This first appeared in the monthly a16z fintech newsletter. Subscribe to stay on top of the latest fintech news.
There’s a long history of banks and financial institutions focusing on specific demographics. Bank of America got its start catering to the Italian-American immigrant community, for example, and Black-owned banks have sought to eradicate discrimination in the banking industry for decades.
Now, in a world of increasingly generic product experiences (everyone builds on the same infrastructure, after all) and rising acquisition costs, fintech companies are pursuing a marketing advantage through vertical banking: services tailored to specific customer communities. Tenth aims to erase the wealth gap for Black Americans, Crediverso provides financial products for the Hispanic community, and Squire offers back-end financial management software for independent barbers, for example.
In the highly fragmented banking industry, this approach makes sense at face value — start by targeting a narrow audience, then cross-sell additional products. But there are two keys to success when pursuing this strategy: 1) the company must have a unique audience segment that self-identifies as such, and 2) the product features must have unique and purpose-built utility for that particular audience.
Targeting a vertical audience that self identifies as such — whether Hispanic Americans or barbers — is necessary to reach potential customers through the usual acquisition channels, like Google and Facebook. Hispanic Americans might be acquired through a channel like Telemundo, for instance, while barbers might best be reached through professional channels on Facebook. Now let’s consider a counter-example: a product focused on freelancers. While there are tens of millions of individuals who might be categorized as freelancers, most do not describe themselves as such. These folks do not go to Google and search “banking for freelancers”; they consider themselves barbers, designers, developers, photographers, and the like. Thus, a product devoted to a broad-strokes “freelancer” archetype is likely to struggle with acquisition.
The second, perhaps more challenging, aspect of effective vertical banking is providing unique product utility to your target audience. While a neobank for photographers may have a marketing advantage over a more generalized neobank, the advantage is unlikely to be durable. To succeed, the neobank must have some purpose-built product that its horizontal competitors are unlikely to match. In the case of photographers, that might mean offering specialized invoicing and billing that bundles the cost of storing digital photos, for instance, or providing one-click access to general liability and property insurance for events.
Given the enormous fragmentation in the banking business, there is opportunity in vertically-focused financial services platforms. However, a unique product and a targeted marketing strategy are both essential to build a large and sustaining business in this space.
The federal government tried to ease the financial shock of millions of Americans by granting stimulus payments to more than 160 million people this spring. The biggest cost to being unbanked this year? Waiting weeks or months for your $1,200 stimulus check to arrive, if it ever did. That’s because many of those payments were delivered through mail — yes, paper checks via mail in 2020.
There are approximately 14 million Americans without bank accounts. Top reasons include not having enough money to meet minimum balance requirements and fear of overdraft fees, which cost Americans $34 billion a year. Should Congress agree to pass another stimulus package, the people who need that money the most are least likely to receive it quickly.
Fintech can help. Many fintech products are designed to appeal to the millions of consumers who have understandably shunned mainstream banking. Square’s Cash App, for example, provides free banking services without a minimum balance requirement and does not charge overdraft fees. In addition, Square informed customers that they could receive stimulus payments via Cash App, which led to significant uptake. Such efforts could be even more effective if the government were to provide a number of free banking options (which, for now, are mostly fintechs!) to those who visit government websites. Want to get your check instantly next time? Get a free account here.
Another potential opportunity for fintechs: most state unemployment systems are overwhelmed. California, for example, had to pause unemployment applications for two weeks to work through a backlog of 600,000 applications and bolster its fraud systems. In a world where every company is becoming a fintech company, fintechs have become world-class at fraud and identity detection. There is further opportunity for the government to partner with fintech to streamline the application process and help users understand their cash flow.
One great example of fintech bolstering a government program is Propel, which supports the nearly 40 million Americans on SNAP, the Supplemental Nutrition Assistance Program. Propel’s mobile app gives users their most up-to-date food stamp balance, helps them create a food budget, and provides resources to make their dollars go further. It’s a vast improvement over the usual way of determining one’s food stamp balance: calling an 800-number on the back of the physical debit card.
