score. This number can be the difference between getting a mortgage to buy a house or not. For such an important variable you would think there is a hugely sophisticated and intelligent system behind it.

There is not — cancel a credit card and your score goes down, new to the country but in a high paying job — computer says no! Building up credit can take over 2 years for someone new to the country regardless of their net worth. People are even encouraged to get into debt because the algorithm likes a bit of debt — shows you are a good borrower apparently.

Individuals’ financial situations are extremely diverse and dynamic and one size does not fit all but that is what we are given. In part the banks are working under structural restrictions — many of their back end systems are decades old. An enormous amount of energy and money is expended just keeping these things going. The cost and risk of upgrading them to more modern infrastructure is too great. They simply don’t have the ability to deliver more than they do and they are incapable of evolving.

Economically they are also locked to a path of steep profit growth. Big Banks profits are already disproportionately high and continue to hit new records every year and have done for an extended period of time. Forced to continuously deliver increased growth restricts investment and forces a focus on high margins — leave substantially less room to develop more diversified products and solutions even if they could.

In the last 10 years or so we have seen a new wave of companies emerge to fill this void — Neobanks (Digital Banks, Challenger Banks etc.). These companies brought little or none of the legacy infrastructure with them and were, therefore, able to be much more focussed and nimble in their product and service development. They also have

Curiously though they seemed unable or unwilling to compete with the big banks and their core customers and almost exclusively focussed on underbanked/unbanked customers.

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Of the approximately 188 B2C Fintech banking services companies launched or to be launched 180 of them or 95% are focussed exclusively on mass-market customers typically earning less than $25–50k per year.

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Data source: https://bit.ly/2CWStzk

Other Fintech segments have aligned broadly with either Subprime or Prime — PFM and Installments apps e.g. Affirm are typically Subprime and Crypto and Investing tend to focus on Prime.

Why banking services have gravitated so exclusively to subprime communities is not clear.

Reasons that have been suggested include:

  1. Tried and failed so went downmarket
  2. Moral high ground (dubious claim there are already many established FI’s serving such communities and not a single challenger bank is not for profit which would be the obvious route for such an enterprise)
  3. Higher profits — ironically the margins in service low-income groups can be disproportionately high — what may be free for affluent consumers is often paid for by those with less choice
  4. Innovator’s dilemma — start where there is less competitive pressure e.g. from Big Banks and their big marketing budgets then work up the value stack. Chase alone spends $2.6bn a year on marketing — a staggering amount. Ironically these new players have created extreme competitive pressure between themselves and with very similar propositions like wage advance.
  5. Product complexity for affluent consumers is too great — credit cards, for example, are very challenging to launch and manage — the fact there are less than a handful of Fintech credit card providers in the market — although again these (Petal, Mission Lane, Jasper, Deserve) are focussed again on subprime consumers (recent notable exception H M Bradley).

Despite the relatively crowded space that is Fintech Challenger Banks in the mass/subprime space the more affluent/mass affluent segments have been largely ignored.

We are now beginning to see the emergence of brands focussing on niche groups including mass affluent and affluent. A few of these have been around for a while and are now extending into banking services (Robinhood and Wealthfront) others are new.g. HM Bradley and Unifimoney. This fits with a narrative that we believe is clearly emerging — the re-bundling of financial services into financial services portals for specific groups. This time though it’s Fintechs that are doing the bundling not incumbent financial services institutions. We believe that the ultimate endpoint of this will be brands delivering bundled services to specific groups e.g. Doctors, Contractors, Startup employees etc. We are already seeing this in a few places like freelancers e.g. Oxygen, Azlo and immigrants e.g. Majority, Deserve, Rayo.

Given that affluent millennials have typically led the early adoption of most digital products and services to date it’s odd that in banking they have been largely ignored. To address this we outline the key players in this space:

Robinhood — Founded in 2013 and launched only in 2015 and become one of if not the most successful Fintech brand amongst the mass affluent. Their key innovation was to make stock trading commission-free. Well-publicized issues with outages and compliance don’t seem to have stopped consumers interest in them. Recently launched a simple cash account and debit card. Robinhood makes money from deal flow a good review is here.

Wealthfront — Founded in 2008 and helped popularise robo-investing. Recently added a cash account and debit card like Robinhood.

Betterment — Close competitor to Wealthfront launched in 2008

M1 — close competitor to Wealthfront and Betterment launched in 2015

Personal Capital — Launched in 2009 but a bit of an oddball — offering neither self-directed nor robo-investing it offered online financial advisory services at a relatively steep (or cheap depending on your views of personal investment advisors) 85 bps. It also has a relatively successful PFM app with substantially more users using that for free than the paid service. In 2019 it launched a cash app similar to Robinhood and Wealthfron but without a debit card as yet. Hitting a far older age group than either Wealthfront or Robinhood it was recently sold to Empower Retirement.

HM Bradley — Founded in 2018 and one of the first Neobanks to explicitly focus on more affluent consumers. Recently launched a credit card further establishing its credentials to serve more affluent consumers. A somewhat complex solution offering an eye-watering “up to” 3% APY.

Luxury Card — Launched in 2008 as an ultra-luxury card — it claims to be the heaviest metal card on the market if that is important for you this card delivers!

Unifimoney — Positioned as a full-service Neobank for high earning professionals. Integrating a high yield checking account credit card and investing. Offering both Robo and commission-free self-directed trading and competing with both Robinhood and Wealthfront. Integration means Unifimoney can truly automate the manual tasks involved in optimally managing money.

Apologies to any companies we may not have included but the point we are trying to make is that there is a huge untapped market opportunity in serving the unmet needs of affluent millennials and there are very few alternative brands in this space at present.

The emergence of companies in this space is bringing the opportunity of choice for the first time to many more people. If you are an affluent millennial currently banking with a top 10 bank its very unlikely that you would find any of the many mass-market digital banks meet your needs.

It also challenges the assumption that all Neobanks are the same. Consumers needs are different and we believe the ultimate end game here is that we will see the emergence of highly focussed players built specifically to meet the needs of niche and highly defined consumer groups — like most industries already are.

This will put a far greater pressure on Neobanks to properly communicate to consumers and ensure that they are reaching the right consumers and helping to differentiate themselves with them.

It’s no longer going to be enough to show a picture of a debit card, an eye-catching APY and headlines like “Free ATM Withdrawals.” It’s not going to be enough just to be new — you have to be different too.

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