Neobanking: The Golden Opportunity | Hacker News Reader

Neobanking: The Golden Opportunity

easilyamused.beehiiv.com

41 pointsjonhershman43 comments

I thought we have seen the end of the neobank era?

https://www.forbes.com/sites/ronshevlin/2022/06/20/the-end-o...

Depends highly on jurisdiction. In Asia, almost every big bank has realized that neobanks just have a fancy UI built on their (big bank's) backend, so now they've begun developing everything inhouse with better terms and efficacy than neobanks. In fact, that's part of the reason many neobanks are getting shafted this downturn season: https://the-ken.com/the-nutgraf/two-regulators-usher-in-fint...

Ok, but my credit unions all offer all those "other services" that I use without fees. Where is there room to compete with them on cost?

Sometimes $0 is too high of a price and they could be paying you.

(Your CU probably pays you indirectly. Mine gives me a $5 share yearly just for existing and I don’t generate any direct fees).

Kinda like how stock brokers should be paying you to have your stocks on deposit with them because they make money loaning them out to others.

Which is partly how “neo”-brokers could zero out trading commissions. Lending out meme stocks to short sellers is especially profitable.

If this is true, you are very lucky with your credit union. One of my traditional banks basically uses tech to try and convince me to switch away from them at every interaction. They are amazing. I'm sure that's also an extreme but the whole range exists.

Well ... perhaps we need an old bank system, with old values and principles. I have read recently a book about Amadeo Peter Giannini, the founder of Bank of Italy that later became Bank of America. A very inspiring lecture for me.

In my opinion we don't need more technology or new financial structures and ideas, but instead some old values and ethics ... https://en.wikipedia.org/wiki/Amadeo_Giannini

See also this brief introduction about the foundation he created : https://www.youtube.com/watch?v=XCYuARrz38c

I think instilling values and ethics on society is way harder than making a new technology. This is why I'm rooting for "trustless" nature of cryptocurrencies.

Neobanks can specialize and handle money in a specific niche they happen to understand at a deeper level than a generic bank can. This is the point, the specialization and being about to do risk calculations on baroque asset classes.

(I work for a ycombinator startup for customers including but not limited to neobanks https://www.taktile.com/)

I stopped reading at "Banks, at their simplest form, take in customers’ deposits and use those deposits (their source of capital) to make loans" which is laughably wrong. The loans make the deposits not the other way round, which is obvious when you stop to think where the deposits must have come from in the first place. Every deposit originates from a loan.

Could you elaborate more on what you mean by that? I haven’t heard that perspective before.

The Bank of England has a full paper about the process

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

So it's only true because the trend at the moment is money is created by central banks giving loans. Is a roundabout misleading statement from the parent comment

It's not the trend, it's how banks have always operated. There's no way within a double entry accounting system to create deposits without also creating the corresponding loan asset. If you know of a way to do so then all the politicians that obsess over the national debt would love to hear from you.

It's true as a matter of accounting.

The bank takes your signed loan note as an asset and creates an advance against it on the liability side.

A deposit is just an advance with the ownership tag changed.

And that's how it has always been.

As Reginald McKenna, former Chancellor of the Exchequer and Chairman of the Midland Bank, said in 1928[0].

"I am afraid the ordinary citizen will not like to be told that the banks or the Bank of England can create or destroy money. We are in the habit of thinking of money as wealth, as indeed it is in the hands of the individual who owns it, wealth in the most liquid form, and we do not like to hear that some private institution can create it at pleasure. It conjures up a picture of an autocratic and irresponsible body which by some black art of its own contriving can increase or diminish wealth, and presumably make a great deal of profit in the process"

[0]: https://new-wayland.com/blog/post-war-banking-policy/

> Every deposit originates from a loan

How is the cash I deposit from the dividends I earned originate from a loan? How about the community banks that purchase gold from their customers?

_All_ deposited money is created from a loan. Trace it back through the system (assuming you can) and you get to a loan creating a deposit.

No seigniorage at all in the system?

Even central banks operate the same way. The result is what is called The National Debt (which is just the sum of money spent but not yet removed).

