First wave of neobanks resets for new offensive

May 21, 2018 2:07 PM

Is a revolution some thought was fizzling out on the resurgence again?

The so-called neobank movement — digital startup challengers that deliver banking products outside the traditional system — can be said to have started in 2009, when John Reich, an Australian software developer and hedge fund quant who was appalled at the complexity of American banking, decided he wanted to start a "really boring, simple bank." He founded BankSimple to do just that.

Shortly afterward another Australian, Brett King, launched his challenger bank, Moven. Chime and Varo Money followed.

In the near decade that followed, the neobanks have faced headwinds. BankSimple (now just called Simple) was bought by BBVA and went through a painful process of migrating accounts to the big bank's systems; its founder recently announced he's leaving. Moven became a seller of software to large banks including TD Bank and Westpac, while still maintaining its own mobile banking service. Varo Money has been trying for almost a year to get a banking license. Chime remained independent (in partnership with The Bancorp Bank) but is going through growing pains.

This year, all are taking up their swords again, renewing an anti-bank message of helping consumers lead financially healthy lives, with fewer fees and more helpful products and software than traditional banks. Following is a look at how the neobanks are fighting back.

The challenger bank movement

Is a revolution some thought was fizzling out on the resurgence again?

The so-called neobank movement — digital startup challengers that deliver banking products outside the traditional system — can be said to have started in 2009, when John Reich, an Australian software developer and hedge fund quant who was appalled at the complexity of American banking, decided he wanted to start a "really boring, simple bank." He founded BankSimple to do just that.

Shortly afterward, another Australian, Brett King, launched his challenger bank, Moven. Chime and Varo Money followed.

In the near decade that followed, the neobanks have faced headwinds. BankSimple (now just called Simple) was bought by BBVA and went through a painful process of migrating accounts to the big bank's systems; its founder recently announced he's leaving. Moven became a seller of software to large banks including TD Bank and Westpac, while still maintaining its own mobile banking service. Varo Money has been trying for almost a year to get a banking license. Chime remained independent (in partnership with The Bancorp Bank) but is going through growing pains.

This year, all are taking up their swords again, renewing an anti-bank message of helping consumers lead financially healthy lives, with fewer fees and more helpful products and software than traditional banks. Following is a look at how the neobanks are fighting back.

Simple

Simple

Year founded: 2009

Based in: Portland, Ore.

What it offers: Online and mobile banking with budgeting and saving tools

Number of accounts: “hundreds of thousands” (the company won’t get more specific)

Typical customers: 20-to-40-year-olds — the average age is 31. Income in the $40,000 to $75,000 range

What’s new: Founder and CEO Josh Reich recently announced he is leaving the company.

In an interview, Reich, 39, said the plan is to start a nursery at the farm near Silverton, Ore., which his wife will be running. They will also raise livestock.

“That requires a lot of manual labor, so I’ll be doing some manual labor,” he said. "It’s different work and it gives me an opportunity to think about things, to disconnect. I don’t know if I’ll be a farmer forever, but it’s a good opportunity to step back from being in front of a computer every day.”

Simple was bought by BBVA in 2014. For the past three years, Reich had to focus on infrastructure projects to migrate from its existing bank partner, The Bancorp Bank, to BBVA.

Last August, Simple laid off 10% of its staff and replaced five members of its management team.

Dickson Chu, head of portfolio management at BBVA and interim CEO of Simple, said this was because the staff grew quickly over the previous three years and “sometimes you have to do rationalization. We needed to simplify the organization a bit. Josh had 11 or 12 direct reports, so he needed to get closer to the business and simplify the org structure.”

Reich was keen to return Simple’s focus to its product, and said in the first quarter of this year it launched “meaningful improvements to customers.” For instance, the team analyzed years’ worth of data and found the most frequent savings goals are monthly: saving to pay the rent or the utility bill. They wanted to make Simple easier to use for this purpose.

“Earlier this year we launched a few things that make that easier as well as making goals and safe-to-spend more meaningful and easy to use for more people,” Reich said.

They also launched paper checks.

“To my chagrin, people still want a checkbook,” Reich said.

In the first quarter, according to Reich, Simple outperformed on revenue, gross margin and net income. This made it seem like a good time to leave.

Chu said he will continue the work and momentum Reich started.

“What we stand for is the name of the company, it’s simple,” he said. “That’s the flag we’ve planted and what we’ve gravitated around: How do you take something that is complex — banking interactions — and make it simple, easy, intuitive and transparent.”

Moven

Year founded: 2011

Based in: New York

What it offers: Mobile banking with a checking, savings, and a Mastercard debit card backed by CBW Bank. Saving and spend management tools

Number of accounts: Around 250,000

Typical customers: Millennials and people with low and moderate incomes

Most interesting recent data point discovered: “We can tell you the day of the week and the time of the day that’s the best time to prompt a user to save and gets the best response,” said Brett King, co-founder and CEO. “It’s down to that level of detail.”

That most popular day and time: Thursdays at 6:30 a.m., though some customers don’t respond until 8:00 or 9:00 a.m.

The psychology behind that? “We think it’s the fact that it’s just before the weekend and people want to lock some stuff away because they know they’re going to spend a lot of money over the weekend,” King said.

People who have responded to a savings prompt in the past are 50% more likely to save when they get a repeat notification.