As the saying goes, a crisis is a terrible thing to waste. While the government is doing a lot to help those in need during this terrible time, fintech is undeniably accelerating these efforts — and will continue to modernize our systems going forward. And though many fintech companies start out by acquiring users directly, in the near future we hope to see partnerships with all levels of government, as well.
Albertsons, the owners of grocery chains like Safeway, Vons, and Shaw’s, recently announced Albertsons Pay. While many retailers have consumer apps that enable payment, there are two interesting components to Albertsons’s offering: 1) Albertsons Cash, a reloadable stored value account that creates a closed-loop payment offering, and 2) Albertsons Direct, which enables customers to pay directly from their bank account.
Why offer these payment options? The grocery business has famously low margins (typically 2 to 3 percent), and both programs save merchants a few points on the interchange fees they typically pay to card networks when customers use a credit or debit card. By comparison, bank transfers are far less expensive, resulting in significant savings for the merchant. Additionally, for the closed-loop offering, the merchant gets the benefits of earning interest on the money maintained in the account and receiving “breakage” — access to balances that are never used. Though such programs are costly to maintain at a corporate level, they often pay off by driving customer loyalty.
These ideas aren’t new. Retailers have been trying to cut down on interchange spend for years, mostly with limited success. In 2012, the Merchant Customer Exchange (MCX), a consortium of retailers led by Walmart, attempted to launch a bank-linked mobile wallet and payment product. Safeway launched its Fast Forward pay by bank product in 2013. And in 2018, Kroger tried to ban Visa cards in protest of the interchange rates.
Starbucks is a prime example of a successful closed loop wallet product. The megachain currently has $1.5 billion in stored value cards that it earns interest on, and 8 to 10 percent of that has been “breakage” annually. The product works because consumers are willing to leave money in their Starbucks account (regular customers know they’ll use that money soon) and because these stored value cards are the only way to pay if ordering ahead.
For Albertsons and other retailers attempting to drive consumer behavior toward a new payment method, there are a number of factors to get right:
While introducing new payment methods in an attempt to skirt interchange fees has historically had mixed success, now might be a particularly interesting time to launch such products. Younger generations have been increasingly spending on debit and are less accustomed to rewards. And with current COVID contact concerns, smaller transactions have been moving from cash to debit as well, which may mean consumers are open to new payment methods. While challenges remain in the design and execution of such payment products, this may be an opportune moment for them.
Since QR codes were first invented more than 25 years ago, the technology’s strongest application has been improving the payment experience. QR codes provide a safe, reliable, and fast way to pay. QR code payments are particularly commonplace in China; in 2017, an estimated two-thirds of all mobile Alipay payments — $1.7 trillion worth — were made through QR codes. Thus far, however, QR code payment has not taken off in a significant way in the U.S.
According to a recent survey of 4,000 American and Canadian households by Mercator Advisory Group, QR code payments were used by 13 percent of respondents before the pandemic. During the first wave of lockdowns and social-distancing measures in March, many predicted that 2020 would be the year that such payments would finally see broad U.S. adoption. It made sense: a no-touch QR code is safer than contact payment methods like cash or cards. But though QR payment use has grown by 11 percent over the course of the year, according to Mercator, 48 percent of consumers have still never attempted it. So why hasn’t QR code payment caught on?
One obvious reason is infrastructure — for many years, few merchants offered the ability to pay through QR codes. That is starting to change: in May, PayPal announced that QR code payments would be available through its app in 28 markets, making it much easier for 25 million PayPal merchants to accept QR payments without additional hardware costs. (PayPal also waived fees until October 2020.) In September, UberEats introduced contactless ordering and QR code payments to eliminate the need for paper bills and signatures. CVS announced that it would roll out PayPal QR code payments in over 8,000 stores in the fourth quarter of 2020. But while more merchants are adapting their infrastructure to enable QR payments, it’s still far from widespread.
In addition, Americans have long become accustomed to carrying and paying with credit cards. In China, by comparison, credit card adoption has historically been low — approximately 30 percent in 2008 — which led many to skip physical cards altogether in favor of digital payment options like QR codes.
As the pandemic lingers, consumer financial behaviors are likely to continue to shift. It’s possible COVID will spur wider adoption of QR code payments stateside — we just haven’t seen it yet.
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