The 'neo-banks' are finally having their moment

Nathaniel Popper

SAN FRANCISCO: After the financial crisis 10 years ago, unhappy customers were expected to flee the megabanks for smaller competitors. It didn’t happen. And the big banks became even more entrenched. Now another wave of alternative banks are at it again, and they say they’ve learned from the mistakes of the upstart banks that tried — and failed — before them.

Chime, the biggest new name to pop up, has opened two million fee-free online checking accounts and is adding more customers each month than Wells Fargo or Citibank. That has inspired a crop of newer start-ups, like Empower, which started its first fee-free online checking accounts, with lots of digital bells and whistles, in October.

Venture capitalists are pouring money into American start-ups that are offering basic banking services — known as neo-banks or challenger banks. In 2018 so far, American neo-banks have gotten four times as much funding as they did last year, and 10 times as much funding as they did in 2015, according to data from CB Insights. Big players from outside the consumer banking industry, like Square and Goldman Sachs, are also moving in.

“In consumer banking, you have what is one of the largest industries in the United States, in terms of profits, and at the same time one of the least disrupted industries, and the most unpopular with consumers,” said Andrei Cherny, the founder of Aspiration, a neo-bank that has attracted nearly a million customers. “Those three things create a perfect storm for disruption.” The persistent unpopularity of big banks has been a boon to the newcomers. And they are helped by a new attitude among financial regulators who have grown more comfortable with online banking and young customers who have no hesitation about cashing a check or sending money on a phone.

That doesn’t mean that building a profitable business will be easy, as the first neo-banks, like Simple and Moven discovered. Establishment banks have big budgets to fend off challengers. And the services that many neobanks are starting with, like checking and savings, are not very profitable. Chime and its ilk all want to eventually move into lending and other businesses. There is, however, a growing conviction that banking is set to change. The consulting firm CG42 said in a recent report that it expected the 10 largest banks would lose $159 billion in deposits to smaller competitors over the next year.

Everyone is looking at cards and bank accounts as the next battleground,” said Lindsay Davis, an analyst covering financial technology companies for CB Insights. The new financial outfits are trying to replace the old, branchbased way of banking with a mobile phone-friendly account that does away with the fees that have made banking giants so unpopular. Andrea Johnson, a dispatcher for a utility company in Michigan, switched to Chime after her old bank, PNC, charged her an overdraft fee as a result of another fee from the bank that had emptied her account.

“That blew my mind: one fee leading to another fee,” Ms. Johnson, 35, said. “They are going to find a way to nickel-anddime you to death.” Since she switched to Chime, Ms Johnson said, she hasn’t missed PNC’s physical branches and has appreciated some of the start-up’s perks, like getting money from her paycheck two days early.

Chime, which has 100 employees in downtown San Francisco, makes money by collecting a fee from Visa every time its customers use Chime’s debit card to make a payment. The company has received $105 million in investments from venture capital firms. “If you look ahead five years, there’s no way there will be a financial services industry that is charging consumers $30 billion a year in overdraft fees,” said Chris Britt, the chief executive of Chime. “We aim to shake that up, and I think a lot of other consumer companies will be doing the same thing.”

The deposits going to startups like Chime and Aspiration are still a drop in the bucket compared with the trillions of dollars in accounts at places like JPMorgan Chase and Wells Fargo. New companies in the United States are also lagging those in places like China and Britain.

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