“The prompted savings behavior is massive for us,” King said. “Forty percent of users are using it regularly as an avenue for savings.” And Moven offers 0% interest on savings.

“Name another bank that’s launched a savings product with 0% APR and zero dollars in marketing budget and has still had 40% response from their customers,” King said. “That’s a testimony to the fact that mobile is shifting us toward more experiential and behavioral finance, that’s where the real design opportunity is.”

Backers: SBT Venture Capital, Anthemis Group, Route 66 Ventures, Standard Bank, New York Angels, SBI Group, Sberbank

What’s new: Moven recently split its business in two. Moven Enterprise continues to provide digital banking software to bank customers like TD Bank and Westpac. MovenBank is working to buy a U.S. bank, to recharge the neobank side of the business.

“Obviously we’re pivoting back to challenger bank,” King said. “We’re deep in negotiations with banks and regulators right now.”

Chime

Year founded: 2013

Based in: San Francisco

What it offers: An FDIC-insured checking and savings account and Visa debit card backed by The Bancorp Bank. A roundup feature sweeps change from transactions into savings; another feature lets people deposit 10% of each paycheck into the savings account. More than 90% of the people who use Chime’s savings account use these automated tools.

“There’s very clearly a need we’re addressing around helping people with the basics of personal finance,” CEO Chris Britt said. “Financial health 101 is making sure that you’ve got a savings account balance, that you’re paying off bills, getting your basic day to day financing right.”

Number of accounts: 1 million; its savings accounts hold $150 million

Typical customers: 25-40 years old, in their second or third job, with median incomes

“We’re targeting mainstream people that overwhelmingly convert to us from traditional big banks,” Britt said. “What they’re looking for is transparency, trust and alignment. We don’t have a business model that revolves around fee income. Banks generally profit from misfortune and mistakes that consumers might make. We want alignment so that as consumers achieve financial success and have more money to spend, we share in the profits and share in their success rather than punish them when something bad happens.”

Chime is the primary financial account for most of its customers, Britt said. The average customer uses the app 25 days a month and uses their card 40 times a month.

Almost all of Chime’s revenue comes from interchange fees. Over time, Britt plans to expand to a wider range of products with other revenue streams. “The average person pays $350 a year in bank fees, and doesn’t have $500 of savings," Britt said. "Potential savings is sucked up by the banks that are supposed to be helping them save. Over time we think there are opportunities to help people to pay off high-interest debt, gain access to credit, and over time invest.”

How people find it: Most customers come to Chime through referrals.

Backers: Aspect Ventures, Cathay Innovation, Crosslink Capital, Forerunner Ventures, Homebrew, Northwestern Mutual Future Ventures, Omidyar Network and PivotNorth Capital.

What they’ve learned about customer behavior: For consumers, it's all about the product.

“It’s not just a clever marketing campaign or even a strong advertising campaign," said Britt, who does neither. "If you build products in the financial services category that are easy to use, transparent, and offered by companies that are trustworthy, you can help a lot of people. When we launched, we didn’t realize how big of an opportunity this was. But look at the headlines around banks over the last year or two. We’re in the right place at the right time, with a fresh voice trying to do things a little differently.”

Chime has doubled the size of its employee base in the past year and is seeing triple-digit consumer growth, while maintaining a net promoter score (the rate at which consumers would recommend you to others) of 65-70%.

Technology: Chime uses Q2’s CardSwap during enrollment to give people an easy way to make their Chime card the one on file for subscriptions like Netflix. It uses IBM Watson to inform the text chatbot it offers in its app.

“We have an IVR and you can always talk to someone live,” Britt said. “But we find a lot of the interaction is through chat. The younger you are, the less interested you are in calling the call center.”

Varo Money

Year founded: 2015

Based in: San Francisco

What it offers: Mobile banking with checking and savings accounts, online bill payment, a debit card, a line of credit and an unsecured loan, with the backing of The Bancorp Bank. Uses machine learning algorithms to help customers forecast their cash flow, income and bills and makes recommendations to improve their situation.

Number of accounts: Company won’t disclose, but says there have been hundreds of thousands of downloads of its app

“We’re seeing great success,” said Colin Walsh, founder and CEO, a former (he says "reformed") banker. “We’re getting a lot of volume, a lot of demand. It’s clear that consumers are willing to switch banks for a better mobile experience.”

Typical customers: Millennials

Consumer-friendly mission: To help people take better financial control of their lives and lower the cost of banking.

What’s new: Varo Money applied for a national banking charter last July.

“We have very positive engagement with regulators,” Walsh said. “It’s a long process as we all know, but that is all still very much in play.”

Varo Money recently introduced a “save your change” feature that’s connected to a high-yield savings account that pays 1.35%.

Varo has also been doing a little digital marketing, for instance a YouTube video series Money Diaries, in which ordinary people talk about their relationship with money.

Backers: Warburg Pincus; the Rise Fund, a socially conscious fund led by the private equity firm TPG that was founded by U2 lead singer Bono, Bill McGlashan and Jeff Skoll

What they’ve learned in the past two years: “One thing that’s been interesting for us is how important the tone of voice is when you’re dealing with millennials, making sure you’re not being patronizing but also helping guide them towards a better outcome,” Walsh said. “The other thing that was interesting for us to learn early on was how many people are hands-off with their money. They just want technology to help them get to the answer.”

Editor at Large Penny Crosman welcomes feedback at penny.crosman@sourcemedia.com.