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US Challenger Banks Have Enjoyed a Spike in Customers During Covid but How Far Can They Go?

Covid-19 has proved a fertile period for US challenger banks, which are beginning to gather momentum, as they have in Europe, after initially struggling to win the hearts and minds of Americans.

Stuart Sopp, CEO and founder of Current, a challenger bank with over two million customers, said its customer numbers had skyrocketed during the pandemic.

“The past year we’ve seen an acceleration to digital banking and more than doubled our member base in less than six months,” said Sopp.

Current is not alone: Chime (the market leader in terms of customer numbers, which is estimated to be over 12million) and Varo Bank are amongst challenger banks which saw a bounce in customer numbers during the pandemic.

Covid stimulus payments a win for challenger banks

The fuel for the surge has been the ability of challenger banks to dish out stimulus payments faster than traditional banks and sometimes pre-funding deposits they expected their customers to receive from the Treasury Department.

Such a zippy service helping those who might be living paycheck to paycheck and whose career took a knock during coronavirus earned challengers a thumbs up from the American public and, in some people’s opinions, contrasted with the tardy service from big banks.

“Getting stimulus money into the hands of customers faster than incumbent banks is a big publicity win for neobanks,” said Sarah Kocianksi, head of research at 11:FS, told Reuters

Crucially, a significant tranche of these new customers were opening primary accounts, which was a requirement for stimulus funds, meaning they are likely to be paying wages into them in future.

Challenger banks taking on the established banks

US challenger banks, like those in Europe, saw a big opportunity for a new type of bank amidst the fallout of the financial crisis back in 2007-2008 and the attendant reputational damage impacted on established banks.

Neobanks saw physical branches as a relic of yesteryear and have garnered customers, many of them of a younger generation, by offering enticing perks like no-fee accounts and early access to funds via banking apps.

Millions have flocked to the neobanks, which have continued to attract big-ticket venture capital funding.

For example, late last year Chime announced a huge $485million (£348million) funding round, valuing the bank at $14.5billion (£10.4billion).

Those challengers with a secure footing in the market have spawned a slew of imitators, with some focusing on specific customer demographics, like First Boulevard, which caters for black customers and Daylight, the LGBT+ community.

Despite their progress, challenger banks still have some way to go in order to be toe-to-toe with the US banking heavyweights.

Industry figures show that challenger banks total deposit market share is in the low single digits, dwarfed by JP Morgan Chase and Co, Bank of America and Wells Fargo & Co, which each account for at least 10% of US deposits.

Leading US neobanks

Chime

Market leader Chime, based in San Francisco, is thought to have around eight million primary account holders, making it the fifth biggest bank in the country, according to this metric.

According to CB Insight’s unicorn list, Chime, which focuses on Americans who earn between $30,000 (£21,500) and $75,000 (£54,000), is the eighth largest startup in the US.

Its features include offering customers no hidden fees, early payments of paychecks and a “SpotMe” feature, which spots customers up to $100 (£72) on debit card purchases with no hidden fees,

In September last year, Chime CEO Chris Britt said it would become “IPO-ready” within the next 12 months while Britt has also said he “probably gets a call from two SPACs (Special Purpose Acquisition Companies) a week.”

Varo Bank

Also based in San Francisco is Varo, which has around three million accounts as of February this year. Varo is the first neobank to gain national charter status when it was given the green light last year by the government.

Charter status means that Varo can provide loans, wire transfers and joint accounts to its customers and is likely to embolden others to go down this path.

Brian Brookes, the ex-acting comptroller for the currency, said: “Granting a national bank charter to Varo marks an evolution in baking and a new generation of banks.”

Varo CEO Colin Walsh said: “The charter is the most sustainable long-term model. You don’t have to share the economics with a partner. You have greater control over your destiny.”

Varo, which offers no monthly fees or minimum balance requirements, raised $241m (£173m), in a Series D round in June last year, followed by a further $63bn (£45bn) in February this year.

