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Into a sea of sameness, new challenger banks are launching left and right. More are focusing on demographic needs, like providing banking services to the LGBTQ community or to immigrants.
Better Financial, on the other hand, addresses a problem the majority of Americans know well: financial shocks. It could be losing a job or getting sick. Better Financial has embedded insurance products into its banking platform that provide a safety net for when something unexpected happens. It all happens behind the scenes.
Thiel fellow and founder Kaushik Tiwari is my guest today on the Tearsheet Podcast.
So who are you? And what do you do?
Kaushik Tiwari, Better Financial: Hi, I am Kaushik Tiwari, the founder and CEO of Better Banking App. We are a new bank that helps cushion income volatility and sudden hardships through a mix of embedded insurance and payroll linked loans.
Background and genesis story
I’ve been interested in startups since college. I dropped out halfway through college to the Thiel Fellowship, started a healthcare company that didn’t go anywhere, but learned a lot. And then that got us into insurance. I started an insurance company for international students — we were basically helping international students get cheaper health insurance, because most internationals are not going to be using health care long term in the US. We were looking at them as a separate risk pool, instead of putting them with students in general, which most universities do. We were looking at them as a specific population and building a plan for them from scratch. So that’s a company that I started back in 2017. We went through an insurance incubator in Hartford, Connecticut, and you know, since then, we’ve been looking for the right product to build for an American audience.
What brought us into what we’re doing now is my co founder and brother got into a rugby accident playing for his school club team, and had to go to the ER to get a simple X ray done. He had health insurance, really good health insurance for that matter. But it wasn’t covered because it was below his deductible. So he had like a $1500 medical bill that came out of the blue. You know, he’s a college student, has a part time job, but really doesn’t have any sort of an emergency fund built in. And we kind of forgot about the medical bill for a while, and it then turned up on his credit report and lowered it by like 50 points. He couldn’t apply for credit cards and things like that.
That sort of problem catapulted us where we really started digging into emergency shocks, and how they affect Americans across different income groups. If you’re making $75,000 as a family of four, that’s your average American household. And if you have a healthcare deductible of $5,000, how on earth are you supposed to come up with that $5,000 if something happens? So we’re trying to answer that question and that’s why we’re building Better Banking.
If you look at how people deal with debt and shocks — traditionally, most people will just default debt. They’ll take a credit card loan, pay a high interest APR or they’ll just ignore the bill, letting it go on the credit report, and long term consequences follow.
For us, I think it started from a few things. One was having a framework to look at these unexpected shocks, as we call them. There has been ton of research by CFPB and Pew that looked into how people deal with them. We classify them into three different types: medical shocks (unintended hospitalization because of an accident or a sickness), income shocks (a pay cut or losing your job), and expense shocks (heating blows or car needs a repair). These are the shocks that we came up with from our conversations with customers and reading all the material that people before us have put together.
We like the idea of embedding insurance within the checking account, because checking accounts are the most accessible financial product that somebody can get access to. Most times they don’t require a credit check. It’s something that people know how to deal with on an everyday basis. Everyone has a checking account. Now you have a checking account and something happens — you go to your checking account and see you don’t have the money there. Then you have to go to a credit card or ask friends but what if your checking account could morph itself to suit that particular situation you’re in?
So say you’re in an accident and you go to your checking account, but it comes with this accident insurance product attached to it. You let us know that you were in an accident and we automatically process a claim. You send us all the information. And then we send a direct deposit within, hopefully, minutes — that’s where we want to go. Or you lose a job. We connect to your payroll, so we have immediate access and visibility into how much you’re making on an everyday basis. We can look at your income streams. And then based on that, underwrite you with a very low interest or a no interest loan, because we’re basically just securitizing your existing paycheck. We know you’ve made this much and we know you’ll make this much next week — today is a temporary blip. So we’ll advance you that money.
The checking account as home base
We did sell insurance in our earlier lives, and we understood the problem, the challenge, with insurance is like, ultimately, it’s a nice thing to have, but most people don’t really wake up thinking they need to buy insurance. So that challenge of getting over the hump of paying money for an abstract promise, which always exists with insurance — that doesn’t go away when we embed it into a checking account. But the thing that does allow us the benefit that we get with checking is high engagement. So, we have a physical debit card that people can use every day. They use our banking app a few times a day. And ultimately, the checking account is the place that they go.
78% of Americans go to their checking account as a first call for help. And for us, it’s the high engagement and home base for all your bills and all your paychecks. We don’t want to spend all that energy building an insurance product, and then customers only buy it from us once a year and then forget about it. We wanted to build a product that had more of a staying value in your life.
We have a group insurance plan with an insurance partner, AIG, in our case, where they are underwriting the accident insurance product. It’s sort of a loyalty program where once you open up a checking account with Better Banking and you move your direct deposit. We then switch on the community safety net which has embedded insurance as part of it. So it’s within your mobile app, within your banking app. You have an option to file a claim, as long as you keep meeting the requirements, which in our case a $500 minimum direct deposit and a $250 spend on the debit card every month. As long as you keep meeting those requirements, you’re part of a group policy, and we are basically paying the premiums on your behalf for them.
