Are neobanks still considered disruptors?

Unencumbered by brick-and-mortar, and armed with sleek UX, next-gen tech, and VC-backed checks, neobanks were seen as the disruptors of traditional financial institutions. But what seemed like a no-brainer a few years ago is not so obvious now.

Given the Q2 financial results of some publicly listed U.S. neobanks, a slew of bad press, and rumors of Marcus – Goldman Sachs’ digital bank – running at a massive $4 billion loss, the neo-shine of challenger banks is wearing off. It appears we're witnessing the cautionary tale of the tortoise and the hare. And the big question that remains is whether they will make it through the incoming recession, let alone disrupt incumbents.

An interview with seasoned banking and fintech expert Darryl Knopp, a Senior Director at FICO, put a few things into perspective. According to him, as the digital transformation unfolds throughout the financial services industry, there will be a role for all kinds of service providers, including brick-and-mortar institutions. "The reality is, I think that there's always going to be, in our foreseeable future, a need for branches," he says. "We're certainly seeing branches close and banks rationalize where they're making those investments. But there's still a great deal of people who gain comfort in getting questions answered face-to-face."

A Cornerstone report suggests that although popularly discussed as a 'monolithic force consuming banks', fintechs instead constitute thousands of companies, each seeking to disrupt banks across different customer segments and products.   

Knopp emphasizes the role that neobanks play in driving innovation within the financial services industry, but equally stresses their need to be profitable. "How do you make money? Because eventually, unless it's a charity, you have to. Their business model has to prove it out," he adds.  

With the above in mind, let us take a quick overview of four publicly listed neobanks in the U.S. to see how they individually performed based on their Q2 earnings results.  

In pursuit of profits

Seemingly bearing the highest amount of losses is SoFi. A closer look at its Q2 2022 earnings shows that the company operated at a net loss of $95 million. But SoFi reported adjusted net revenue of $356 million, an adjusted EBITDA of over $20 million, and is on track to become profitable in 2024.

On a mission to become the AWS of fintech, the neobank acquired Galileo and Technisys to offer white-label products to other businesses. The SoFi app sits at #63 in the finance apps category and has a user rating of 4.8/5 stars.

A look at the Q2 2022 financial results for Dave, a recently publicly listed neobank, shows that it is operating at a net loss of $27.1 million in Q2, compared to a loss of $0.9 million in Q2 2021. Still focused on growth, with a strategy to convert users into lifelong customers, the company increased its ExtraCash overdraft limit from $250 to $500 and onboarded more than half a million new customers in the second quarter.

Dave has yet to reveal its path to profitability. However, the company records a total of 7 million members. The Dave app remains among the most popular fintech apps, ranking at #14 in the financial apps category and boasting a rating of 4.8/5 stars.

Looking at a similar neobank, MoneyLion's Q2 2022 financial results show the company is operating at $24 million in net losses. Applying a different strategy, MoneyLion acquired two companies to drive growth and customer engagement. The company also reduced its customer acquisition cost to only $9 in Q2.

MoneyLion is planning to break even on its EBITDA by the end of the year, if all goes according to plan. The MoneyLion App ranks in the top 100 finance apps, occupying #63, and has a 4.7/5 rating. 

Beyond break-even

The Q2 2022 financial results for BM Technologies (BMTX), the parent company of BankMobile VIBE, show that it is operating at a net income of $4.5 million. The company uses a B2B2C business model, leveraging partnerships to achieve a customer lifecycle strategy with low customer acquisition costs. 

Already a profitable fintech, BM Technologies is focusing on completing its merger with FDIC-licensed First Sound Bank, gaining an additional 2 million customers. The BankMobile VIBE app sits at #91 in the top 100 finance apps, with a user rating of 4.4 stars.  

Although burning up a lot of cash in the battle to become the primary financial services provider to consumers, it is apparent that neobanks are blazing a path to carve out their own space in the financial services industry. They are expanding their product offerings, engaging in M&As, and diversifying their income streams. In other words, they’re putting up a good fight.

"I think some niche banks (neobanks) will continue to exist, and they will create products for a specific segment that larger FIs have difficulty with because their technology platform is limited,” Knopp says. However, he cautions that with the large amounts of investments that traditional FIs are pouring into digital transformation, and the promise of AI and open finance, it may only be a matter of time before the disrupted become the disruptor.