“Yesterday’s weirdness is tomorrow’s reason.” –Hunter S. Thompson
Gonzo readers, a quick question: How many neobanks are operating in the United States today?
The broadly accepted definition of a neobank is a financial technology company that provides banking services through electronic channels. Neobanks do not have bank charters, so they often partner with traditional banks for support of their offerings. By that definition, while there is no official number to be found anywhere, it is very easy to get to a count of 75-80. It is an interesting group to dig into.
Most of the neobank press and focus has been in three areas, all consumer banking related, that focus on the “big 3” areas of the retail earnings model:
The large players that have seen extraordinary growth in retail deposit customers, like Chime, SoFi (before its charter acquisition), and Varo. Chime alone has, by most estimates, 10 million active users.
Payments vendors like PayPal, Cash App, Venmo, Zelle, Apple/Google/Facebook Pay that have made deep inroads into smartphone wallets. Two-thirds of U.S. adults have at least one P2P payment app on their phone (I have four), and over 50% are active users of an app. Twenty percent of adults have used an app for an in-store purchase.
Retail lenders with buy-now, pay-later providers like PayPal, Affirm, Afterpay, and Klarna are getting most of the press. According to Cornerstone research conducted by my colleague Ron Shevlin, nearly half of Gen Z’ers and 40% of millennials have made at least one BNPL purchase.
Banks have seen two trends with these players. One is co-existence, meaning that bank and credit union customers did not necessarily replace their existing relationships with these products, they expanded their product count. In that same research, 84% of survey respondents said their use of fintech solutions either had no effect on their traditional banking relationships or actually deepened them. People have more than one checking account. Hardly anybody closed their checking account because they started using PayPal. BNPL borrowers didn’t close their credit card accounts (although CC balances may well have been lower).
The second theme is revenue diversification. After luring users with a great digital experience and low fees, these players started diversifying revenue sources. SoFi, for example, just announced a suite of business banking products. PayPal is also a large BNPL lender. This diversification will no doubt continue.
However, there are by conservative count another 40-60 neobanks operating in the U.S. that add new solutions to the ecosystem:
Other retail players – they may not have the volumes of Chime or Sofi, but they offer similar solutions. Names include Mercury, Porte, Zeta, Upgrade, and Revolut.
Small business focus – names such as Bluevine, Found, Relay, Cheqly, North One, and Mercury focus on a turnkey small business banking solution.
International – Payoneer, Grey, Majority, and other neobanks focus on banking for non-U.S. citizens and/or international exchange and remittance.
Rewards – Moneylion and Copper are examples of institutions that focus on unique rewards programs.
Earned Wage Access – Lenders such as Payactiv, EarnIn, and Clockout allow customers to borrow against future earned pay.
Other niche solutions – Examples of neobanks that have developed solutions for unique niches:
- Adro – internationals moving to the U.S.
- Quontic – ITIN mortgages for non-U.S. citizens Panacea – doctors
- Acorns – family banking
- Lili – freelancers, solopreneurs
- Aspiration and Atmos – green lending
This list is meant to be illustrative, not exhaustive (apologies to omitted institutions). The point is that the total picture of neobanks closely resembles traditional banking: big players expanding and diversifying, middle-tier players looking to grow, niche players trying to dominate one market.
So, there needs to be a reality check on these neobanks. Do they all have significant market share and customer bases? No. Getting accurate active counts for many of these solutions is hard because there is no requirement for them to report these numbers, and when requested, the customer counts can appear to be (ahem, how should we say this, ummmm) a bit optimistic. Many may never get to significant customer count.
Will all of them survive? No. Monzo, for example, just pulled the plug on its U.S. operation. Others will merge or be shut down. But the truth is that all of these neobanks don’t have to survive in order to change the competitive banking landscape. Only one or two in each area can accomplish that.
The one big difference with many of these new players that we should pay attention to is the decline of co-existence and the growth of flat-out replacement. Small businesses don’t need two operating accounts. Doctors don’t need two business banks. People don’t need two international payments solutions. Many more of these focused, niche neobanks intend to replace the traditional banks that customers are using.
So, what to do?
It is true that many of the newer neobanks are in early growth stages. But wasn’t Chime at one point, too? So first, as we needed to do in retail banking, learn from the unique, niche experiences that are creating and plan to match them. As the old saying in tech goes, “If at first you can’t beat them, copy their homework and change the fonts.”
Many of you will recognize some of the neobank areas of focus discussed here in your own customer base. Maybe you serve that market or maybe you want to. In either case, make sure you have a good radar on the neobank solutions out there and how they are growing. Somebody at your bank should be designated as the neobank scout.
For bankers who are thinking that you just don’t see the impact of these neobanks on your business yet, maybe you’re right. Or maybe you just don’t see it.
Terence Roche is a founding partner at Cornerstone Advisors. Follow him on LinkedIn and X.