Battle for Banking
New business models leveraging a modern tech stack are driving a generational transformation of retail banking
We are in the early stages of a multi-front battle to dominate banking in the U.S. market. Venture-backed neo-banks are focused on rapidly growing their account base through best-in-class digital marketing and user experience. Top retail banks are organically growing their existing deposit base by investing in tech and infrastructure. Non-bank tech players (e.g. Apple) are increasingly active in financial services through new partnership models. Meanwhile, several leading commercial banks are shoring up their deposit base by developing an adjacent consumer brand and then leveraging those deposits to support their core business lending activities.
At the core, this battle is about owning the consumer’s primary demand deposit account (DDA):
- Why banks care
In our view, leading banks are focused on new DDA customers to address demographic shifts, provide low cost funding sources, and generate relationship cross-sale opportunities.
- Millennials: Banks have been slow to court millennials, the critical next generation of customers. Millennials are 1.5x more likely than Gen Xers and 2.5x more likely than Baby Boomers to switch banks(1). Given this increased openness to change, banks recognize they must deliver best-in-class capabilities and experiences to meet this customer’s ever-increasing expectations.
- Low Cost Funding: Banks are acutely focused on accessing low-cost funding sources. With U.S. consumer credit reaching all-time highs in 2018 (+50% higher than the 2008 peak), banks are lending at unprecedented levels. Meanwhile, uncertainty in the macro environment has reinforced the appeal for stable deposits to protect against rate increases and recessionary pressures.
- Cross-Sell: Most experts agree that cross-sell should start with a core, highly engaged customer relationship. Cross-selling matters because it represents the opportunity to spread initial customer acquisition costs (CAC) across a higher customer lifetime value (LTV). Put simply, it is a cheaper way to grow revenues and profits than acquiring new customers. The highest engagement product for most banks is a debit card-linked DDA, so banks are focused on creating more of these starter relationships, hoping they will grow over time through cross-sale.
- Why Neo-banks(2) and FinTechs Care
For Neo-banks, the DDA is the core account relationship, so this battle is existential. Early movers who have reached scale (e.g. N26, Chime) are being rewarded with large new funding rounds at attractive valuations. FinTech players more broadly are facing an uncertain path to building a long-term, independent business without the high engagement, core financial relationship a DDA represents. Moreover, the unit economics of monoline brokerage and lending challengers are suffering in light of heightened competition for new customers.
- Pure-Play Neo-Banks (U.S.): Players like Chime and Varo have raised a lot of venture capital to get their DDA base to scale and are now turning their attention (and war chests) to launching credit cards.
- Pure-Play Neo-Banks (International): Overseas (primarily in Europe) there are several players at scale with models like the U.S. Many of these are now attempting to launch in the U.S., including Number 26, Revolut, and Monzo. These players will face an early test by navigating a different regulatory framework as well as market environment that has historically rebuffed non-native banking brands.
- Non-DDA FinTechs: The last five years have seen a flood of venture capital flowing into monolithic “challengers” in every area of financial services (e.g. banking, wealth, lending, P2P). Today, these monolines are starting to offer core DDA accounts to ensure their long-term consumer relationships. Such players include: Acorns, MoneyLion, Robin Hood, SoFi, Stash, Betterment and Wealthfront.
- Why Tech Giants Care
Leading consumer tech and communications players are launching financial services strategies as well, in order to play a more central role in the financial lives of their customers. For players like Apple and Amazon (still just rumors), we believe the goal might be to bring the core transaction account closer to the spending destination (Amazon.com) or mechanism (Apple Pay / iTunes). For others, such as Paypal, Square or T-Mobile, the goal is to attack what feels like an under-exploited opportunity to serve young (think: Millennial and Gen Z) and lower income Americans. Paypal and Square (and even Apple) also see the importance of connecting fast-growth P2P payments volume with a DDA that earns attractive interchange income.
- Why Commercial Banks Care
Commercial banks have an opportunity to increase their business lending operations by leveraging consumer deposits. Historically, this would have required significant investment in processing infrastructure, branches, servicing centers, and marketing. These investment requirements coupled with the need to develop consumer brand awareness made this an unattractive distraction for most commercial institutions. Today, however, it is possible for commercial banks to launch, scale and operate a stand-alone brand with substantially less capital, risk or in-house resources.
What does this all mean for us?
We remain focused on startups powering the digitization of financial services. This is more relevant now than ever: As the battle for the DDA heats up, incumbents and challengers are investing aggressively to gain an edge. This includes building better digital experiences, improving direct marketing, and digitizing the entire customer lifecycle – from account opening through to accessing your financial services in third party applications. Our related investments include: Socure (day zero identity platform), ClickSWITCH (automated direct deposit switching), BillGO (digital bill pay), MX (data visualization and analytics), and Marqeta (modern card issuance). While we tend to lean towards infrastructure, we will selectively continue to evaluate investments in unique challenger opportunities that might represent a fundamental long-term shift in financial behavior.
 “Neo-bank” = startup offering a branded banking-related financial service
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