[The Fintech Times] US Digital Banking Report: How 4 Companies Have Created and Own Niches in a Very Crowded Category

Originally posted on The Fintech Times

by Adam Snyder

Over the past few years, digital banking in the US has experienced a significant level of transformation and growth, with over 70 digital banking platforms launched since 2018. Each attempting to occupy and own a niche, and making big bets around key features and incentives, all to stand out and win the hearts and minds of the ‘underbanked.’ At the same time, after years of rumours, a group of tech whales, most notably Google announced plans to enter the fray through partnerships with traditional financial institutions. The battle lines are drawn, and the category became very crowded.

“The digital banking space in the US has evolved in a short period of time. Early entrants like Simple and Moven entered the market with the premise that existing banks’ mobile banking capabilities–and overall customer experience, for that matter–was failing consumers,” says Ron Shevlin, Director of Research at Cornerstone Advisors. “It made for good press, but it wasn’t really true. Americans weren’t really dissatisfied with their banks, and expectations for mobile banking functionality wasn’t very high. As a result, the early challenger banks failed to gain traction in the market.”

In 2020, we saw the challenges of building a business model around a group with small monthly balances and minimal swiping activity come clear; roughly 1% interchange on approximately $400 would not provide a path to profitability. As a result, digital banking went through a natural realignment. The more robust platforms shifted their priorities to focus towards a younger mass affluent audience. Some even announced plans to go public, while others ceased operations. In the process, these companies established a baseline standard.

While some platforms have shown to be more hype than substance, a core group of companies, Chime, N26, Varo, and MoneyLion, have been responsible for most innovation in the category. In the beginning, the goal of many digital banks was not to be a bank at all. Still, in reality, the winning strategy was the opposite -be a bank, but different, better, more emphatic, and overall focused on the needs of the customers versus using the customers as a means to participate in markets and finance. This approach still sticks to the core principles set years back when Green Dot launched the first platform in the US and enabled digital banks to create a new type of relationship with their users. Here’s an overview of how.

The Behemoth: Chime

Chime was founded in 2013 by Chris Britt and Ryan King, who serve as CEO and CTO, respectively. Like many early entrants, their stated goal was to offer an alternative to traditional banking. What that meant when the company launched publicly in 2014 is considerably different from what it means now. The company went from offering a simple digital banking account, essentially a prepaid debit card and basic checking services through a partner bank, to the pioneer of a much wider set of products and services, most notably getting paid two days early, that have become table stakes in the category,

“We’ve gone through explosive growth,” says Chris Britt, Chime co-founder, and CEO told CNN Business. “We’re a company that’s in the right place at the right time because so many Americans are feeling anxiety about their money. The big banks are good at serving the top 20% or 25% of Americans, Everyone else in the middle feels nickel-and-dimed.”

As Chime grew, it took into account the ongoing challenges younger individuals experience with banks, fees, credit, access to emergency funds, and more. First, in 2016, the company was one of the first digital banks to provide customers with an automated savings feature. In 2018, it began to help users build their credit after it acquired Pinch, a company that reported on-time rent payments to credit bureaus as a means to increase scores.

Next in 2019, Chime was the first bank to offer users who set up direct deposit the ability to access their money two days early by holding transactions until their paychecks cleared. That same year, Chime launched SpotMe, a service designed to address the overdraft fee trap many younger individuals face. Customers can overdraft their accounts by up to $100 without incurring a fee. Unlike traditional banks, once the overdraft limit is reached, purchases are declined, and no further negative balance fees are charged. Finally, in 2020, Chime launched Credit Builder, a credit card designed to help consumers build their credit history. The company also has no hidden fees, offers customers access to thousands of free ATMs.

Since beginning its journey towards raising $1.5billion and becoming the largest digital bank in the US with 12 million customers, it has gone through several iterations. According to a Reuters report, Chime has held preliminary talks with investment banks about launching a stock market flotation, which could value the financial services startup at more than $30 billion, as soon as the end of 2021. This would make it the second US digital bank after MoneyLion, to go public.