SoFi

Valued at $5.7billion (£4.1billionn) last year, lender SoFi is set to go public by merging with Social Capital Hedosophia Holdings Corp V, a so-called SPAC backed by US investor Chamath Palihapitiya.

Its value is set to increase to $8.65billion (£6.2billion) following its imminent IPO.

Palihapitiya took insurtech Clover Health public early this year via a SPAC.

SoFi started out by refinancing student loans- helping its build up a customer base of young, highly-paid white college professionals- and has expanded into mortgages and stock trading as well as cash management accounts.

Last year, SoFi, which as of last year is thought to have around a million customers, said it has received preliminary approval from US regulators for its application for a national bank charter.

Case studies

Current

Current was founded six years ago in New York. Its members, like the business itself, are relatively new to the banking scene. The majority are Generation Z and have never had a bank account.

“We are onboarding people onto the financial system with a unique opportunity to be their primary financial relationship from day one,” says Stuart Sopp.

The strategy, aided by a wider shift towards digital banking, seems to be paying off. Current has doubled its customer base in less than six months.

Something else that the members have in common is their financial situation: most live “paycheck to paycheck.”

Though Sopp argues the basic issue is wage deflation, he believes that Current’s innovations can help.

It instantly refunds “gas holds”, for example – the first and so far only neobank to do so.

“All the products we build […] are centered around getting [customers] faster and better access to their money and helping improve their financial outcomes,” adds Sopp.

Stash

In 2015, the founders of Stash walked around New York asking people if they invested – and if not, why not?

“The responses were unanimous – investing felt inaccessible and intimidating,” says Claudio Esposito, the neobank’s vice president of product for banking.

“This became the genesis of Stash’s founding mission and what drives the company to this day: helping to make investing as easy and affordable as possible for millions of Americans.”

One of its unique offerings is the Stock-Back Card. When a customer makes a purchase using the card, they earn 0.125% of it back as stock matching where they shopped.

“Swipe at McDonald’s, earn $MCD, Spotify, earn $SPOT, Etsy, earn $ETSY,” explains Esposito. “Customers can feel like they’re investing in their future selves as they go about their daily spend.”

For companies that don’t have stock listed on the platform, Stash lets the customer invest in a stock or exchange-traded fund of their choice.

Varo

“Varo is the only all-digital bank to hold a national bank charter,” says head of strategic communications Alex Woie.

“As a nationally chartered bank, we can leverage the latest technology to address key consumer pain points, provide a fully comprehensive set of premium banking services to our customers, and help to improve the financial health of Americans who have been underserved or ignored by traditional banks.”

Varo calculates that around 180 million US citizens have been “underserved” by financial incumbents.

The neobank has been trying to gain chartered status since it was founded in 2015. “In order to meaningfully address systemic financial inequality, we knew we needed to work within the regulated financial system,” Woie explains.

Varo’s next mission is overhauling its credit and lending services. It recently announced Varo Believe, which allows members to build their credit history and monitor their score through its app.

“And we’re just getting started,” adds Woie.

Dave

CEO Jason Wilk said: “Dave’s unique approach to banking is set to upend the financial services industry.

“Dave is doing this by first solving the most pressing financial challenges its customers face–from covering emergency expenses and building credit to finding work in a global pandemic.”

On the challenges facing the bank, Wilk said: “Because its product builds trust first, Dave avoids many of the pitfalls that traditional and challenger banks face in their business models, including high acquisition costs and loyalty among customers.

“The true winners will be differentiated by creating a community presence with a very defensible product suite that creates a full ecosystem for the customer.

“As more players enter digital banking, it will become more challenging to differentiate and attract customers.

“We’re growing at a steady pace, so our main focus is to build a community-driven and trusted brand while offering the best product and experience to our existing and future customers.”

Authors

  • Benedict Smith studied English at Oxford University, followed by Journalism at City, University of London. Alongside the The Fintech Times, he has written for ABC News and Good Morning America.

  • Contributing Reporter at The Fintech Times

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