This is factually untrue and I just gave you two counter-examples. While it's true that credit has long replaced deposits for money creation, the idea that all deposits strictly originate from some virtual loan operation is fallacious.

Consider that some banks are hundreds of years old and have commercial relationships that span well over a century, long pre-dating the modern financial system and the considerations we're discussing.

I was under the impression that every cent that is created by the Federal Reserve and the US Mint, is delivered to banks via a loan.

Wouldn't that mean that the origin of all "money" under this system, either be a loan or fraud?

They weren't counter examples, they were just normal monetary transfers. Even early banks ran in the same way, with a double entry ledger. Every liability in the system is matched with a corresponding asset, that's just accounting.

Obviously, not all transfers of money are loans, like your dividend payments, or normal transactional commerce. The statement is that when a bank creates a loan, it creates money. The money they give to the lendee is new money. This is the primary mechanism of money creation in our system.

I think it is a highly simplified or "stylised" depiction of the banking sector. It may or may not be an appropriate way to think of the banking system depending on the context in which it is used, but I would not say it is (necessarily) "laughably wrong". In aggregate, deposits are created by bank loans, but depositing cash with a bank may increase that bank's ability to make new loans, so it in effect "uses" the deposits to make the loans.

I have heard a lot of very intelligent and educated people describe the banking system in the same terms as the article. Too much to conclude that it is a laughably wrong take. If I stopped reading every time I saw that description, I wouldn't read much about the banking system at all, beyond that one Bank of England paper that people post every time this comes up.

If you stop reading when that comes up, you'd probably not read most of the nonsense that passes for commentary on the financial system and be much better informed as a consequence. It's not a simplification, it's completely wrong. There are plenty more descriptions of how it works if you care to look, it's just that the BoE paper is rather authoritative (coming from the bank that literally makes the rules within the UK).

The mechanism by which deposits "increase a banks ability to make new loans" is just a sideshow. Deposits are not the limiting factor in the banks ability to make new loans. It might be they use deposits as a cheap way to meet their Basel III liquidity obligations, but there are other routes to doing so.

100%. Money is debt.

The assumption that neobanks always use a sponsor bank is false. Most European neobanks have a full banking license.

I had never heard the term before but Wikipedia says this:

> There were two main types of company that provided services digitally: companies that applied for their own banking license and companies in a relationship with a traditional bank to provide those financial services. The former were called challenger banks and the latter were called neobanks.

That (as well as this article) seems to suggest that neobanks are by definition companies that do not have a banking licence. But I have no idea if that is the correct or current usage. Wikipedia also describes N26 (for example) as a neobank - N26 originally launched without a banking licence but now has one.

The problem with venture-funded neobanking business model today is that growth is expensive. CACs for traditional US banks have always been high (ever gotten an offer of several hundred dollars to open an account?), and it's even higher for an upstart with no brand equity.

On top of the high CAC, the pressure for growth is strong for venture-funded businesses, leading to more spending on marketing.

While the author does list opportunities to generate revenue, in my experience the annual revenue per user is at least 10x lower than CAC, meaning you can't generate a profit for decades, even discounting fraud losses as 0.

High perhaps but wasted for lack of creativity no? Which might be changing? When Transferwise started, it didn't need ANY cash offer to attract customers.

The graveyard of failed neobanks is crowded, but the front-runner of US neobanks is Chime, which has a strong culture of compliance and following regulations, while also being fee free.

They only have 3 revenue streams: interchange, small dollar loan interest fees and tips.

Interchange fees are paid by businesses, not customers. Loan fees exist to offset the cost of their interest payments/fraud risk giving out loans. Tips exist to offset the cost of their fee-free overdraft protection/"spot me" feature.

I'll also add that it's great they're able to exist, as a large portion of their customers are actually banned from traditional banks. A great resource/read for learning about the "unbanked" is "The Unbanking of America".

There's a golden opportunity for tech led banking. 1) less barriers to entry, 2) more cost effective, 3) only need small customer bases. While neobanks and traditional banks offer most of the same products, their business models are different. I write about it more here: https://easilyamused.beehiiv.com/p/neobanks-vs-traditional-b...

