Have the neobanks won?

"When I go to Silicon Valley…they all want to eat our lunch. Every single one of them is going to try,"- Jamie Dimon, Feb 25 2014, JPM. Investor day conference

Nine years later, Jamie Dimon’s Chase has eaten the starter & lunch of neobanks and then finished off Silicon Valley Bank for dessert.

I have gotten feedback that my articles are too long (booooooo to the haters) so for those with the attention span of goldfish let me summarize:

1. The neobanks have not won

2. They have been annhilated

3. In many ways, we were insulting so many banks by the amount of media attention we showered on neobanks. Even me writing this article is proof.

I am going to prove my point by focusing on the USA, the land of the free and home of the brave. I promise you that my arguments apply globally.

The Situation
After all the huffing and puffing your fave neobanks have not lived up to their billing. Great PR & colorful adverts but customers have not left their legacy banks.

As a Nigerian I was always a bit suspicious about the pitches favored by African entrepreneurs: “Stripe/Uber/Amazon but for Africa.” It does warm my heart to see that we were not alone in our lack of creativity. My American brother and sister founders have taken this to a new level in the banking sector. Over the last 5 years, we have seen every type of banking pitch in the form of “ I am JPMorgan but for:

• Children

• Startups

• SMEs

• Crypto

• LGBTQ

• Migrants

• Military

• Climate

All these strategies failed and Jamie Dimon and co are laughing all the way to the bank. Everyone in these affinity groups has the same needs as the majority of consumers i.e. banking services that just work. Given the poor showing of these neobanks I have to conclude that any underserved needs that they were promising were either illusory or are still unmet because of poor execution.

How did we get here?
To be fair to these American startups, neobanks have failed to fulfill their promise in almost every international jurisdiction. There are three main reasons:

1. Limited product innovation with features that banks found easy to copy.
   Quick SMS alerts from Monzo, and get your money 2 days early by Chime. Whopeee - are we surprised that things have not panned out as promised?
   

2. Poor business models that can be summarized as “Hey come and do free transactions on me.”
   This led to one of the most amazing wealth transfers of our generation from American investors to customers all around the world.
   

3. Lack of trust in neobanks as a custodian of money.
   Your favorite neobanks will shout about how they have millions of customers (don’t let me start on that) but when you calculate the average deposit, you might be lucky if it’s enough to buy a coffee & a Snicker bar.

Impotantly credit became a dirty word with investors ignoring 2,000 years of banking built on lending. This left a trail of banks that raised phenomenal amounts of money, the majority of which have barely proved to be sustainable without their benevolent investors.

How have they done as investments?
Excellent question.

As an investment class, it has been a colossal failure unless you were an angel investor who waited for “smart” fintech investors to buy you out.

Let me share my receipts though and look at 2 recent public examples:

• Dave went from $3bn at listing to $97mm to date

• Moneylion to $2.4bn at listing $520mm to date

These are the only two that have been brave enough to open themselves to scrutiny and their experience means that others will not follow quickly. It’s a brave venture capitalist that will bring a neobank idea to their investment committee so don’t expect many Chase-but-for-X startups coming soon.

Oh dear poor babies - they didn’t beat Chase but at least they had an impact and gave the 2nd tier banks a run for their money. Right?

The harsh reality
The noisemaking by the neobanks and the media that cover them belie how small and irrelevant they are in the grand scheme of things. Think of any of your faves and even Wesbanco is bigger than them. You are giving me a quizzical look like you don’t know Wesbanco. And you shouldn’t - I didn’t until I was writing this article.

I went to the site ibank.net which has financial data on most banks. I looked at a list of the top 100 banks picked the last bank on the list, and came up with my new friend Wesbanco. If you want to know, it’s a bank that started in 1870 but if you think this is some geriatric bank with no mojo - think again. $12.9bn in deposits, $11.13bn in loans, and $40mm net income as of 30/06/2023. It is almost 50 times bigger than MoneyLion and I had not heard of it

“Come on, Ngozi that’s unfair - you are gaming the system.” Ok ok, calm down. Let’s make it fair and go to the same list but for credit unions and take the last on the list.

My people, have you ever heard of Twinstar Credit Union - because year-to-date revenue is about $60mm with net income of about $5.0mm and loans of about $3.1bn all as of June this year. By contrast, Dave made $120mm in revenue but $36mm in losses.

I don’t know about you but right now give me the unknown Twinstar every day of the week and twice on Sundays. Losses won’t pay for my children’s school fees.

The silver lining
Come on people, lift your heads. Things aren’t that bad and I am happy to let you know that there is hope in emerging markets where I operate.

There is room for neobanks but the conditions have to be right. When I think about the three examples of sustainable digital banks only three come to mind: Capitec, Tinkoff, and now Nubank from South Africa, Russia, and Brazil respectively.

They have all utilized a playbook that needs to be followed:

• They were credit-led - another way of saying they charged customers for a service they provided. Basically unlike the vast majority of neobanks, they refused to play Candy Crush with their investors’ money

• They were disciplined in strategic execution. Capitec for example spent 5 years just giving out 1-month loans.

• The legacy banks are structurally unable to compete because of inferior resources or fear of income cannibalization. These three came out with differentiated products that were hard to copy

Mini rant: For the last few years credit-based digital banks were a thing to be ashamed of. We at Carbon went from one cherubic-faced VC to another who would question why our transaction (read zero-income) metrics were below their expectations especially compared to the latest sexy neobank that they had invested in. It was a trying period for us explaining how sharing interchange fees of less than 1% between 6 parties was not a winning formula.

I wonder where these VCs are now? Probably investing in AI companies that were crypto startups just 2 months ago.

Anyway I thank my Lord and Saviour Jesus Christ for that learning experience; I will never again doubt myself 😀.

End of rant

So no, the neobanks haven’t won - but there exist some faraway places where they still have a fighting chance.

p.s. fyi I am not talking about Kansas

Conclusion

For too long, we have tried to fight the laws of nature. Banking is one of the oldest professions built on financial intermediation but too many neobanks tried to build empires in the sky & ignored the boring fundamentals like treasury management, lending, and customer trust. Banking is not perfect in the States - I mean Jamie Dimon and his people charge me 26% on my credit card despite being a customer of over 20 years and having decent credit. It can’t be because I was a shitty investment banker at JPMorgan so clearly there are opportunities to improve the system.

I am sure that as I write AI-driven banks are being pitched (pls show me the gullible investors) some of which will get stupid amounts of money. If they use the same tired playbook, you can trust that I will be writing about them soon.

Darwin’s theory on the survival of the fittest or most adaptable is apt. We neobankers laughed at many of the older banks mistaking their age for technological obsoloscence. Well, the banking empire struck back and proved that age is a proxy for their adaptability.

Jamie Dimon wins this round and his victory exemplifies the resilience of traditional banking. Yet, the story of neobanks is far from over.

Their potential for innovation and disruption is undeniable, as long as they can marry their futuristic visions with the fundamental principles of banking.

I have my popcorn 🍿 ready I am excited to see what comes next.