New neobank fees; fintech for prime borrowers; RBG’s legacy, and more

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Neobanks focus on unit economics

Two U.K.-based neobanks, Monzo and Starling, announced they are introducing new fees for their customers this month. Monzo will charge a fee for customers who take out more than 250 British pounds in 30 days, as well as those who need replacement cards. Similarly, Starling will charge for replacement cards, as well as children’s cards and those who make payments via the Chaps system (a real-time payments system in the U.K.). These new fees are partially a response to COVID-19 — as consumer spending has declined, Monzo and Starling receive less in interchange fees from debit card usage.

But these fees are also indicative of a broader trend we’re seeing across neobanks: a focus on unit economics.

For many consumer neobanks, customer acquisition cost (CAC) has increased over time. This is partly due to the disappearing “acquisition arbitrage” that many neobanks once relied on. Originally, neobanks could simply take advantage of traditional banks’ weakness in acquiring customers. Neobanks knew how to acquire customers through digital channels, used millennial-friendly marketing messages, eliminated fees (often subsidized by venture funding), and attracted customers through high-yield savings rates, none of which traditional banks were doing. And neobanks targeted mainstream, middle-income consumers that had good, but not great banking experiences. As a result, neobanks didn’t even need much product differentiation; many consumer neobanks offered an only incremental product improvement over traditional banking products, like a checking account with a debit card and a savings product. They typically had a better mobile application and maybe an overdraft or cash advance product that provided short-term borrowing.

Over time, however, acquisition became more difficult — and traditional banks became better at digital acquisition. Competition increased, product sets converged, and the Fed cut rates, making high-yield savings rates difficult to offer. The customer relationships were less valuable: customers didn’t end up porting over their direct deposits and establishing neobanks as their primary banking relationship. Several years ago, online lenders experienced a similar trend: though their loans weren’t all that differentiated from traditional lenders, they were better at acquiring customers digitally. Over time, that acquisition advantage dissipated. Many online lenders struggled with rising customer acquisition costs and lower credit customers who had previously been rejected by banks and weren’t particularly loyal.

So how do neobanks make their unit economics work? Many that originally drew customers through low fees and high yield rates now need to increase their revenue streams. To boost revenue, they can launch and charge for additional products, offer premium subscriptions, or start adding or increasing fees for features like ATM withdrawals and card replacements. Interestingly, there is currently more innovation on the business model than product side: Neobanks like Monzo and Starling have introduced premium offerings, which provide some lightweight product (e.g., custom spend categorization, virtual cards), but extend discounted fees to the consumer in exchange for subscribing.

In addition to the fees announced this month, these neobanks have also started charging overdraft fees, which seem to contradict neobanks’ original consumer-friendly, transparent ethos. Though these neobanks claim that these new fees will only affect a small subset of customers (ATM fees, for example, should only impact the 20 percent of customers who withdraw more cash), the fees nonetheless feel reminiscent of petty fines charged by traditional banks for mistakes like accidentally overdrafting or withdrawing from an out-of-network ATM. Remembering which fees apply when is confusing for consumers, making this a tough monetization strategy for neobanks. This could lead to such banks being acquired, consolidated, or even shuttered if they are unable to find a path to profitability.

While some could theoretically drive profit by offering lending, like traditional banks, the comparatively low credit quality of many neobank customers makes that a challenging strategy. Offering these customers credit — in smaller increments, to start — could also add revenue, but that’s more likely to be a smaller business built over time. 

So where’s the opportunity then? Notably, while many neobanks are coming to grips with their own unit economics, not all are experiencing the squeeze. CAC is likely lower and more stable for neobanks that targeted a customer segment underserved by traditional banks. The same goes for neobanks that offered a differentiated product early on, built brand trust, and quickly established a direct deposit relationship with customers—classic good business. Those neobanks are in a better position to capture more spend and cross-sell additional products, rather than relying on fee increases to quickly bring in revenue.

