5 new challenger banks with ultraspecific niches

September 29, 2021 2:21 PM

People with disabilities. Immigrants. People of color. Gay, lesbian or transgender individuals.

These are all groups of consumers who in some cases have felt underserved by their traditional institutions and have been gravitating toward neobanks that offer specialized savings accounts, debit rewards meant to match their values and empathetic customer service.

“Oftentimes, [the founders] are focusing on what they know,” said Sam Kilmer, fintech practice leader at Cornerstone Advisors. “It’s personal.”

Certain niches — including kids and teens, couples, people of color, immigrants and small-business owners — have each attracted a number of startups. Some companies are distinguishing themselves by targeting a sliver of those populations, such as immigrants from a certain region (Cheese), newlyweds (Hitched), gig workers (Gig Money, Moves Financial) and freelancers (Lance, Lili).

Other neobanks are springing up to cater to groups with few, if any, dedicated banking options. Founders who focus on a segment they are intimately familiar with have an advantage if they are realistic about the segment of customers they will reach (obtainable market), rather than the broad audience that fits into their neobank's category (addressable market).

“The more finite and smaller your niche is, the less likely you are to run into competitors,” Kilmer said.

The following is an overview of five neobanks that have surfaced in the past two years, their unique bents and the founders who are passionate about their target audiences.

Nerve

Niche: Musicians

Headquarters: Austin, Texas

Founders: John Waupsh and Ben Morrison

Number of customers: Will not disclose

Musicians are a genre of entrepreneur that co-founder and CEO John Waupsh (above) knows well. He spent 15 years leading product management, research and development, and user experience at Kasasa, a provider of reward accounts to community banks and credit unions. He also spun funk and soul records as a college DJ and created Preservation Project, a boutique record label that releases rare vintage funk and soul records on vinyl.

Nerve zeroes in on anyone who makes money with music, including musicians, DJs, songwriters, producers and street performers. Customers get a business debit and savings account (deposits are held by Piermont Bank in New York City) and can send instant payments to other Nerve users for free. Currently, this service acts as an alternative to Venmo or PayPal but could evolve into a private networking tool where users can enable location sharing to find nearby contacts.

The company's app will collect performance data from Spotify, namely listeners by country, city and date, and follower statistics from social media sites such as Facebook and TikTok. Nerve will also separate out an artist’s revenue types, from e-commerce providers such as Bandcamp to side gigs driving for Lyft. Over time, the app will learn from this data and automatically alert users to income that never arrives and predict how much they will earn from different streams.

The founders don’t plan to broaden their audience beyond musicians. But the number of products they offer will increase. In early 2022, customers will be able to choose to subscribe to a version that helps them manage expenses, invoices and tax reporting. Currently, all app services are free.

Like most neobanks, Nerve will rely at first on interchange income from use of its debit card. Future revenue sources will include subscription fees from an upgraded offering and fees paid by companies for advancing money to musicians on Nerve's platform.

“Musicians and bands at all stages of their development need smart financial management, access to the real-time data that drives their business, and collaboration and business banking features to run their brands effectively,” Waupsh said in a press release in August.

Purple

Niche: People with disabilities

Headquarters: Bonita Springs, Florida

Founder: John Ciocca

Number of customers: Small set of beta users

Individuals with disabilities and their caregivers often face a dilemma: earn income or receive government benefits.

To remain eligible for monthly Supplemental Security Income benefits, a person’s assets can’t exceed $2,000 for an individual or $3,000 for a couple, including funds held in a bank account. The more “countable” income one receives, including wages, the lower SSI benefits will be. John Ciocca (left in photo above), who is a senior at Florida Gulf Coast University, has personal experience with this problem. His brother Christian (right) has Down syndrome, and the family has had to weigh the social advantages of his holding a job against the higher payments if he were unemployed.

Purple

, the challenger bank that Ciocca founded and leads, will address this problem with a unique savings account.

For now, Purple is a standard challenger bank, with no fees or minimum balance requirements (deposits are held by The Bancorp Bank in Wilmington, Delaware). A portion of revenue from each debit purchase is donated to the Special Olympics. But Ciocca is working behind the scenes to integrate a tax-advantaged savings account called an ABLE account where people with disabilities can store up to $100,000 that doesn’t affect SSI eligibility. Withdrawals for qualified expenses, including health care, housing and assistive technology, don’t count as taxable income.

This product is valuable to people who depend on SSI. Ciocca said his beta testers tend to burn through their monthly benefits to avoid surpassing the $2,000 threshold, meaning they can’t accumulate savings. When a Purple-branded ABLE account is up and running, customers will be able to let Purple invest money that exceeds the $2,000 limit in the ABLE account and automatically pull funds from either their regular checking or ABLE savings account, depending on the purchase.

Purple will make money from interchange fees every time users swipe its debit card. When it has introduced its ABLE account, it will charge an annual fee and a small investment management fee.

“The goal is to make Purple the default choice when it comes to managing finances for anyone with a disability,” said Ciocca via email. “Rather than expanding our reach of customers, we’ll look to expand into adjacent products that allow us to fulfill our mission of enabling people with disabilities to spend, save and invest for a better life.”