Embedding insurance using interchange to pay for it
We’re very upfront with our customers that we are funding this insurance through interchange. We’re upfront with them about that. The goal is to be the primary manager and count on them to understand that every time they spend on the debit card, they’re actually contributing a small dollar to their own protection or to protect other people like them — folks that were in their shoes that are challenged right now with a financial shock. We want to engender that kind of feeling. You can think of it as sort of a financial community that’s banking, spending, saving together to protect each other from the unexpected.
We launched a few weeks ago and right now we’re about 40 banking customers. We have a waitlist of 10,000 people that we onboarded almost a year ago. It took us a non trivial amount of time to go live, just to get a card program up with some amount of legwork involved and getting all the insurance. regulatory approval. We had to work with state insurance: we filed with the Delaware Department of Insurance and got approvals there. So it took us a little bit to start and now we’re starting to ramp that up. Our goal right now is to basically get to 1000 customers.
Next steps in the product
We plan to add on a few other benefits. We don’t want to become an overdrafting app. We’ve seen a lot of other people find amazing success doing overdrafting. But our goal is to sort of bank the middle income American who doesn’t overdraft very often and wants to take proactive steps to secure themselves and their family’s future. And even then, we needed to build a lending product. So we’ve been looking into payrolling loans for a while. And we work with Argyle, which is a payroll linked product. We were using payroll linking to move a direct deposit of the paycheck –that was our primary use case where you drag a deposit instantly to our account within the Better Banking App. But then we realized, why don’t we leverage that relationship, but then offer you loans? Because we already know how much you’ve worked last week, and how much you’re going to work next week. And in fact, how many hours you’ve worked this week. So yeah.
It’s not early wage access — it will be in the form of additional debt. We’ll see how much you make every week and we’ll advance you money which you then pay back increments over the next 10 weeks or so.
Launching with partners
We are working with Unit right now. And Unit has been an amazing partner. We started working with them in March of 2021, which is like three months ago now. Within three months, I think they got us. Before that, we were working with another partner. There were communication issues around getting approval from the bank, like getting compliance approvals. Data security was another — we weren’t in the loop that we needed to get hold of ISO 27001 and SOC 3 compliance. That was a surprise for us early on. We had to change banking partners from our earlier partner to move to Unit in March of 2021. Since then, working with Unit has been a breeze. These guys are hungry, as we are — they’re a startup and we have a Slack channel with them. Any sort of issue that pops up, we can text message them as I would message any member of our team.
I think there are new banking as a service platforms coming up that are geared very differently than the previous crowd of banking as a service companies. They’re much more geared toward working with startups like us, where they understand the constraints we work with and on our timelines.
Onboarding and activation of new customers
We’ve been very deliberate about the kind of customers we onboard. So early on in our onboarding flow, you create an account with us. But before you even create a bank account, you connect your existing bank account — so you have to link your primary banking account with Plaid early on, and we use that to verify whether you meet our minimum income requirement. So you have to have at least a $500 direct deposit, because what we learned was a lot of people just come through and their primary accounts didn’t show much transaction volume at all. I don’t know, maybe it’s because they were connecting a throwaway account. But it was important for us to focus on the users that will convert to direct deposit.
So one thing we require early on is you have to connect your existing primary account. We verify minimum transactions. We make sure that you spend at least $250 on your debit card and you have at least $500 of direct deposit. It also helps with reducing fraud, because we want at least two months of transaction history on your existing card.
The second thing we do is we ask you to move at least $20 before we ship you a debit card. And that was again, a way for us to vet people. If you create a bank account with us and you don’t move the $20, you don’t get your debit card, which increases people actually activating their cards later on.
User acquisition plans
We raised a pre seed round from Slow Ventures summer of 2020. And we’re at the point where we have an 18 month timeline. So we’re reaching a point where we’re basically acquiring customers, getting some proof points, and then going back on the road to fundraise.
We’re building banking for the unexpected. So insurance, obviously, is a start. Payrolling loans is one thing, but we want to go deeper into healthcare. So having virtual primary care — we’re talking to a virtual primary care provider, so that if you bank with us, we can give you discounted medical advice anytime you want. We’re starting to look into dental and vision plans, sickness — like actually starting with accident, we want to do more upsells. So like, sickness, insurance, and then going on to other forms. Being able to pay a little bit more and then covering your entire family instead of just the individual. Those are things that we’re excited by.
For us, it’s about building around the different unexpected shocks someone could have. Some form of auto coverage would be helpful for our customers, because that goes into the theme of the unexpected. I’ve looked into what some other people are doing around subscription home repairs. So you pay a subscription amount. It’s not insurance, but if your appliances break down or anything, they’ll come fix it for free. There are some startups that are doing that, so we’re just excited by what everybody is doing and seeing how it intersects with our goals.