The Experienced.

German digital bank N26 has taken a significantly different approach. The reality of fintech in the US is that it tends to be a few years behind Europe and a few more behind Asia. So in 2019, when N26 launched in the US, despite starting with a limited set of features, it did so with a product that immediately seemed more advanced than its competitors because customers had an idea of what was possible. Two years later, the company has over-delivered on promises and earned a vocal and loyal group of 500,000 US customers. Whenever new features are launched, it’s clear that they’re being offered for a specific set core based on insight and a deep understanding of its customers. The company takes a global view and ensures that learnings are passed from one region to the next.

“As the first European challenger bank to enter into the US market, we launched in the US in the summer of 2019, building off a strong foundation from our European growth,” says Stephanie Balint, US General Manager at N26. “In the US, we know there is a need for a more transparent banking experience. America’s biggest banks earn billions from ATM and overdraft fees. We know that we can provide a better experience for customers who are frustrated by their current bank.”

As the company has further established its presence in the US, it has been hyperfocused on customers’ pain points with traditional banks. To start, N26 doesn’t charge overdraft fees, a profit centre for most banks fees, or have minimum account balance requirements, which have serious ramifications for individuals. Both can push customers into a fee trap -$36 for a bounced check, $12 for being below the minimum, then another overdraft fee if the minimum balance charge puts their account in the red. These types of fees ostensibly put younger individuals, who are just starting out or living paycheck-to-paycheck in debt to their bank account, diminishing their weekly income. N26 also offers individuals the ability to get paid and have the money clear up to two days early, along with unlimited free ATM withdrawals at over 55,000 locations.

Beyond focusing on improving core banking, N26 has also broadened its scope to provide its users with access to products and perks usually reserved for higher-tier accounts at larger financial institutions. Users are automatically enrolled in its Perks program, which offers cashback for thousands of everyday purchases. The company also recently announced a move into insurance in partnership with local start-up Simplesurance. While the program will begin in Germany, if history shows us anything with N26, it will make its way to other markets worldwide.

“We continue to see promising figures, with a substantial proportion of N26 customers in the US depositing their salaries into their accounts, signalling that N26 is serving as a primary bank account,” says Balint. “We are just getting started in the US and developing a strong roadmap of products for the market. With a strong foundation in place, we want to compete by being the most customer-centric product on the market and offering a friction-free experience for customers from sign-up and beyond for years to come.

The Lion

Founded in 2013, MoneyLion’s target market is 70% of American consumers, a group that has less than $2,000 in savings on average. The company’s goal is to optimise consumers’ money management and savings while boosting their credit. Over 93% of MoneyLion Plus Members are first-time investors. The company is on a mission to “Rewire the American banking system so that it can positively change the financial path for every hard-working American.” Since its founding by Diwakar Choubey, Chee Mun Foong, Pratyush Tiwari, Adam Green in 2013, MoneyLion has built a base of 7.5 million customers, offering a range of products including mobile banking, lending, and investment solutions all in a single application.

In late 2020 the company launched RoarMoney, a platform designed to meet the evolving needs of consumers who are focused on making their finances work for their individual needs – from faster access to their funds to safe and secure contactless payment options. RoarMoney offers cutting-edge features like two-day early paydays, advanced mobile wallet capabilities, multiple funding options, advanced cybersecurity, and near real-time transaction alerts. RoarMoney users also get access to other valuable MoneyLion member benefits, such as zero-percent APR InstacashSM advances up to $250, the ability to earn cashback rewards from leading retailers when using the MoneyLion Debit Mastercard, and a suite of personal finance tools, including MoneyLion’s Financial Heartbeat, a weekly spending report and more.

