Navigating the ‘convergence’ of product streams: Conclusions from the Tearsheet Challengers Conference
- Challenger banks have grown rapidly in the U.S. market; brands contend the opportunity is only getting larger with younger consumers feeling less attached to incumbents.
- Direct-to-consumer models have potential among niche consumer groups, but some companies are pushing business-to-business partnership plays to diversify revenue streams.
Eleven years after Simple paved the way for the entry of digital challenger banks in the U.S., digital-only banks are finally making their mark on the U.S. market.
A key recent milestone is Varo Money acquiring a national bank charter in July. Meanwhile, in September, Chime, which has more than 8 million customers, reached a $14.5 billion valuation, becoming the most valuable U.S. consumer fintech. In recent years, challenger banks from Europe, including N26 and Revolut, have launched in the U.S. During this period, fintech firms initially focused on digital investing such as Wealthfront, Betterment and Stash, have moved into digital banking.
The proliferation of digital banking platforms is raising the bar for companies that want to scale. There are ongoing questions about paths to sustainability for challengers, but recent research shows consumer attitudes are shifting, with incumbents’ hold on the market loosening as the pandemic pushes financial activity away from physical locations. A growing number of consumers are comfortable with having their primary account at a digital-only institution, based on a July 2020 Cornerstone Advisors survey of U.S. consumers. It found that 6% of Americans consider a digital bank to be their primary bank, a 67% jump from January of this year.
Though the market opportunity may expand for challengers, long-term success will depend on building and maintaining customer trust. Alongside that development, the rebundling of product offerings is continuing. While this comes with the risk of a “sea of sameness” among challenger banks, analysts suggest long-term success will depend on the staying power of a company’s value proposition over time.
“When we first started on the direct-to-consumer side, businesses were focused on a single product; what we're seeing now is those companies trying to be wholesale financial services providers,” said Tripp Shriner, a partner at Point72 Ventures. “The question that we have, as we’ve seen that convergence, is how you then lend yourself to differentiation over time.”
The opportunity for challengers centers around the development of improved customer experiences, personalization, and the continued development of new products, he argued. At the first-ever Tearsheet Challengers conference in September, banking startups, venture capitalists and incumbents reflected on the implications of the rise of challenger banks in the U.S. market.
Among the conclusions:
Personal finance fintechs that began as lending, investing or PFM platforms are realizing client cash flow is the key to unlocking a customer for life. A way to get a window on a customer’s cash flow is to add banking.
Banking is a foundation for making financial platforms more effective, and deepening relationships. Betterment, for example, said it had been considering a banking offering for some time. With the growth of banking-as-a-service providers, launching banking products is easier and cheaper than ever before, Mike Reust, president of retail at Betterment, explained.
“When you're trying to solve problems for customers on long-term investing in short-term investing, it ultimately all comes back to day to day cash management,” said Reust. “It’s become easier to actually offer banking services -- eight years ago, The Bancorp was the only game in town.”
Meanwhile, Wealthfront, which started as a digital investing platform, added banking in response to customer demand. By using banking as an anchor, customers can now consolidate their financial accounts under the Wealthfront umbrella. Wealthfront recently rolled out a solution called Autopilot, which acts as a digital assistant that can find “extra money” and automatically put it to work by moving it into an investment account.
“The vision of self-driving money is really to shift the balance of power away from the financial system and back into the hands of our clients,” said Chris Hutchins, head of autonomous financial planning at Wealthfront.
Brands may be global, but banking is local.
As global challenger banks expand to North America, it’s important to recognize that banking is local, from both regulatory and customer experience perspectives.
“The only region around the world where you have some kind of synergy across borders is actually Europe,” said Alex Weber, chief growth officer at N26. “You always have to think about market opportunity, per license. As soon as you go to a different region, you need a new partner bank, you need to apply for a new banking license, [and] that is a very big effort.”
Others emphasized the importance of a proactive dialogue with regulators.
“We are very forward leaning in terms of [communicating with] the regulators as often as we can,” said Sean Hunter, chief information officer at OakNorth. “We address their concerns in a very straightforward way, and that’s by far the best way rather than waiting for them to be upset.”
Niche customer groups are popular avenues for differentiation.
Understanding the day-to-day financial needs of the target market is a critical factor affecting a challenger bank’s ability to scale.
The average Current user, for instance, is 27 years of age and lives paycheck to paycheck. The platform’s user numbers surpassed 1 million in June. Current has seen swift adoption throughout the pandemic, often adding more than 100,000 users a month.
“If they’re not on the credit rails, or maybe they're thin-file or no-file [customers] -- you're seeing people having to manage their accounts receivable and accounts payable,” said Current CEO Stuart Sopp. “[When] you're paying your bills, it's like knowing when they're coming out, how much they are, knowing when things settle, and understanding bill pay. And then in the middle, there's insights, budgeting, savings, and we have a [reward] point system.”
By contrast, Betterment and Wealthfront typically serve customers whose incomes are higher than average. These users may also be more comfortable delegating their day-to-day money management to an automated, digital assistant, the companies said. For Revolut, the target customer could potentially be a “digital nomad” worker who crosses borders frequently, for whom a seamless experience between different countries, and attractive foreign exchange rates, are important.
