Welcome to the age of Neo-Banks 2.0! I hope you can imagine such a welcoming in the voice of Jurassic Park CEO, John Hammond.
So, what makes this “age” of neo-banks different than the first? I argue that this new age is marked by 3 distinguishing characteristics: 1. A clear drive towards profitability, 2. Collaboration, not competition with existing legacy banks, and 3. A niche focus on a particular core competency or customer sect.
In sticking with the Jurassic Park theme, I’d like to recall Ian Malcolm’s famous “Could/Should Speech” in the 1993 film. Ian extolls, “Yeah, but your scientists were so preoccupied with whether or not they could, that they didn’t stop to think whether they should.” This is the exact spot we find “older” neo-banks today. Neo-banks in the previous era had a very myopic focus on growth and became too preoccupied with gaining economies of scale in an effort to compete against existing legacy banks. There were some valiant efforts, but, sadly, none could compete with the fortress balance sheets bestowed upon velociraptors like JPMC or Bank of America.
In this new era of neo-banks, we see entering players taking a look at what they “should” do. Neo-banks should drive costs down by leveraging existing Banking-as-a-Service (BaaS) technology. Neo-banks should continue to innovate through the use of technology, but not if such investment requires huge up-front costs- thereby shooting profitability in the foot. Neo-banks should construct their own mini fortress balance sheets and prove unit economics.
Neo-banks in the 2.0 Age will collaborate, not compete with legacy banking institutions. As mentioned, legacy banks have economies of scale on their side. Instead of competing for a morsel of a piece of the legacy bank’s pie, neo-banks should realize that they’re baking their own pie. If neo-banks focus on working with and supporting legacy banks, they can harness economies of scale (and, likely, scope) that would otherwise have taken decades to win over. More importantly, this new pie can attract folks with different tastebuds: a win-win for both legacy banks and neo-banks.
Finally, neo-banks must have a niche focus on a particular core competency or customer sect. I think in the next 5 years consumers will expect their banking relationship to mirror their personal lifestyle. For example, I will want my money to work in my personal interests, not just sit in an account and generate paltry interest revenue. What does this mean? It could look like this: a neo-bank focused on servicing the LGBTQ+ community through investment funds promoted by the Human Rights Campaign Foundation. Or, perhaps, a neo-bank focused on the BIPOC community and that provides a majority of loans to Black, Indigenous, and People of Color. There’s lots of room for creativity in determining a core competency of such neo-banks (and this competition is healthy, especially if it incorporates consumers who don’t fit the typical “mold” of a legacy bank client). After all, there’s a lot of underserved communities that have waited long enough to receive the same services allotted to their white, straight, cisgender counterparts.