Seema Amble, a16z fintech deal partner


How to design fintech for prime users? Embrace complexity

We’ve previously written about how segmenting a product’s audience by credit score bands can be an effective way to hone product design in consumer fintech. Traditionally, products designed for a non-prime audience tend to focus on liquidity (such as earned wage access or overdraft protection), whereas those targeting near-prime and prime audiences often focus on yield (like high-yield savings and robo advisors). To date, we’ve seen significantly more startup activity in the non-prime space than the prime space, with the rise of companies like Earnin, Chime, Dave, and many more. This spate of well-designed products for non-prime consumers is a direct reflection of the urgency and opportunity in meeting that market’s financial needs.

Innovative fintech products geared to prime consumers, on the other hand, have been less profuse. One obvious reason is that the segment is already better served by legacy products. But another, less examined angle is that these customers’ complex financial lives are considerably harder to abstract into a tidy user interface. Many prime consumers currently use spreadsheets with a high degree of customization to manage their money, which poses a considerable competitive and design challenge for startups launching new products. 

But what if the best user interface for prime users didn’t do away with the spreadsheet, but improved upon it? 

That conceit is what makes the recently announced Plaid + Excel partnership so interesting. By allowing individuals to use the interface that they’ve grown accustomed to — the humble spreadsheet — and simultaneously supercharging that workflow through data ingestion and projections, it’s possible that prime consumers will now have a fintech “product” tailored to their financial needs. Those product capabilities could expand to include refinancing mispriced debt, executing portfolio changes, or even dynamically sweeping cash into accounts that maximize yield.

Product and design abstractions are necessarily generalized. This works well when there is a common, predictable set of consumer behaviors, but inevitably falls flat when consumers behave variably. Instead of swimming against the tide, fintech product designers should consider embracing and complementing this complexity, rather than asking prime customers to scrap their established mental models.

Anish Acharya, a16z fintech general partner


RBG and the gender gap in financial services

Supreme Court Justice Ruth Bader Ginsburg, who passed away at the age of 87 last week, was widely considered one of the most important jurists in American history. However, as the writer Moira Donegan notes, some of RBG’s most important work predated her appointment to the bench: it centered around providing women equal access to financial services. 

Imagine being prohibited from opening a bank account, applying for a mortgage, or holding a credit card. Less than 50 years ago, this was the financial reality for women. In practice, and often in law, women were systematically excluded from accessing the financial system.

In 1971, RBG wrote the brief for Reed v Reed, in which the court struck down an Idaho law favoring men over women in estate battles. In 1972, she became the founding general counsel of the ACLU’s Women’s Rights Project, which was a driving force for many gender equality issues, including those demanding access to financial services. Lawyers from the Women’s Rights project tried more than 300 gender discrimination cases, 34 of which made it to the Supreme Court, and six of which were argued personally by RBG (who won five). A selection of those cases addressing financial services include:

Ruth Bader Ginsburg was instrumental in advocating for gender equality in our financial system. That work continues today. 

Rex Salisbury, a16z fintech deal partner


What the SEC’s new accreditation definition means for startups

Last month, the SEC adopted amendments to the definition of “accredited investors,” which determines what types of investors can invest in different offerings. Since 1985, the standard definition of accredited investors has, at a high level, been based on wealth: $200,000 in yearly income for at least two years or over $1 million in assets, excluding one’s primary residence (see the full definition from the SEC here). 

The new regulation expands the accredited investor classification by including professional designations (e.g., investors who own professional certifications and licenses), knowledgeable employees, and spousal equivalents. In addition, the new regulation broadens the qualified entities that count towards individual accreditation by including more entity types: family offices with over $5 million in AUM, Indian tribes, governmental bodies, funds, entities organized under the laws of foreign countries, and more

The change is a welcome one for many investors. While the previous rules took a wealth-first approach to accreditation — meant to ensure that individuals could sustain losses, should their investments fail to materialize — this new, broader definition adds an element of investor sophistication.

