How Do Neobanks Make Money in Tough Times: Tips from Fintech Brain Food’s Simon Taylor
Building a neobank is hard. Recent data from Simon-Kucher & Partners revealed that among the top 25 neobanks, most are earning less than $30 in revenue per customer annually. Meanwhile, against a backdrop of fallen fintech stock values, neobank heavyweight Chime has delayed its IPO. Other top neobanks are similarly facing challenges, which has led Cornerstone Advisors Chief Research Officer Ron Shevlin to suggest the neobank era is over.
The story these neobank statistics tell: It’s rough out there. Really rough. How do neobanks make money in this environment? The good news is that sound strategy can help overcome this trying period. That’s true for neobanks, but it’s also true for fintechs more broadly.
Treasury Prime connected with 11:FS co-founder, Sardine’s Head of Content, and Fintech Brain Food author Simon Taylor — who recently wrote about challenges in the way of neobank profitability — to hear his thoughts on solutions. This piece will share his insights, plus some from Treasury Prime.
How do neobanks work?
Neobanks aren’t actual banks — they generally lack a bank charter, and therefore must partner with an established chartered bank to provide their financial offerings to their customers. They don't have physical branches either, and interact with customers over the internet.
Neobanks focus on offering banking products through a digital platform. While they offer more limited services than traditional banks, they allow consumers to have more control and real-time visibility into their finances. By accessing financial services products through the internet, neobanks are also able to reach different segments of the population who have specific interests.
How do neobanks make money?
The high-level view: To achieve profitability, neobanks need to think critically about their segments, sources of revenue, expenses, partner networks, and user communities. Look beyond interchange, which is often a primary source of revenue. Seek opportunities to cross-sell products, drawing inspiration from other fintechs that have found success. Forge partnerships that create value for customers. Find the missing puzzle pieces that, together, make your customers’ work and lives easier.
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Neobank business model — understanding opportunities in your segment
Your segment dictates your opportunities, said Taylor. If your neobank serves businesses, you have a leg-up in card issuance and interchange for two reasons: Corporate cards command higher interchange rates, and businesses make larger purchases than an average person. (Think: Travel expenses, office computers, equipment, and tickets to conferences.) If you work with a banking as a service platform like Treasury Prime that partners with smaller, Durbin Exempt banks, you may also earn higher interchange fees.
You also have great opportunities to cross-sell other offerings, such as automated accounting services or even just referrals to accountants that can embed with your app.
Opportunities to grow revenue in low-income consumer segments still involve cross-selling, but look dramatically different, he said. He says neobanks working with this segment should think about how to grow with their customers.
“Think about your time horizon to payback. What a lot of companies have started doing is helping customers to reform finances, improve their credit score, and get them to a point where they are a higher spender, a higher transactor, a higher earner. You should be thinking about, how can I actually grow with my customers?” Taylor said.
An earned wage access product, for example, can prove that it’s really working when it gets its users past the point of needing to access their wages ahead of their regular pay period. Once they get to that point, what comes next? It could be that the company then helps the customer start investing in a retirement fund, perhaps by partnering with a major investment firm. Other potential ideas could be helping them save for health care, or for car expenses.
Different consumer segments — couples, parents, freelancers — may value specific services or offerings that would not necessarily appeal as strongly to others. They could be willing to pay for these services with subscriptions. Part of your strategy to find new sources of revenue is to reassess the values and pain points of your user community. What ideas did you table when you first launched, and are they now viable? What have you learned in the time you’ve been operating that opens new doors?
“Seek opportunities to cross-sell products, drawing inspiration from other fintechs that have found success. Forge partnerships that create value for customers. Find the missing puzzle pieces that, together, make your customers’ work and lives easier.”
Think about how to diversify your offerings
What draws non-fintechs to embedded finance is the opportunity to create something sticky that encourages customers to spend more time and money with their products. Bank accounts hold customers’ money. When customers start holding money in your app, that breeds loyalty. For a case in point, look at the success of the Starbucks app.
Why talk about this? Because this line of thinking also works for neobanks. You have already built something powerful: You’ve created an environment where customers store their money. This engenders loyalty. The question is, how can you respond to that loyalty by meeting other customer needs?
People and businesses are willing to pay the right price for the right offerings, if those offerings fulfill an untapped need or bridge a long-standing gap. Think about new features you can add to your offerings, perhaps on a subscription basis. One way to approach this, said Taylor, is to consider what “in-betweens” you can own. You can’t sell car insurance necessarily, but you could potentially insure people’s cell phones — a useful service that may interest consumers if it’s bundled with other perks.
Here’s a list of potential offerings:
- Mobile phone insurance
- Travel insurance
- Automated budgeting tool
- Tools to help automate savings
- Rewards with select retailers
- Automated tax preparation
- Credit monitoring
- Fiat on-ramp for crypto
“I'd give you Revolut, who have just gone feature, feature, feature, feature, feature, feature. They've added stock trading, they’ve added crypto, they added small business accounts, they added merchant acquiring, they've added everything, it's literally as if they’ve thrown just a whole bunch of spaghetti at the wall and gone, ‘One of these will be a business model,’” said Taylor.
Fintechs — if you can’t do it, refer it
Neobanks are in a funny position. Your service looks like that of a bank to some, but you’re a fintech. You usually can’t make money through one of the key avenues banks use, which is lending, noted Taylor (though that may change in the future.) What you can do right now, though, is build an incredible user experience that creates value not just for you and your customers, but for potential business partners.
Referral relationships with retailers, lenders, insurance providers, investing platforms, and others can be a source of revenue. For an example of what this looks like, check out Intuit’s Mint app, which has a marketplace where users can “unlock more savings” by purchasing products and services from partner vendors.
How to survive a recession?
It would be irresponsible to sugarcoat the moment we’re in. A number of economists and business executives are predicting a recession. Venture funding is coming down from record highs. That means businesses in any sector could be seeing setbacks. At the same time, companies do survive — and even thrive — during hard times. Venmo, for example, launched during the 2008 Great Recession.
“The first rule of entrepreneurship is don't die,” said Taylor.
Key to survival: Keep the right support around your business. That means working with partners that are willing to stick with you through bumps in the road, and with whom you can mutually invest in each other’s success. Treasury Prime facilitates these kinds of relationships with our customers by connecting them with a robust and growing network of leading partners. This network includes the largest number of bank partners in the banking as a service (BaaS) industry. To learn more about working with Treasury Prime, contact us.