“Our customers come from the incumbent banks,” said Ronald Oliveira, U.S. CEO of Revolut. “It's really about what that customer wants; we have a great FX, we've got a great multi-currency wallet, [but it’s] the whole life journey, and you don't have to leave our app to do almost anything you want to do along the way.”
Aspiration, which aims for customers who care about social, environmental and climate justice, said it too doesn’t see competition coming from other challengers, but from established players.
“We're not going after the people who are hunting for the highest interest rate,” said Andrei Cherny, CEO of Aspiration. “We’re speaking to a very differentiated customer base, and have a set of offerings that are fundamentally different than what anybody else in the space.”
Small businesses are still underserved by the banking ecosystem.
While personal finance fintechs and consumer-focused challenger banks attacked retail consumers’ money management pain points, there is room for product innovation for small businesses while many large incumbents struggle to serve these customers profitably.
The pandemic was an important opportunity to cater to small-business client needs, said Bank Novo co-founder and CEO Michael Rangel. More than 80% of Novo’s user base has increased deposits throughout the COVID-19 period, he noted.
While the consumer-facing banking segment has revamped money management toolkits for customers, the industry is only beginning to offer these solutions for small businesses. Novo’s path forward will be to roll out capabilities to improve speed and the integration of financial tools.
“One of the things that we're working on now is almost replicating a similar model to what Chime and a lot of the challengers in the individual consumer space have done with direct deposit, like getting paid two days early,” said Rangel.
In addition, digital banking platforms are also focusing on direct connections with businesses’ cash flow patterns, improving possibilities for personalization and underwriting.
“People need more than just another great bank account,” said Rob Daniel, head of product for QuickBooks Cash at Intuit. “How can we more quickly and confidently give you insights about actions that you should be taking, and then connecting you with the services that enable you to take those actions?”
Partnerships, or banking-as-a-service models, bring down customer acquisition costs and can help challengers scale rapidly.
BankMobile is seeing growth through a banking-as-a-service partnership model, helping non-financial brands develop banking capabilities. BanMobile serves the student market through partnerships with academic institutions; it’s also the bank partner for T-Mobile MONEY and one of a few banking-as-a-service providers for Google’s upcoming checking account initiative.
“We started with the student segment, but there are so many other non-financial services companies that want to get into banking and don't want the burden of getting into banking,” said Luvleen Sidhu, co-founder and CEO of BankMobile. “The benefit [for partners] is to be able to attract, engage, retain customers, create differentiation in the marketplace, add another stream of revenue coming in -- there's tons of reasons why they're interested.”
Regulators are becoming more open to digital-only banking propositions, but the charter route isn’t necessarily a path all fintechs may want to take.
Varo, which was founded in 2015, and has 2.5 million accounts, obtained a national bank charter this summer. It said a charter was a necessary step to allow it to offer a differentiated set of products.
“We believe that to bring about effective change to the banking sector, we should do it from within,” said Philippa Girling, chief risk officer at Varo Bank. “In the next 6 to 12 months, we’re looking at a whole slew of products focused on our customer base at the moment and our future customer base.” Among its future offerings, Varo intends to offer small-dollar loans, she added.
Varo’s successful, three-year journey to acquire a banking charter demonstrates that regulators are open to the concept of fintechs becoming banks, but contenders for a bank charter need to understand the level of effort involved from both time and resource perspectives, Varo emphasized.
“It’s work, but it’s not mysterious, but you have to have the will to do it,” said Girling. “The Office of the Comptroller of the Currency, in granting the charter, has really made it clear that they are supportive of fintechs.”
Time will tell whether others will emulate Varo’s example, though at least one major digital banking company, SoFi, recently resubmitted its bank charter application.
"This is a moat that we've created because it's a high bar to cross from a regulatory perspective, and it’s also a high bar to cross with investors," Varo CEO Colin Walsh said in a recent interview. "It's certainly going to pique the interest of others, but I don't know if, from a regulatory perspective, it's going to get any easier."
Incumbents are watching and incorporating elements of the challenger playbook.
Beth Johnson, chief experience officer at Citizens Bank, said it’s important to learn from challengers, particularly how they’ve responded to customer needs, without the legacy architecture and legacy thinking. She noted that Citizens employs a “buy, build and partner” approach to fintech collaborations. Citizens has acquired some companies, including in the wealth space, the bank said, without specifying which ones.
From the customer experience perspective, Citizens has focused on building data-driven advice features, and pairing them with human interaction as needed. The bank’s future roadmap involves building out data-driven personalization capabilities and enhancing point-of-sale payment solutions.
“We've talked a lot about investing in our app and investing in our insight layer,” Johnson said. “On point-of-sale lending, that is something in which Citizens has been very innovative and will continue to invest in over time.”
“Once community financial institutions and some regionals really understand who their competition is, we'll see more traditional FIs looking for creative ways to grow their business. The real winners are people and businesses that have more access to money and services as a result of this "financial arms race."”