Not Another Neobank: Why the market is overcrowded and where BBGV sees opportunity

by Mallory Bell, BBGV MBA Summer Fellow

I am not sure we need 50 nearly identical neobanks in the US, but let me back up.

If you’re not familiar with them, neobanks are digital banks without branches that came on the scene in the 2010s as a solution to the inconvenience and fees of traditional banks, capitalizing on consumer resentment coming out of the Recession. But technically, they aren’t even “banks.” Getting a bank charter in the US is a lot of work, so neobanks team up with an established, chartered partner bank in order to have their customers’ deposits FDIC insured.

A few early movers now lead, having captured millions of customers. Examples include Chime, which is now positioning itself as a software company (13M users); Dave (10M users); Varo, which will be the first to become chartered (3M users); and MoneyLion (1.4M users). Besides ease of use and low/no fees, these neobanks share a few other characteristics:

1. They all started when building a consumer banking platform was more of a challenge. Today the barriers to entry are lower because other companies provide the infrastructure (e.g. Plaid for integrations, Visa for cards)
2. They launched when it was relatively easy to capture users with a lower digital marketing spend, so LTV/CAC looked a lot better
3. All achieved product-market fit early, by capturing single 25–35 year olds making $35–75K

But the main reason these early neobanks flourished was because they went after the customers the big banks deemed unprofitable. That was an awesome idea that only went so far — as most were built by young white males to appeal to young white males with lower credit scores (it’s both funny and apt that there is a neobank called Dave). Today, neobanking products are highly commoditized and copying features is the law of the land. Given the crowded landscape and little differentiation, new entrants will likely have a hard time competing with established brands if they target the same consumer base. There are, however, populations who remain underserved by incumbent big banks and whose needs still aren’t being met by the top neobanks. To me, that spells opportunity.

At BBGV, we invest in products and solutions that will transform the collective and lived experience of the 99%, and we invest in female founders (Note: companies with female founders are highlighted throughout this post with asterisks). Fintech is actively rebundling, shifting from a product strategy to an audience one. Below are just a few audiences we think are underserved by the neobanks of today, and what fintech companies building for them must do to win.

Women

Of the total global population without bank accounts, 56% are women. Even in the US, until the 1970’s a woman could be denied a credit card for being unmarried, and a married woman could be barred without her husband’s signature. Today, inequality in finance still exists with things like the pay gap and credit algorithms (who remembers this Apple Card nightmare, where women were given significantly lower credit limits than their husbands with the same info!?). There is also a fintech gender gap, with 29% of men using fintech versus 21% of women. For startups looking to capture this segment, there’s a lot of room to run.

In seeking mortgages, women are charged higher rates and denied more often, despite being more likely to repay their loans than men with the same FICO score, loan-to-value, and income. This means that for women, offering the same treatment for the same credit profile as a man is wrong, because the woman will actually default less. The issue is exacerbated by the fact that income is a key factor in mortgage rates, and women earn just $0.84 for every $1.00 earned by men.

We’ve seen a few fintech companies trying to address these challenges: Swaypay** is helping expand income streams by democratizing influencer advertising. While Swaypay is not just for women, women do make up 61% of US TikTok users and would directly benefit from their product. Jefa**, a digital bank for women in Latin America, and Sequin**, a debit card for women in the US, are both focused on building banking products that help women build credit and grow their financial literacy.

Women also deal with specific life events that impact the wallet. A woman’s household income drops 41% on average after divorce or separation. The CDC reports 12% of women will have trouble conceiving, but IVF costs around $25,000 and freezing eggs is around $6,000. Ensemble** and SupportPay** are helping women with co-parenting, including managing child-related expenses, while BBGV portfolio company Future Family**, and Carrot** are building fertility treatment concierge & financing solutions.

LGBTQ+

The LGBTQ+ population deals with the dual challenge of higher expenses and generally lower incomes. Many of these expenses are health-related, such as the cost of hormones, HIV management, transitioning, and mental healthcare. Facing discriminatory practices in employment leads to between 10–30% lower incomes on average; and many leave jobs because of harassment, causing LGBTQ+ people to be 2x as likely to be unemployed. Finances can even be impacted before entering the working world: many lose family support after coming out, so end up with an average of 20% more college debt.

On top of this, there is a unique issue with the banking process that negatively affects the trans population: “Know Your Customer.” In the US, KYC is an identification process — but since many trans people have a SSN associated with several genders and/or names, applications frequently get delayed or outright denied.

This is part of the reason why the LGBTQ+ population is 20% less likely to have a savings or investment account. Daylight,** which recently raised a $5M seed from Kapor Capital and Precursor Capital, is a neobank that offers cards in a preferred name, a digital community, LGBTQ+ finance coaches, and early wage advance.

LGBTQ+ consumers are also 75% less likely to be homeowners compared to the general population. They’re often faced with a tough choice between kids (adoption or surrogate costs), a house, or gender reaffirming surgery ($25,000–100,000). Euphoria** is building a suite of tech solutions for gender transitioning, including a savings/budgeting tool. They also offer resources surrounding sense-of-self and mental health.

Black & Latinx

If you know anything about the history of banks and Black America, it’s easy to see why we don’t *love* banks. From Freedman’s bank shuttering in the 1870s leaving depositors empty handed, to Wells Fargo’s recent fraudulent tactics that targeted minorities, there is warranted mistrust of institutions.

