The convergence of tough economic times, waning trust in banks and the rapid advancement of mobile technology has given life to a fintech Cambrian explosion in the areas of reloadable prepaid debit cards, digital-only checking and savings account products, personal financial management (PFM) tools, fractional share investment providers and fast, easy, short-term, small-balance loans.
With the emergence of these new disruptive players, we welcome a new buzzword to our industry vocabulary: “neobank.” This term describes a collection of early-stage companies that presumably make it easier for consumers to manage their money in a highly mobile age on a platform separate from their primary financial institution. Even though credit unions should be the low-cost leaders for serving the underbanked and financially challenged, these neobanks are positioning their brands as caring more and charging less than the big banks.
While this certainly isn’t always true, credit unions and banks face daunting new competition for the business of Gen Z, millennials, tech-savvy boomers and cost-conscious or financially challenged consumers who will otherwise consider one of these providers.
Most neobanks are providing some combination of basic banking features for free or for very low monthly fees, including:
- Checking and/or savings accounts
- Reloadable, prepaid debit cards
- Direct deposit of some (or all) of a paycheck
- Remote deposit check capture
- Free withdrawals at massive ATM networks
- Bill payment capabilities
Importantly, these startups are also differentiating and capturing more relationship value with PFM, micro-credit and micro-investing features baked into their platforms:
- Paychecks as many as two days early with direct deposit
- Small dollar wealth building through roundups and fractional share investing
- AI-powered budgeting and financial advice tools
- P2P money transfers
- Account aggregation
- Short-term, small-balance borrowing at zero percent APR (or significantly less than traditional credit)
At neobanks, all of this is made possible by eliminating physical branches and providing everything via digital channels. They can do this in part because most neobanks are not banks themselves. They work with chartered specialty banks like Bancorp or Evolve to offer FDIC deposit insurance, manage debit card fulfillment and infrastructure, and offer other services such as P2P money transfers and wealth building in conjunction with an existing bank or credit union account.
With scores of players in categories like prepaid debit, lending, investing and personal finance management, many of the top companies are converging to cover multiple categories and, in some cases, even morphing into fully chartered banks — now termed: “challenger banks.” Some of the largest U.S. banks are already rolling out their own all-digital banks with sub-brands, like Finn by Chase and Greenhouse by Wells Fargo.
It is important to distinguish between neobanks that don’t have a bank charter versus challenger banks and beta banks that do have a bank charter or are newly chartered “greenfield” banks (subsidiaries or joint ventures where banks are central owners).
Leading neobank brands include: Chime, MoneyLion, Acorns, Moven, Empower, Aspiration and Zero. Examples of challenger and beta banks are: Simple; GoBank; Bankmobile, a division of Customers Bank; Finn by Chase; Greenhouse by Wells Fargo; Marcus by Goldman Sachs; and Citizens Access from Citizens Bank.
Consider some of the brand promises of the larger neobanks:
Chime: “Banking that has your back. Say goodbye to ridiculous bank fees. Get paid up to 2 days early with direct deposit. Grow your savings automatically.”
MoneyLion: “America’s most popular financial membership. Join millions of Americans who are changing the way they bank, invest and grow.”
GoBank and Walmart Money Card, powered by Green Dot Bank: “ASAP Direct Deposit. No Overdraft fees. 5% cash back. Reload at the Register at 100,000+ retailers.”
Green Dot Bank has its own mobile banking solution and empowers many of the neobanks with reloadable prepaid debit cards that include the following features:
- Five percent Cash Back Visa Debit Card up to $250 annually with instant alerts reminding the cardholder of dollars saved immediately after each purchase
- “ASAP Direct Deposit” to deposit some or all of a paycheck up to 2 days early or up to 4 days early for government benefits
- “Reload at the Register” in conjunction with 100,000+ retailers including pharmacies on every corner and some that are open 24/7. A $4.95 fee is charged for this convenience
- Free ATM withdrawals within their 32,000 ATM network
- “Fair and simple fee plan” that touts no overdraft or bounced check fees and no penalty fees of any kind. (In reality, there is a $9.95 monthly fee, $2.50 ATM or bank teller withdrawal fee, $0.50 ATM balance inquiry fee and $4.95 cash reload fee at retailers.)
The convergence of products and services for the underbanked with mobile offerings targeting millennials and speed-conscious consumers gives way to this expanding group of neobanks that are primarily funded with private venture capital. Make no mistake, they want to be banks and make money doing it, but if they can’t evolve into “challenger banks,” they will be content monetizing a mobile platform that makes banking faster, cheaper and more convenient.
All of this is enough to make credit union leaders’ heads spin. With most larger credit unions experiencing robust membership, deposit and loan growth, many may not worry about these new competitors right now. But despite the many innovations being pursued through CUSOs and by credit unions individually, one has to wonder, where are the neo-credit unions? Why haven’t they sprung up yet?
Digital banking startups like Cogni, a New York-based firm, wants to be a one-stop shop for “lifestyle banking.” It is counting on curation of features like personal financial management tools and platform features that have proven successful in eastern hemisphere super apps like WeChat and Paytm. Cogni believes that special features in bank mobile apps will be the ultimate differentiator.
Last year, CU Solutions Group launched its LifeSteps Wallet app that helps credit unions create a one-app, Mobile Banking Plus strategy for members. Platforms like Paytm provided a concept that we set out to emulate for credit unions. While the initial product builds in features and functionality related to shopping, auto and home ownership and financial wellness, all in conjunction with the credit union’s core mobile banking features for account management and P2P money transfers, our future vision for the product is to help credit unions align with these neobank offerings in more compelling ways in order to help members with important life decisions. Millennials and the underbanked are the primary target, but a much broader group of consumers will also benefit from LifeSteps Wallet features.
We hope to add features that help credit unions with reloadable debit cards similar to Green Dot’s product, and features that will enhance a credit union’s existing debit card offering. This will enable credit unions to offer and promote such products and features through the LifeSteps Wallet app. Also on the drawing board is an expanded suite of personal financial management tools, fractional share investing products and even fast and easy borrowing tools like QCash and Lending Club.
For the two-thirds of the population not yet benefitting from credit unions, wouldn’t it be intriguing to explore the creation of a neo-credit union that would establish an all-mobile product relationship as a means of transitioning consumers to full-service, mainstream credit unions? Of course, this would have to be limited to those not yet aligned with a credit union to avoid competitive friction.
Whether enabling neobank functionality for credit unions or finding ways to help onboard more consumers to the benefits of credit unions, CUSG is on a mission to find creative ways to help credit unions serve and compete in a world of “next generation” banking.
“Logic will get you from A to B,” Albert Einstein once said. “Imagination will take you everywhere.”
Credit union leaders are very good at applying the practical logic of fair and affordable financial services with an emphasis on value and service, and many are extremely innovative. But to compete against the growing number of neobanks and challenger banks, and to match their appeal to millennials and tech-savvy members of all ages, credit unions will need more imagination and risk-taking to find the solutions of the future.
CUSG looks forward to playing a role by offering great products and mobile banking feature enhancements that help credit unions bring imaginative banking services to their current and future members.