Daylight

Niche: LGBTQ

Headquarters: New York City

Founders: Rob Curtis (left in photo above), Billie Simmons (right) and Paul Barnes-Hoggett

Number of customers: Closed beta; 25,000 sign-ups on the waitlist

The obstacles LGBTQ bank customers often encounter are nearly invisible to outside communities. These customers may be flagged during know-your-customer checks because their names or genders differ from what is tied to their official identification or Social Security numbers; rejected at a higher rate for mortgages; or saddled with heavy debts related to transitioning or starting a family through surrogacy or adoption.

When it launches to the public in November,

Daylight

will try to solve many of these problems. The debit card and account will feature the user’s

chosen name

. Users will also get up to 10% cash back for spending at LGBT-owned and -allied businesses. These will be easier to pinpoint with a “walk the walk” feature, which will rate each transaction on how queer-friendly the business is based on a combination of public data and customer ratings. Deposits are held with MetaBank in Sioux Falls, South Dakota.

Daylight is striving to be a community where members can get advice about unique financial concerns and hire financial coaches to discuss matters such starting a family or retirement. These decisions can be more fraught for queer individuals than those who are straight because, for example, they may need to stick to a metropolitan city or carefully consider state laws when choosing where to raise their children.

“We are looking at a different type of relationship with members than a traditional neobank,” Curtis, who is also the CEO, said late last year. “Rather than focusing just on payment pain points, we are looking at unique life events and how we can help them solve them end to end.”

The founders are firmly focused on the LGBTQ community as their target audience. But Simmons, who is also chief of staff at Daylight, notes that the product has stirred up interest among allies as well.

“I think the idea of wanting to spend in line with your values and receive cash-back rewards for doing so is a really appealing concept to a wide range of people beyond those that identify as LGBTQ+,” she said via email.

Fair

Niche: Shariah-compliant banking

Headquarters: Houston

Founder: Khalid Parekh

Number of customers: Will not disclose

Fair

markets itself as an ethical challenger bank for people from all backgrounds and all religions. For observant Muslims, there is another advantage: Fair adheres to Shariah law.

Shariah, or Islamic religious law, prohibits interest (or “riba”) charged on loans and deposits. To comply with those rules, the bank will engage in equity-based lending, where Fair and the customer will acquire a home in partnership and the customer will buy back shares over time. Fair also does not generate interest on customer deposits. Plus, instead of earning interest from a savings account, customers will earn dividends from funds that Fair has invested in halal Shariah products.

For the upcoming robo-investing service, customers can only invest in socially responsible products, meaning companies that have any thing to do with alcohol, pornography and gambling are off the table.

Several banks offer Islamic financing in the U.S. But, “there is not one institution that allows you to do banking, lending, investments and retirement,” CEO Khalid Parekh (in photo above) said in an interview in April. “When we asked Muslims why they bank with Chase versus an Islamic bank that offers Shariah-compliant products, their answer was, ‘We don’t have a choice.’”

Unlike most neobanks, which tout fee-free services, Fair charges a membership fee and bundles a number of products, including deposit accounts, international money transfers, debit cards for kids, life insurance and early direct deposit. The company plans to launch business accounts in the first quarter of 2022 and expand into Canada by the second quarter. For a limited time, lifetime memberships will be $99; otherwise, customers will pay $69 per year or $6.99 per month. Deposits are held by Coastal Community Bank in Everett, Washington.

Panacea Financial

Niche: Physicians

Headquarters: Little Rock, Arkansas

Founders: Tyler Stafford and Dr. Michael Jerkins

Number of customers: Will not disclose

Digital banks or fintechs for physicians have become their own mini niche, including

BankMD

by TransPecos Bank;

Provide

, which partnered with banks to make practice loans and was acquired by Fifth Third Bancorp; and an upcoming venture from

KeyCorp

. Panacea launched last November to serve medical students, residents, fellows and attending physicians

Jerkins is a practicing physician. While doing his residency, he dealt with hurdles when obtaining a personal loan, such as finding a co-signer and facing double-digit interest rates. (Jerkins, who is also Panacea's president, is at right in the photo above. At left is chief operating officer Dr. Ned Palmer.)

Since it launched, “we saw the greatest underserved population was the early career or in-training physicians and dentists,” Stafford, who is CEO, said via email. It started by offering checking and savings accounts and fixed-rate personal loans. It has since introduced student loan refinancing, practice loans for those starting or acquiring a practice and insurance.

The challenger bank is a division of Primis Financial in Tappahannock, Virginia,

rebranded

from Southern National Bancorp of Virginia earlier this year.

Although Panacea does not plan to broaden from its core focus of doctors, it is growing in other ways. Over the past few months, it has partnered with the American Association of Orthopaedic Surgeons, American College of Emergency Physicians and other national and state medical and dental associations to market their services among their membership bases. Panacea will also widen its target audience to include veterinarians by the end of 2021.

“From these partnerships and multiple other marketing initiatives and an active hiring pipeline, we believe our growth over the next several years will be substantial,” Stafford said.