“With RoarMoney, we’ve completely reimagined the mobile banking experience by going above and beyond what consumers expect from their banks,” said Dee Choubey, CEO of MoneyLion. “While RoarMoney can be used as a standalone bank account, it’s designed to be its most powerful when used in conjunction with our lending and investing products. For example, Instacash, our zero APR cash advance product, works seamlessly with RoarMoney, allowing our customers to tap into a source of short-term financing and access the funds within minutes. And with our easy Auto Invest feature, RoarMoney customers can set up recurring transfers from their RoarMoney account into their MoneyLion investment account, which offers personalised investment portfolios with no minimums or asset-based management fees.”

At the beginning of 2021, MoneyLion announced it was going public following a merger with Fusion Acquisition Corporation (“Fuse”), a Special Purpose Acquisition Corporation. This occurred following the revenue generated by MoneyLion across 2020 ($76million) – finishing the year with an adjusted revenue run-rate of $102million in Q4, with a forecast of $144million in 2021, representing year-over-year growth of approximately 88%.

After the public announcement, Choubey said, “Our platform surrounds each customer with the financial tools, content, and actionable advice relevant to their unique situation. This model is generating high user growth, multiple product engagement, and low cost of acquisition. A public listing enhances our ability to scale more quickly and continue to innovate so that we can help more people take control of their finances and achieve their life goals.”

With the accelerated engagement that a public listing brings, MoneyLion aims to serve 100 million customers and reach $250 billion in revenue through its data-driven approach to product innovation.

The ‘People’s’ Bank

Founded by Colin Walsh in 2017, Varo aimed to tackle the underlying bias in American banks and eliminate the screening process of different people based on race, sex, sexual orientation, gender, age, disability, or any other discrimination. As the first digital bank to receive a limited fintech charter from the OCC on July 31, 2020, compared to the larger cohort of digital banks, Varo is perhaps in the best position to deliver real change. After completing an extensive three-year process, the company is now able to truly call itself a bank and in a position to innovate across a range of financial products directly. While on the surface, this may seem to be accurate, a deeper look at its product suite shows the challenges of innovating in an industry filled with regulations and limitations.

“As a nationally chartered bank, we can leverage the latest technology to address key consumer pain points, provide a fully comprehensive set of premium banking services to our customers, and help to improve the financial health of Americans who have been underserved or ignored by traditional banks,” says Alex Woie, Head of Strategic Communications at Varo

Starting at launch, the company has always focused on fees. Its ‘no hidden fees policy’ includes no monthly fees and no fees for overdraft, foreign transactions, incoming and outgoing transfers. In October 2019, Varo formed a partnership with Allpoint to enable its customers to access their accounts at over 55,000 fee-free ATMs throughout the US. Unlike other digital banks, which refund a majority of ATM fees, Varo charges users a $2.50 out-of-network ATM fee, which comes in addition to any additional fees from the ATM operator.

From a feature and perks standpoint, Varo is on par with many of its competitors. First, It offers early direct deposit and a modest referral program. Next, account-holders and anyone they refer who sets up a direct deposit of $250 or more can earn a $50 bonus, with a $500 cap for the lifetime of the account. Finally, by making at least five qualifying Varo Bank Visa Debit Card purchases and direct deposits totalling $1,000 or more, users can earn 3.00% APY on a maximum of $5000 of savings. Any balance beyond this amount earns 0.20% APY.

The combination of $482million raised and the charter Varo has the potential to continue to be a first. It remains to be seen if the realities of their business model and the weight of regulation will be a barrier or if the company will find ways to innovate within its new confines.

Cause for success

Many startups have since tried to emulate the success of Chime, N26, Varo, and MoneyLion. However, few have succeeded. Though some have survived the pandemic and have begun to establish a unique selling point to attract customers, others found that a business model based on interchange was not the formula for success. Despite a slimming of the category, the competition is more fierce than ever before. We’re beginning to see a new chapter of digital banking form. Traditional banks are waking up to the potential and partnering with established companies, and bringing new forms of money into the equation. The next few years will prove to be determining factor in the future of digital banking and could provide the foundation for what the category will be when it fully matures.