‘Challenger banks aren’t challenging anything’: Agora’s Arcady Lapiro on launching a new banking as a service platform

Challenger banks' challenge

Honestly, in the pitch that challenger banks push, yes, they are challenging the status quo. In reality, they're not challenging anything. If you take a look at Greenlight, Chime and all of them, product-wise, they're great at marketing, but time is on the side of traditional banks. They can catch up easily.

It will take time. The big ones will catch up digitally. The question is about the small ones. With them, I'm not sure. There was a great article this morning by Ron Shevlin about who are the winners and the losers of 2020. One of the winners is Chime. The big losers? Credit unions.

Targeting Tier 2 banks with banking as a service

Agora started in 2018. First of all, it was a joint venture with the largest European retailer, like the equivalent of Walmart. They built for themselves a challenger bank in-house. They put tens of millions of dollars into that. We started a joint venture with them. And the idea was first to answer if there is a market. Is it core conversion or a pure challenger bank? We worked with a big consultant here in the US.

We saw that there was banking as a service for fintech firms on one side. On the other side of the market, there were players trying to do core conversion for traditional banks. And we found a sweet spot which is fintech as a service for tier two banks and below. There's almost no one really working here. Everybody is trying to resell the old way to do core conversion when the need today is fintech as a service, challenger bank technology for this segment. That's why we're here.

Core conversion versus middleware

Agora is a complete challenger bank tech platform. You could see this as a core banking provider for challenger banks. We don't want to position as core banking but as middleware.

So what can a tier two bank or credit union do with us? One, if they need a single feature. They need onboarding, they need card control, they need a shared account, they need reporting. Whatever it is, with our API, we can bundle and plug in a single feature option so they can build a complete new digital bank. It's a new move -- Nimbus and Moven with Q2 are trying to step in.

If you take a look at the final product we're launching, it's very similar to a digital bank. And you can go to our website to see the products that we're launching, which is more a challenger bank kind of platform. That's option two.

Option three: I'm from this industry. I built my career at very large scale banks, digital banks, and I was an advisor to very large banks -- we are launching a fully white label challenger bank, and we're launching with two different types of white label banks.

Tier 2 banks' challenges

Small regional credit unions and community banks have the trust of their clients. They are growing deposits during COVID. They have the long term opportunity to build relationships with clients.

But if you look at the opening of a paper checking account, not online, but just a regular checking account, they are totally losing ground. The two winners are, on one side, challenger banks, and the mega banks on the other.

And challenger banks are focusing on teenagers. But the actual profitable market is small and medium businesses. You have ZenBusiness, Kabbage, and Radius Bank, which announced a few weeks ago that they're launching an SMB digital bank.

So, teen banking and SMB banking are the two hot segments for credit unions and community banks. The new niche, the underbanked for minorities, it's not the real market for tier 2 banks. The real market is the mass market. It's the young population, Gen Z, and small and medium businesses -- it's where you have a huge market. It's a $370 billion market.

White label

When people talk about white label, it can mean one of two things. Either it's a pure regulated part, which means providing a bank charter. Option two, it's like having a platform, which is embedded for third party fintech or banks and which is used by them. That is the concept of white labeling.

I'll give you an example. Today, I'm a new bank, and I want to launch a new digital bank brand. A provider can produce an app with basic features, like deposit, bill payment, and new card issuance. That's it. And they will call that a new digital bank.

We are going further than that. When we say white labeling, it can be a full set of features. We're launching two digital suites, a bank for teenagers and a bank for small and medium business. I'm going to focus on teen banking. Chase just launched a teen product powered by Greenlight. If you take a look at the features, there's an app for payment and plastic card issuance. There's no Apple Pay or Google Pay. And basically, that's it. That's the product.

The product that we're launching is a fully white label for banks and credit unions. We're coming with a BIN sponsor and we're also doing the card issuance. Basically, we are in housing everything, including virtual cards. We also include a rewards marketplace with the equivalent of cashback. We include a transactional website for the parents, co-control for the parents, and much more. It's not just a single white label feature, which is okay -- it's much more complex. So this is what I call second generation white labeling. We do the same thing for SMBs.

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Teen banking

Teen banking was always of interest to banks. Digital teen banking is the new interest because before every bank had a piggy bank account for teens, with a $50 saving bonus and a checkbook and a small piggy bank as a gift. When I was a child a long time ago, they gave kids a puzzle or things like that when they opened an account. So it was always of interest.

Digital teen banking started two or three years ago with Greenlight in the US and now you have Step. There's differing kinds of approaches. There's the gaming approach. There's the social network approach, which is more Step. And there's a club part, which is kind of Copper (I think they want to take the club approach).

So why is digital teen banking a vibe today? Because the technology allows it. And because there are social networks. The reality is over the long term, I'm not sure it's a real play.

I'm going to ask you a question. Your child is coming to you saying, Dad, I want a bank account. And they will tell you that I want a bank account from this new fintech being promoted by Will Smith and other celebrities. And on the other side, your bank will call you, saying we have an in house, digital bank approach, many more features than the other bank your child is talking to. And, by the way, everything is in real time. It's peer to peer, with rewards, a savings account -- everything. As a parent, what are you going to choose?

You don't want your child to bank with Fortnight or Xbox. And by the way, it won't be cheaper, and there won't be additional features, and you have less control. So that's what I think will happen if incumbents have a real offer to be able to compete with Step and all of the teen banks. They have a play because they hold the relationship with a parent, and the money comes from the parent, not from the child.

SMB banking

There's no money in teen banking today. The real money today for credit unions and community banks is with small and medium businesses.

If you're a bank and want to launch an offering for SMBs, what are you going to do? A website and app, bill payment, checking, saving, CDs. And that's it. Then you have to call your core banking provider or a fintech to try to build an offering. I'm going to take an example: Radius Bank. which announced a few weeks ago that they're launching a new SMB suite, which is in collaboration with Narmi. It's an app, it's a website, accounting service, digital opening -- a great offering for SMB.

On the other side, you have Kabbage, N26 and Revolut with this kind of product. The common product today for SMB banking for a community bank and credit union is a website. And that's it. There was a great report last summer, saying that half of the small and medium business population is thinking about changing their bank provider in the next 12 months and they're interested to pay for services, which is a great thing. It means customers are looking to pay.

So we're launching a small and medium business white label offering with an app, onboarding, and additional features that will allow banks to not only compete with new challenger banks, but to be ahead of them with products challengers don't even have: mobile point of sale, separate accounts, CDs, retirement plan, lending, etc.

New brands moving into banking

Let's think of Intuit and Kabbage moving into banking services. They have a customer base. Their banking service is easy because it's already integrated, so they make the life of their customers easy. So let's play that out. If you already are our client, you already use our services. So it allows you to expand into banking. It's integrated. But that's for existing clients. To future clients, they will say, hey, we have a banking product and you can also use our existing product. It's the reverse approach.

Now, let's go to the credit union/community bank. They have existing clients, and they will have new ones. They can say, you already use our banking services as an end user on the retail side. And now we have a couple of other services which are even better because we have even more features and we are local, physical. When COVID will stop, you can even talk to us physically. So basically, they can see we have the best of both worlds, digital and physical. You can always pick up the phone to speak to a banker.

Priorities in 2021

We're launching live with our BIN sponsor in Q1 2021. Our BIN sponsor is Sterling National Bank. It's a $30 billion bank in New York. We are also going to integrate with a smaller bank. We are going to go live with Finastra. We're going to launch for a third key segment for white label in addition to teens and SMBs: elderly people, for people who need to be protected, with custodians and trusted care takers. I think it's going to be a huge segment in the US.