In the early days of the challenger bank movement, neobanks typically focused on one core product: a mobile-first checking account with no punitive fees that slipped customers their wages two days earlier than most banks. But over the last few years, some have bundled in so many additional banking services — such as savings accounts, budgeting tools and automated investing — that they closely resemble full-service institutions.
MoneyLion and SoFi Technologies are among the rebundlers. They have cobbled together a slew of services that are typically offered by more traditional financial institutions — including financial advice, lending, and insurance — and others that are more elusive, such as cryptocurrency trading and recommendations for third-party products.
This triggers two questions: Have challenger banks become full-fledged alternatives to traditional banks? And does this make them a bigger threat?
There are several factors pushing challenger banks to add on products.
“There is a lot more competition in the digital checking account space,” said Alex Johnson, director of fintech research at Cornerstone Advisors. “You are constantly facing a barrage of new competitors and banks that are putting more effort into digitizing their core deposit products.”
Expanding the breadth of services could be a tactic for some challenger banks to demonstrate value before hitting the public markets. Adding credit, lending and services that generate commissions are also a way to diversify from interchange revenue and increase profitability. Alongside SoFi and MoneyLion,
Perhaps the furthest along is SoFi Technologies and its new division, SoFi Bank, which emerged from the
Sean Horgan, a fintech equity research analyst at Rosenblatt Securities, finds that SoFi is closer than MoneyLion to being a full-service bank because of its lending products, which are not easy to build, and its newly acquired charter.
“They are ahead of the curve in this arms race among the challenger banks to get to that full product suite,” he said.
SoFi has reached this point with a mixture of
The long-term goal, as SoFi Technologies’ CEO Anthony Noto phrased it in the company’s fourth-quarter earnings call, is “to be the digital one-stop shop for the major financial decisions in our members’ lives.”
Meanwhile, a September report from Rosenblatt Securities said
The company advertises mobile banking, credit building, investing, cryptocurrency trading, personalized financial advice, and a marketplace for personal loans, auto and student loan refinancing, life insurance, credit cards and high-yield savings. Buy now/pay later is on the road map. Its deposits are held by Meta Financial Group, a $7.6 billion-asset institution in Sioux Falls, South Dakota.
“One of the things we’ve learned being in the business for eight years is that as consumers, we don’t bifurcate our lives. Everyone thinks about [financial services] holistically,” Dee Choubey, MoneyLion's CEO, said in an interview.
To that end, the company doesn’t feel as strongly about offering products to consumers directly as it does about pointing them in the right direction. “We’re OK if consumers aren’t taking our first-party products but using our advice to get the best third-party products,” Choubey said. “We can’t be everything for everybody but we can be an aggregator.” MoneyLion earns revenue in a variety of ways, including fees, commissions and for providing its software to other financial institutions. It
Even as it recommends third-party products, MoneyLion has been bulking up its own suite at a pace of about one to two products each year. The company calculates that 30% of active users rely on MoneyLion as their primary bank account and that customers use an average of 2.4 MoneyLion services each.
“All challenger banks have a long way to go,” Horgan of Rosenblatt Securities said. “The biggest [question] is, who is going to park a substantial piece of their wealth in an app?”
Still, he says challenger banks are an existential threat to banks. In a research report from June 2021, Rosenblatt Securities estimated that 5% of the U.S. adult population consider a challenger bank or digital wallet their primary spending tool. That is projected to triple to 15% by the end of 2025.
“Over the next five to 10 years, challenger banks will meaningfully obtain a market share of primary accounts, largely at the expense of the incumbents,” Horgan wrote in the report.
To be sure, some challenger banks are gaining market share without offering a broad array of banking products. For instance,
Even if the rebundling challenger banks have a long way to go in taking market share, the potential is there.
“The premise of this whole strategic approach was if neobanks can effectively peel away some customers from traditional banks with their wedge product, they will be in a position to cross-sell additional products and be a full-stack competitor to traditional banks,” Johnson said. “Now that they are successfully crossing over from a novelty into a significant competitor in the deposit space, it’s likely that at least a few will be successful in their efforts to cross-sell in these other areas.”