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Step’s CJ MacDonald on building a bank for teens

  • CJ MacDonald cofounded gyft, which was acquired by First Data in 2014.
  • He's back with Step, a banking platform targeting teens with age-appropriate services and financial education.

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Step’s CJ MacDonald on building a bank for teens

There’s a flurry of activity around banking young people. Getting the balance between autonomy and parental oversight is critical for teens, and Step feels like it’s found the sweet spot. Joining me on the podcast is CJ MacDonald, founder and CEO of Step. CJ was the co-founder of gyft, a startup targeting the massive gift card market and was acquired by First Data. He’s come back to fintech with Step, a bank targeting teens and their parents.

We talk about what teens are looking for from a bank and the challenges around servicing them. We discuss the product, CJ’s philosophy around monetizing teens, and Step’s acquisition channels. 

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The following excerpts were edited for clarity.

The genesis story

I was born and raised in the Bay Area. And I've been in the early stage startup ecosystem all of my career. I have always loved to build things. And over the last almost 20 years, I've been fortunate to be part of four different companies that I joined very early on and help build and grow.

My last company was called gyft. We built a digital gift card platform that actually stemmed from my wedding. I got married and got a lot of gift cards for my wedding and was frustrated as a consumer with managing and handling plastic gift cards. I did not know that the gift card industry was over $100 billion in the US. And I got super interested in just disrupting and bringing technology and automation to a large, very traditional industry. We built gyft up over the course of several years, and ended up selling that to First Data Corporation back in 2014.

When I went to First Data, I was exposed and learned a lot and got more deeply involved with the payments ecosystem. And when I left, I started to think about what was next. That's when Step was born.

Step's building blocks

I took some time off and spent time with my family. I've got two young kids and I just liked the idea of building a next generation money and banking platform. It just became more and more clear that there was a massive opportunity and a wide gap with all the other products and services that were out there.

Our mission is to educate the next generation to be smarter with money. And it's always bugged me that schools don't teach kids about money. Families, rich or poor, don't talk about money. You really have to have an understanding of the financial ecosystem just to get by in life. And so many Americans find themselves in a hole or in debt, that's just very difficult to dig out of. Starting that financial journey on the right path and the right step, no pun intended, is something that we're excited about.

Existing bank products for kids

Banks have offered a teen checking account for years. I think the problem is that they take their platform and their mobile app, and they kind of reskin it, or change a few words. Then, they allow a parent to open one up for their teen, but it's not really tailored towards the younger demographic, and it's not really tailored towards families. So if you're just looking to get a card with an account, you can accomplish that. There's some friction to even getting to that point. But that doesn't really serve the purpose of ultimately what we're trying to do.

We built a product specifically for children, teens, and young adults to jumpstart their financial future and journey. It was built with that in mind. For our UI and UX, we spent a lot of time thinking through how we provide the best overall user experience. I don't think I have seen that from traditional banks. It's not something that they offer in any meaningful way.

Modern times, modern experiences

If you look at what Millennials and Gen Z gravitated towards over the last five to 10 years, with regards to money, we've seen platforms like Venmo and Cash App really explode. And they've got tens of millions of users globally that are transacting billions of dollars and basically using these apps to send and receive money.

The problem with something like Venmo or Cash App is, first of all, you need to be 18 years or older to use it. So that kind of cuts off the high school and under 18 market in general. But the bigger problem is, in order to use it, you have to have an underlying bank account to link to it in order to get money in and money out. The problem is most teenagers don't have a bank account of their own. And so they don't have the ability to link it to something like Venmo or Cash App.

We took a traditional bank, like Wells Fargo, or Bank of America, and we took something like a more modern day fintech company like Venmo or Cash App, and we brought those worlds together -- in terms of a p2p solution with an FDIC-insured banking platform. There are no fees. And we allow you to have your bank account and the ability to send and receive money, either in your family or among your friends, in an all in one solution. That's not something that exists today for Gen Z.


