The Banking Podcast Ep. 17: The story of Dave going public and BNPL as the new challenger bank

Welcome to episode 17 of Tearsheet's Banking Podcast (fka The Challengers Podcast). I'm your co-host, Zack Miller, Tearsheet's Editor in Chief. Joining me is Josh Liggett, investment team principal at OurCrowd.

In this episode, we'll discuss:

• Dave: The challenger bank significantly revised its revenue projections now that it's public. We'll explore unit economics, the pressures on fintechs once they go public, and how some models are inherently hard to monetize.
• BNPL as the new neobank: BNPL appears to be a foothold for firms like Klarna and Affirm to move into managing more and more of their users' payments.
• Uptake of DeFi in TradFi: Josh shares some recent experiences at a conference to show that even the early adopters in the industry aren't quite there yet when it comes to using what they're building.
• Apple's buy of Credit Kudos: Josh and Zack discuss what may be Apple's end game with a new acquisition of a European open banking player.

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The following excerpts were edited for clarity.

Dave, as a public company

The neobank ramped very significantly -- its early days were spent building an overdraft avoidance tool before moving squarely into challenger banking. It ramped up millions of customers and then went public via SPAC right at the tail end of the craze.

Things didn't go so well during its first earnings season. "Shocking," Josh said.

The company significantly revised its earnings projections and was impacted more generally by what's happened in the last few months. Everyone is taking a step back -- before, the market would have tolerated a private company going public, without a clear path to profitability but justified by growth. Now, investors want to see that path.

Separating the company from its products

"These are great products, like these are really good products. They're awesome with users, and tons of people love them. But then when you get to earnings season, now you have to talk about the numbers, revenue growth and negative net operating income -- it leads to shareholders not necessarily acting in the happiest manner, so to speak, to put it lightly," said Josh.

Because Dave placed itself as a protector of overdraft fees, compared to some of the other neobanks or traditional banks, it's not a sticky. "It's not the type of thing you need to go and keep checking and hitting multiple times throughout the month," said Zack.

But Dave has the users. It has a good product. Is it just a matter now of layering on more profitable things like lending?

Monetization

Josh said you can go one of two ways. If you look at Dave, it doesn't charge anything for overdraft. So they're losing money on that because they're either doing that off their own balance sheet or they have a line from a bank. The problem is they're charging something like four bucks per month for an account. "Of course people like it -- you're basically giving them money for free," he said.

Josh mention he saw a TikTok about freelancers -- when a freelancer says I'm busy all the time, they recommend to double your fees. You'll be half as busy, but make the same amount of money. Even if Dave ups the fees, they'll churn out quick. That will be so ugly, short term. People may freak out over the the user growth and your cohorts will look ugly over the period of time. You'll have really bad churn, but they'll be making more money and hopefully getting to better economics.

Or, Dave needs to upsell in other areas and add in more tools. "Then the question is, now that you're doing more marketing and product development, are the board and investors going to be willing to sit with the time that it takes to add another product? Are they going to have to buy a company?" Liggett asked.

BNPL moving into banking

Shifting gears, Zack recently spoke to the head of risk at Affirm. "Affirm doesn't see itself as a BNPL company. It's a consumer finance company and BNPL was just one leg into it," said Zack. When a consumer goes shopping, Affirm wants to be the financial institution that supports those rails, from payments, to returns to logistics, all that kind of stuff. That's what you see most of the BNPL companies moving into. For consumers, BNPL providers become a sort of primary bank relationship. With a built-in revenue model, they make money as they do this. Is it just a better model than challenger banking?

But with some many options in the market, Josh pointed out people still stick with their original bank account they opened when they were younger. There seems to be some fatigue in the market with so many choices.

DeFi in the financial services industry
Josh moderated a panel at Tel Aviv FintechWeek about DeFi. The title was 'Banks versus Blockchain'. The panel had one person from a bank in Israel, one person from a bank in the UAE and then three startups: one working in wallets, another in custody, and one creating smart contracts and stuff like that.

Everyone agreed that it's not DeFi versus banks -- it's banks and DeFi. "What's missing for mainstream adoption of DeFi are three magic letters of KYC and the other three of AML, which is why a lot of banks are hesitant to touch blockchain," said Liggett.

This conference was on a Tuesday in Tel Aviv, downstairs at the Tel Aviv Stock Exchange, with a couple hundred people at 10 in the morning at a panel about DeFi. You had to make an effort to get there. "I asked how many people here have used staking or liquidity pools or decentralized exchanges, whatever -- how many in the crowd have actually participated? Four people raised their hands," he said.

What's Apple up to with Credit Kudos?

Cornerstone's Ron Shevlin said people were basically thinking there were four options: Apple will launch Card in the UK, get into BNPL, launch A2A payments, or an acquihire. He ultimately said that he didn't think it was any of those four things, but that Apple was either building out a digital ecommerce system, like Square and Klarna have, or improving its data management analytics capability.