Fintech startup Totem tried to do everything right. What went wrong?

Consumer neobank Totem made every effort to cover its bases as it launched in 2022.

The startup had a niche audience — Native Americans — for whom a neobank did not seem to exist. It had a plan to monetize beyond interchange revenue by white-labeling the app for individual tribes. The founders, Amber Buker and Richard Chance, who are Native themselves, mapped out features that would be of particular value to the community, such as credit building and a powwow finder. It secured its first tribal partner in 2023.

This past summer, two years after Totem publicly announced its launch plans, it closed.

"We built an ethical business model that showed it is possible to serve 'risky' or 'niche' populations when you build holistically and tap into the broader needs of their communities through value-add services like payments," wrote Buker, also Totem's CEO, in a LinkedIn post after her last speaking event representing Totem. "But businesses looking to serve Indian Country can only do so at the speed of trust. And that comes much, much more slowly than the pace at which a venture-backed company is expected to move."

Digital banking

Native American neobank customizing financial services for tribes

Totem's digital banking app is the first created by and for Native Americans. The challenger bank will help each of its partner tribes offer uniquely branded apps that provide banking services, distribute government assistance and teach users how to build their credit.

By Miriam Cross

July 12

Several other so-called "niche neobanks" have quietly folded in recent years, including Cheese, for Asian-Americans; Tend, for Latin American immigrants; and Daylight, for LGBTQ individuals. Kinly, for Black Americans, was acquired by Greenwood, a neobank with a similar mission. Many others have expanded or pivoted from a direct-to-consumer to a business-to-business model in order to sustain themselves.

Buker did not respond to a request for comment. But she outlined the "perfect storm" of issues that contributed to Totem's demise in comments on a LinkedIn post from Cornerstone Advisors Managing Director Ron Shevlin, who invited fintech founders to weigh in on whether the "niche digital bank" model was "flawed and dead."

The company raised a little less than half of what it wanted in its pre-seed round, she explained. It collected funding from impact investors rather than traditional fintech venture capitalists, who told Buker they liked the idea but did not know enough about tribal economies to invest.

The extension also faltered. Buker intended to hire staff to build out Totem's payments mechanism with new funding, so tribes could disburse benefits electronically through the app. But a lawsuit filed by Chance in the summer of 2023 spooked new investors, some of whom cited this issue when they pulled their checks.

Shortly after Totem launched its B2B product for tribes, its sponsor bank, First Pryority Bank in Pryor, Oklahoma, exited the BaaS space entirely. Other financial institutions, including Five Star Bank in Warsaw, New York, and Metropolitan Commercial Bank in New York City, have done or are doing the same. Still others have raised the bar for accepting new fintech partners.

"The standards for companies seeking a bank partner had already risen precipitously by this time," wrote Buker. "…With only one very small tribal client and any other contracts still months away, we simply weren't able to outrun the confluence of circumstances that led us to have to wind down."

First Pryority CEO and President Aaron Dillard said his $450 million-asset bank decided to pull out due to the "extremely high regulation threshold" imposed by regulators over the past year rather than any one fintech.

"The threshold is too high and the cost too prohibitive for us to stay in the space," Dillard said. "Amber had a great niche idea and I believe she will be successful in the future."

Differentiation is one factor that boosts the odds of survival, but it's not enough. The cost of acquiring customers, the need to monetize beyond interchange revenue, the travails of raising enough capital and pullback in the banking-as-a-service sector also present challenges.

"Traditional banks have upped their game with respect to products they are offering to customers," said Maria Gotsch, co-founder of the FinTech Innovation Lab accelerator and president and CEO of the Partnership Fund for New York City. 

That leaves the question, how does a consumer neobank with a mission and a unique slant survive?

Jimmy Chen has asked himself the same questions.

Chen was an angel investor in Totem's first round, "because I believed in Amber and still do," he said. Chen is also the founder and CEO of Propel, the 10-year-old company behind a free mobile app that lets people check their Electronic Benefits Transfer balances.

"We are very much in the thick of trying to make the business work," he said

Chen theorizes there are four main ingredients in the recipe for a successful neobank. One is finding a proprietary "edge" in acquiring users.

In his case, adding a debit card to Propel's lineup as a way for users to store and spend government benefits was a natural extension. (Sutton Bank in Attica, Ohio, provides the debit card.)

"We are promoting this to existing users instead of trying to play the Facebook auction," he said.

Gotsch also highlights customer acquisition as a hurdle.

"The cost to acquire customers has to be reasonable and decline over time," she said.

Another piece is monetizing beyond interchange revenue without charging the end users directly — something Totem aspired to do itself. Many niche neobanks target underserved customers, who often have less to spend in the first place, which means interchange revenue will be lower.

Gotsch points out that it is historically difficult — and expensive — to reach and keep the un- and underbanked as ongoing customers, because of distrust of financial services, reliance on cash, cyclical income and a high churn rate.

In Propel's case, the app serves as a marketing channel for companies that want to reach its users, such as Amazon with its discounted Prime subscription for qualifying government assistance recipients.

Chen also believes neobanks need a "strong technical team willing to grind out a bunch of small wins," he said. "To succeed in neobanking is not a silver bullet; it's a lot of lead bullets."

Finally, startups need enough capital to sustain all of the above, "which is especially tough in this market," he said.

Gotsch acknowledges that lawsuits can be a sticking point here.

"As a new investor, the last thing you want your money to be funding is a lawsuit for a previous problem," she said. "You want your money to be funding growth."

A great idea will nevertheless compete with other great ideas.

"Ultimately, the loyalty to your mission or brand has to overcome some pretty tough challenges from competitors with highly developed loyalty programs, such as airline awards, to get to be the provider of choice," said Curt Queyrouze, president of Coastal Community Bank in Everett, Washington. 

For Jason Henrichs, founder and CEO of community bank consortium Alloy Labs Alliance, there has to be value for the customer beyond having an affinity to the neobank's mission. (The Alloy Alchemist Fund participated in Totem's pre-seed funding round.) Henrichs points to Greenlight, a neobank for families, as one example, since it solves problems for both children and parents, who are willing to pay for it.

"Affinity doesn't mean much to people," he said. "It is about value."

This too was something Totem tried to solve for. In a 2022 interview, for example, Buker pointed out that credit building would be an important part of Totem because Native Americans get targeted for expensive credit coaching. In 2023, she highlighted that Native-specific mortgages were on her road map.

Despite the headwinds, Queyrouze has seen firsthand that some of Coastal's fintech partners have a "passion for their mission [that] has created a small but powerful loyalty among a core contingent," he said.

"I am watching a number of programs get traction and scale," said Queyrouze. "Many of the programs out there are finding that right mix and will survive."

In her comments on Shevlin's LinkedIn post, Buker — who is now senior innovation strategist at Chesapeake Bank in Kilmarnock, Virginia — voiced optimism for another Totem someday.

"I've spoken to folks who serve tribes through various prepaid card solutions and they all want desperately to reduce their costs," she wrote. "If the BaaS space can ever calm down and find its footing again, I know it could work."