Giving teens financial autonomy

We've had so many internal debates over the years about finding the fine line between giving parents controls and giving the teenager responsibility and independence so they don't feel like they're being watched or handcuffed. Different platforms have different stances on this. The stance that we've taken is if someone's under 18, parents have full control over the platform. The teens are the end user, but parents can log into their account, and they can have visibility into transactions that their child has made.

We did not go to the extent of blocking specific merchants or blocking MCC codes, because we did not want the teen to feel like they were completely handcuffed. We kind of took a middle ground approach to give parents full visibility and control, but we didn't want to make it where every single transaction that the teen was doing needed to be approved. Parents get notifications and they can go in and block specific merchants. They can turn off the card and close the account. But it's not as granular.

Monetizing teens

There are a few other platforms out there and traditional banks that charge a monthly fee. The reality is a child or a teenager does not make much money and they do not spend much money. But they do spend money. And so from a monetization standpoint, we look at it with the lifetime value of the customer. We're starting this relationship earlier. We want to build tools that help them and educate them along their financial journey. And our goal is that at each step of their journey in life, we continue to offer relevant financial products and services to them. And there's lots of opportunities along that journey to monetize and not have to charge outrageous traditional banking fees.

So, to start off, we offer a card with an FDIC insured bank account. There are no fees for the card or the bank account. And each time the user transacts and uses that card, we're paid interchange. We don't plan to build a business solely on interchange, but for the time being, there's opportunities to monetize and at least start to build the business out of the gate off of that.

Step's differentiation

A big differentiator is that Step doesn't charge fees. Another big one is we're going after a very specific demographic -- that 13 to 18 year old demo right now. There are a few other players out there that are skewing younger, and there are a few other players out there that are skewing a little bit older, but we've got a very specific, focused demographic that we're targeting that we want to win and have millions of teens on our platform to start off. So that's a big difference, just kind of our approach and our targeted demographic.

Our product is very unique, our account in our card construct. It's a secured card that is secured against your Step deposit account. But the thing we're really excited about is our product actually helps you build credit at an earlier age before you turn 18. And there's no other product that does that out there today. A lot of people start making mistakes and damaging their credit early on. So we built the product with the intention of establishing credit an earlier age. And for all intents and purposes, our card and account has guardrails on it so you cannot overspend, you can not negatively impact your credit, you can only positively impact your credit.

User acquisition

We've got a lot of organic traffic, where people are just finding us or specifically searching for a product for their kids or for themselves. And we're pretty active on social media. Our demo is 13 to 18 years old, and we have started to build a community just around social media and engaging our community.

We've got some really interesting partnerships with some influencers. As part of our launch, a few weeks ago, we announced a partnership with the large digital influencer, Charli D'Amelio. She's 16 years old, and she's in our core demographic. She's got a massive platform, and she's super passionate about financial literacy and helping other people, as well. And so we've got a multi prong approach of just building a really solid product and building a really solid brand for the next generation.

Lifecycle banking

Naturally, 17 year olds turn 18 and go off to college. And when they go off to college, there are different products and needs than when they were 15 years old. There are additional financial products and services that you're going to want in your life. Some of that turns into credit, lending, savings, and investment products. So, we've got a really exciting roadmap over the course of the next couple years, and our goal is to continue to offer relevant financial products and services for our customers.

Biggest priorities going in to 2021

It's an exciting time and there's so much to do. But I'm a firm believer in focus. You can only do so much, and you need to focus and do it well. And so, for us, it's all about focus and execution. We've got some new features and products that we're going to be rolling out over the course of the remainder of this year and running into early 2021. So that's a big priority and focus.

We're hiring and that takes up a lot of time. And it's really important to hire the best people. We're spending a lot of time adding to the team and growing a team. So that's a priority and focus.

We're prioritizing making our product better. We want to be the best version of ourselves. We want to offer the best product for our customers. And so we want to continue to improve and add some of these new features, as well as just make some overall UI and UX improvements. We just want to be disciplined and laser focused on our task at hand, which is to build the largest banking platform for the next generation.

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