Likewise, the change has also been embraced by startups that offer alternative investments to investors. In recent years, we’ve seen an explosion of new asset classes and alternative investments. Real estate is historically understood to be an excellent asset class, but it has an extremely high barrier to entry — it’s expensive to buy property. Companies like Fundrise, Cadre, and Roofstock allow investors to make smaller real estate investments in order to get exposure to that asset class. Meanwhile, startups like Otis, Rally Road, Masterworks, and Vinovest offer non-traditional asset classes like cars, sneakers, art, and wine. A company called MoneyMade compares these different alternatives for prospective investors. 

Though many of these platforms currently operate under crowdfunding rules, which allow their investments products to be offered to both accredited and non-accredited investors (more on those reforms here), this broadened accreditation definition is still likely to allow such companies to expand their customer base. As more individuals are able to invest and build diversified portfolios, startups offering alternative investments and asset classes are likely to continue to grow. 

Matthieu Hafemeister, a16z fintech deal analyst


Charting the COVID Effect on fintech

Hemingway famously wrote that there are two ways to go bankrupt: gradually, then suddenly. In many ways, the impact of technology on our day-to-day financial choices has followed a similar trajectory. Fintech has been a gradual, but enormously consequential force of change in financial services over the past decade. But the emergence of COVID-19 suddenly catapulted the digitization of finance into overdrive — and scrambled many consumers’ typical budget. Though that leap has frequently been described in the abstract over the past six months, we were interested in portraying that historic shift in tangible terms

To examine what exactly has changed in the world of finance — as well as weird and noteworthy patterns of consumer behavior, more broadly — we partnered with Glimpse, a software company that culls millions of online signals to identify surging trends. At a16z, we’re accustomed to closely tracking engagement, retention, and financial metrics to measure growth; in this post, we analyze growth potential through another lens: public online activity. People click, review, discuss, comment, like, search, tag, download, share, and purchase. Looking at these actions across all keywords allows us to understand the rise of a trend. 

The resulting data uncovered a trove of insights across liquidity and lending, trading, small business impact, and consumer banking.  Plus: from the spike in RV loans and pool financing to the budding market for used golf balls (you read that right), it’s clear that our collective boredom is driving a slew of new consumer behaviors.

Read the full post, including two dozen trend charts »

Anish Acharya, Seema Amble, Rex Salisbury, Matthieu Hafemeister, and Lauren Murrow


More from the a16z fintech team

a16z Podcast: PPP & Fraud: Willful Deceit or Design Flaw?
How design flaws in COVID-19 relief measures sowed confusion, waste, and abuse — and how fintech and software can help.
—Alex Rampell, Naftali Harris, Bharat Ramamurti, and Lauren Murrow

Investing in Silo
An operating system for wholesale food distributors that is reducing waste, improving margins, and upgrading antiquated processes through software.
—Anish Acharya

New Models for SMB Lending
Plus: How fintech products are easing more Americans into the stock market, what’s inside your (mobile) bank, and more. 
—Seema Amble, Anish Acharya, Alex Rampell, Angela Strange, and Matthieu Hafemeister

Fintech Scales Vertical SaaS
Today, the majority of SaaS company revenue comes from subscription fees. With fintech products and services, the future may look very different.
—Kristina Shen, Kimberly Tan, Seema Amble, and Angela Strange 

What’s Behind New Credit Builder Products? 
Plus: How COVID-19 hit big banks; fintech goes after Gen Z; an emerging model for high-yield savings, and more. 
—Angela Strange, Rex Salisbury, Anish Acharya, Seema Amble, and Matthieu Hafemeister

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The views expressed here are those of the individual AH Capital Management, L.L.C. (“a16z”) personnel quoted and are not the views of a16z or its affiliates. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by a16z. While taken from sources believed to be reliable, a16z has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. 

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