Novo’s Michael Rangel: ‘Solving SMB banking requires addressing the fragmentation in the market’

For entrepreneurs in the US a few years back, it was strange what was happening overseas. There wasn’t one but a handful of challenger banks launching that were changing the entire banking experience. Signup was quick — there was a buzz around their FX, lending, and spending products. But when you looked at what was happening domestically, well, the early neobanks hadn’t really caught on.

Novo’s Michael Rangel set out to change that. And instead of focusing on the consumer, he went after the business customer — a harder and more complicated route to take. Novo now has a business banking platform in market and is going up against some of the biggest banks in the US.

SMBs are underserved and we talk about the approach Novo is taking for building its product for such a fragmented market. Mike describes how the massive opportunity for SMB banking requires a platform approach. We also discuss the dichotomy between digital banking for consumers versus SMBs and how Novo plans to bridge that gap.

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The following excerpts were edited for clarity.

The difference in European banking and the U.S.

About 5 years ago, my co-founder and I were looking at what was happening in Europe across the pond with all the challenger bank activity. We thought, "Damn, that's awesome. It's really cool how innovation is being injected over there." Then we looked around in New York and said why the hell isn't that happening here?

It's interesting to see how the US market doesn't necessarily follow the same type of velocity. But the flip side of that is almost like the blessing and the curse of ignorance -- the willing ignorance of launching a startup against the largest players in the world, not knowing how difficult this undertaking would be. That's when we started out building a business banking platform because it didn't really exist at the time.

Consumer versus business banking

Consumer is just way more saturated in banking and fintech. From a regulatory perspective, it's easier to get into consumer banking products than it is business banking products. That said, business banking has just been a very underserved market for a long time in the US.

If you think about where big banks lie, there are two ways the pendulum swings. On the one, you have the individual consumer or retail market. There you have the likes of JPMorgan Chase and Bank of America. You have big shops spending millions and millions of dollars tying up massive internal resources to crack that egg to develop a consumer product.

On the other side, you have larger corporate accounts. If you have a large firm asking for additional functionality or service, these large banks corral large amounts of resources around that because that's where the spending gets a lot bigger.

In the middle of all this, you have small business. It's difficult to address this market because it's very fragmented. What makes sense for my business may not make sense for yours. It doesn't make a whole lot of sense to spend big money and take years to build a product that almost immediately becomes invalidated when it hits the market. That was our window of opportunity.

The SMB user and her painpoints

First thing, there's a massive dichotomy between the consumer and business banking markets in the US. The majority of US banks still don't have mobile applications for their small business checking accounts. That's nuts -- it's 2019. The ones that do have an app are incredibly limited -- they don't allow you to do many of the things an SMB owner needs. The most innovative banks have mobile apps with functionality limited to reviewing your balances and transactions. For everything else, you need to go online.

At the same point in time, all these SMB owners are also individual consumers. In their individual consumer lives, their lives aren't perfect but they aren't that bad. If they don't get the tools they need from their bank, there are other tools to help them. But when she puts on her SMB hat, it's horrible. It doesn't make any sense.

These people want to run their businesses on mobile. They run their businesses on the go all the time and they want their bank to do the same. Everything is cumbersome -- from onboarding to logging in. It takes a lot of time to get through it all.

Creating a business banking platform

From Novo's perspective, we want to create all of these integrations with best-in-class services and products in order to build a sort of financial watchtower over our users.

We're doing some cool things now to create this ecosystem where we're able to alleviate a lot of this stress that an SMB owner feels. The average business owner uses something like seven different tools to try and piece together all their information to get a clearer understanding of their financial picture.

We know we're not the best at everything, but we are pretty good at specific things. We want to go out and create integrations with companies like Xero to facilitate different transaction types that haven't existed in the US.

Novo's offering and features

Novo is a small business checking account. It's a DDA, or demand deposit account. It's not a prepaid card. A checking account can only do three things: hold money, receive money, and send money. We allow our customers to do this very easily, starting with the onboarding process. The average Novo customer completes his application in about 10 minutes from his mobile device and open his account in a matter of days, rather than weeks or months like at other banks.

We allow everyone to process electronic transfers from the mobile app via ACH. Our customers can store different payee profiles and we'll print and cut a physical check on the backend. We also allow our customers mobile check deposit. That's really the core checking functionality that I think we do really well and make easy.

Partnering with a chartered bank

My co-founder Tyler and I saw how banking had been done before with the rent-a-charter model. We didn't have a whole lot of money to burn. So, paying a bank to operate like a bank didn't really make sense for us. Also, it's hard to build a long term, sustainable business model like this, too.

We started looking at different ways for us to enter into banking. Community banks have been dying and don't have the same resources the larger players have. They have to pull from marketing and technology budgets to stay competitive, leaving them at a disadvantage to retaining existing customers and acquiring new ones. Novo's value prop was a good marriage for community banks and their challenges.

We filtered through the entire US banking ecosystem by certain criteria and found Middlesex Federal Savings in Boston. Middlesex literally could not be a better partner for us -- we joke that the bank's CEO is our third co-founder. We see eye to eye on everything -- it's all customer first and building the best product. Community banking serves such a critical role in local communities.