But this mistrust provides an opportunity: as it turns out, Black and Latinx populations are more open to fintech solutions. One recent example is that, during the onset of the pandemic, Black business owners applied to fintech lenders for PPP loans at 2x the rate of all other populations.

28% of Black and Latinx households are credit invisible, meaning they have no credit history with any of the 3 bureaus, compared to 16% of white households. Without access to credit, the upward mobility that can be achieved through mortgages and business loans is nearly impossible. Camino Financial is a lender for Latinx small businesses, welcoming the cash-heavy, low- or no-credit, and no-employer TIN businesses.

Traditional banks are inconvenient and expensive for the non-rich, with practices like pricing products differently based on zip code (just one example of the enduring effects of redlining); not having branches in lower income neighborhoods; and maintaining minimum balance & overdraft fees. The result? Nearly half of Latinx (43%) and Black (47%) households are either unbanked or underbanked.

Targeted, digital-first banks are trying to solve this: Capway** and First Boulevard** are solutions combining community and financial literacy content with traditional neobank features like no minimum balance or overdraft fees, early pay, and P2P transfers. First Boulevard also plans to offer cashback for shopping Black-owned businesses. Others in the space include Greenwood (bank for Black and Latinx consumers co-founded by rapper & activist Killer Mike), Paybby, and Bridge.

Black Americans are also more likely to have student debt (85% vs 69%) and carry a $4,000 higher debt balance on average. Vault is building a solution to make student loan debt repayment an employer benefit, while Mos** streamlines the complicated financial aid process into a single application.

Black and Latinx consumers are more likely to use money orders, check cashing, and predatory lending sources (payday loans, auto title loans). BrightUp** is working on financial wellness, starting with a low-cost emergency loan product repaid through paycheck deductions. Prosper is well-known for peer-to-peer personal loans, but Black-founded SoLo is also trying to end the need for predatory lending.

Immigrants & Immigrant Families

40 million US consumers were born in another country, and immigrants make up 55% of U.S. population growth. These consumers face unique challenges, like US credit agencies not recognizing their credit history. People come to America and have to start over as credit invisible. This impacts their ability to get a credit card, sign on an apartment, and begin building a better life.

One way startups are tackling this is by creating new ways to build credit. TomoCredit** is a credit-building, no-fee card where approval is based on cash flow rather than credit score. Esusu allows consumers to build credit through their regular payments of lease rent. Cheese is a neobank specifically targeting Asian immigrants, with customer support in English and Chinese (more languages coming), customer service messaging via WeChat, and cashback on purchases from Asian-owned businesses.

We previously discussed one of the issues created by KYC; another is the requirement of a social security number, which makes bank accounts unobtainable for many immigrants. B9 is building a banking service offering up to 15-day early wage access, with no SSN or credit history required. Passbook (by Remitly) is a neobank where signup just requires proof of US residence and a photo ID from another country (e.g. a passport).

The largest flow of funds in the developing world is from people sending money home: in 2020 alone, $68B in remittances were sent back home from immigrants in the US. Today, most use Western Union or Moneygram, which often require travel to a physical location, have predatory fees (~7% per transaction), and offer slow transmission (1 week). It’s 2021 — money transfers shouldn’t take that long or be that terrible. Maybe that is why Remitly, a cross-border money transfer app, achieved unicorn status last summer at a $1.5B valuation. The company serves 3M customers virtually, charging a flat $4 fee for instant transfers and offering 3-day transfers for free.

In serving any of these populations, fintech winners will need to leverage authenticity and an intimate understanding of their users’ problems to build tailored solutions. I like to call them “Fintech Allies.”

At BBGV, here’s what we look for in these Fintech Allies:

• Transparent business model: It should be clear how the company is making money — and how the business model is aligned with the consumer’s interests — in order to build consumer trust. One example is Current, which set out to target Gen Z and teens who are wholly overlooked by incumbent banks. The product is affordable at $36/year for teen accounts and $5/mo for pro accounts; and their upfront pricing strategy, compared to hiding behind a mountain of obscure fees, is rare in banking.
• Unlock a new or untapped consumer behavior: In fintech, like with all new apps, companies are competing with the consumer’s most precious resource: their attention. To win, fintech companies need to create an experience that makes usage sticky. In short, they have to be more than just functional. While Venmo had a headstart on Cash App, the newer app had a stronger emotional pull with Cash App Fridays (Twitter-based giveaways that drive engagement and downloads) and fractional stock/crypto investing.

• Strong distribution strategy: Digital performance marketing costs are increasing, with Instagram and Facebook CPMs (cost per thousand impressions) up 40–50% in 2020 alone. Startups will need a way to keep CAC in check while scaling, like playing to social or emotional levers. Robinhood’s free stock strategy has over-delivered, with 80%+ of new funded accounts in 2020 originating from word-of-mouth or referrals.
• Serving the needs of the 99%: At BBGV, we focus on female founders addressing the needs of the many, whose big ideas will reshape the way we live.

If you are a female founder in fintech building for an underserved demographic, I’d love to connect. You can reach me at MalloryBell@berkeley.edu / @Mal_Bell_ on Twitter.

Below are some of the companies mentioned throughout this post:

Note: I want to acknowledge that many of these solutions are for a broader audience than the ones I’ve highlighted (for example, many tools for immigrant families are also targeting Latinx consumers). I also want to acknowledge individuals that identify at the intersection of some/all/none of these categories. This map is imperfect — don’t let anyone (me) put you in a box!