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by Molly Wood
Italian version
Tim
Robberts/Getty Images is being turned into a business model...
So-called neo-banks, or challenger banks, have been all the rage in Europe and Australia for the past few years.
Now they're starting to get attention here in the US, with names like,
Yes, the exclamation point is part of the name. Like Yahoo! Cutting edge, I know...
These neo-banks have been trying to make money in the usual ways: By taking a cut of credit or debit card transactions, collecting interest on consumer deposits, and making loans. The usual banking stuff.
Their come-on is that they're super-convenient, all-digital, mobile alternatives to the big banks. Better yet, they're focused on their customers' "financial health," as one neo-bank CEO told me, and easing the "pain" that people feel around their money.
What makes that pain go away?
At Chime and Varo, you can get what sounds a little like a neo-payday loan - your paycheck cashed, up to two days before your actual payday. Checking accounts at these startups are often free, and the companies will let you go $50 or $100 into the red before they start charging any overdraft fees.
Some have automated savings accounts that invisibly funnel a few dollars from your paycheck into savings.
These neo-banks aren't necessarily even banks at all... Some are apps that facilitate transactions, which are then carried out by partners that are banks.
Others have applied for bank charters while touting their homegrown technology stacks and hyperpersonalized product offerings (based, of course, on your personal data).
But all of them say, explicitly or by intimation, that they're mission-driven. Their mission is the hot mess that is your finances.
The hot mess is very real.
So what better fix than to slap a slick veneer of tech over basic banking services, push the ouroboros paycheck cycle up by a couple of days, offer some basic budgeting tools, and call it a revolution in consumer banking?
Better banking isn't a bad idea, nor is it a tough sell.
There's definitely an ambient frustration with the megabanks that,
...and on and on and on.
I mean, there really should be a mission to take customers away from these companies. At minimum, it's smart to capitalize on all of this well-earned consumer rage.
Still, it's deeply depressing to attend a large gathering of executives, founders, and industry veterans, as I did at October's Money 20/20 conference, and hear the same, somber message repeated over and over again:
This, according to attendees and speakers, is both a problem and an opportunity.
No one bothered mentioning that the sick
state of the nation's finances isn't technology's problem to
solve.
The same
business logic - that you're trapped in a sad, hellish
existence dictated by megacorporations, and tech can free
you like Neo from the Matrix - underlies the entire gig
economy.
It's the basis for another tech veneer, this one
layered over people's inability to find meaningful work for
reasonable pay.
Uber got into the
financial services game recently, with
Uber Money.
The
headline feature?
Real-time earnings for drivers and
delivery people, so they can collect immediately, instead of
weekly.
In fact, we
can use the evolution of the gig economy as a case study for
how the latest wave of banking disruption might play out.
There was a
lot that was appealing about the gig economy at first.
Those Uber "side hustle" commercials were
super cool back in 2016, when driving for
Uber or Lyft
or Postmates, or shopping for TaskRabbit or letting out a
room on Airbnb to cover your hiked-up rent, actually seemed
like an opportunity rather than
a necessity.
Remember when this was about making
"extra"
money, instead of just barely enough?
It was only
scale, and the hard realities of American economics, that
made these things look a little less consumer-friendly a few
years later. As Uber and Lyft grew, driver pay went down.
Word got out that unicorn-like businesses could be built by
replacing paid employees with a massive network of
independent contractors.
The model spread.
Enter Lugg,
Instacart, DoorDash, GrubHub, Prime Now, and Homejoy...
This
phalanx of apps comprises an army of independent contractors
who hope for enough tips to make their labor worthwhile.
As
their finances have cracked under the strain of small
checks, no benefits, and a near-total lack of retirement
savings, I guess it was only a matter of time before a fresh
set of apps - the neo-banks - were deployed amid the chaos.
I'd like to
think the mission-driven companies flooding into the US
market (and the world in general too...) for financial services will be better for consumers.
In the short term, that seems plausible.
Cool features,
fewer fees, and a helpful person on the phone or online chat
could make us happy.
Let's not forget, many people really
hate big banks and would rather take their business
elsewhere.
But there
are two problems with this potential disruption.
One, it
might not end up being so consumer-friendly in the
long run. Uber and Lyft ended up paying drivers less as
their revenue pressure grew, and they're
raising prices for consumers.
Many
riders will tell you the quality of the driving, the
cars, and the experience has declined over time, which is
both inevitable with growth and not surprising given the
shrinking pay and incentives.
That will almost
certainly also be the case with these neo-banks. Banks won't lie
down and let the disruption happen - they'll almost certainly buy some
of these upstarts and reabsorb reluctant customers.
Big Tech
incumbents are already honing in on the space.
Apple's (issue-laden)
credit card, Amazon's
small business loans and unknown future ambitions, Google's
forthcoming consumer checking accounts, and
Facebook's payment wallets could all eat into the market for new
companies.
Whether it's due to
competition from banks, each other, or bigger tech companies,
neo-bank startups will inevitably go out of business, leaving
consumers stranded. That's pretty disruptive when you're talking
about your checking account.
And at some point, the neo-banks will
have to make more money, which means their offerings will get less
generous over time.
A second problem is
more serious.
Ultimately, no amount of friendly design, accessible
features, and overdraft protections will solve the underlying
problems that made these services necessary in the first place.
No
neo-bank can erase the student loan debt or the 40-year stagnation
in wages or the unexpected medical expenses or the crippling reality
of America's existential brokeness.
The neo-banks have promised that
they'll ease your pain, but that's just morphine for the real
condition.
When it comes to the actual sickness, you're still on
your own.
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