> Since the Neobank doesn’t have its own FDIC insurance and bank charter, the neobank customer’s deposits actually sit on the sponsor bank’s balance sheet

Are you saying that "neobanks" do not record the deposits as a liability? Or that they do not record the cash as assets? I don't understand what you are trying to say.

Are there any public "neobanks" you can point to so that we can see the financials as you describe them?

Getting a bank charter and FDIC insurance is a huge undertaking, so neobanks are usually not actually banks. They are technology companies that have partnered with banks or are customers of banking-as-a-service providers (Hydrogen, Stripe Treasury, and similar).

The banking partners have their own bank charter and FDIC insurance, but the technology company itself does not. If you go to most neobank websites, you can scroll to the bottom and see a disclosure along the lines of "Banking services provided by The Bancorp Bank, N.A. or Stride Bank, N.A., Members FDIC".

That doesn't have anything to do with financial statements. If you're Joe's Lawn Service and someone hands you money, it goes on your balance sheet. That's how accounting works, every penny gets (you know) accounted for. Otherwise how do these "neobanks" know who they owe?

None of the deposits are on the technology company's balance sheet because the neobank doesn't actually handle any of the money. They are essentially UIs on top of APIs exposed by the bank.

If you make a deposit into a neobank, you'll have a routing and account number, but the routing number belongs to the partner bank servicing that account. If you deposit cash or a check or whatever, it goes _directly_ to the partner bank.

I think they are describing what is termed "brokered deposits" -- like your Starbucks gift card account isn't managed by Starbucks, but rather a (usually large) bank on the backend which treats brokered deposits differently than unbrokered (standard) deposits.

Hmmm, possibly. However you are describing an operational reality and the author was using financial reporting terms. And specifically if something like "people gave a bunch of money to what they thought was us" isn't on the balance sheet, it's a big red fraud flag

> A neobank is a technology company that provides banking services fully online.

Not exactly a confidence builder, but go on.

> Rather than having its own bank charter, a neobank relies on a partner bank or “sponsor bank” to provide the regulatory umbrella for the company to accept customer deposits and provide other similar services as a bank.

So... it's a middleman providing a fancy website for a real bank, but under a different name with minimal regulatory obligations? Now I'm getting nervous. Does it at least work like a normal bank, where they directly benefit from being a secure place to store money?

> Although the neobank brings in the deposits, through marketing and other channels, the sponsor bank is the main beneficiary of the interest income.

Oh dear. Who's going to pay for those tech company profit margins, then?

> Typically, Neobanks have to rely more on the non interest income: account fees, transaction fees, credit cards, debit cards, and interchange fees.

Fees and predatory loans -- every bank account holder's favorite things! What do I get out of this?

> To attract customers to their services, the neobank must offer the above services in a way that is above and beyond better than what is currently available. That’s where technology comes into play.

So... a really fancy website?

> Traditional banks do not have a strong track record of innovation, technology adoption, and digital transformation. Between regulatory concerns, legacy systems, and the costs / risks of switching vendors, large technology spend scares most bankers away.

Yeah, there are good reasons for that. People become very unhappy when they can't get their money.

> Neobanks do not have to worry about that.

They probably should!

> They can build something from the ground up, in a slightly different regulatory environment

If there's one thing Silicon Valley is good at, it's rebuilding complex, decades-old systems from the ground up in a regulation-free environment without having to relearn lots of historical lessons the hard way.

> and use technology to serve a smaller population needs.

Is this "smaller population" credulous people who want to be nickel-and-dimed to death so they can receive targeted advertising while trying to send an ACH transfer?

> So... a really fancy website?

Basically.

Which isn't a high bar, if you've ever use a banking portal.

>Is this "smaller population" credulous people who want to be nickel-and-dimed to death

Oddly enough, most Neobanks have significantly lower fees than the traditional banks. The first Neobank I tried, close to a decade ago now, Simple, would do this really weird thing where if a debit came in and you didn't have money for it, it would reject it at no cost rather than charging you a fee. Later, PNC bought Simple, and their fee structure was $35 fee per overdraft, capped at 4 fees per day. $140/day they could charge you for not having money.

Assuming your questions are in good faith: The bulk of Neobank customers seem to be people who want better tools to manage their money. Most banks provide poor tools, whether that's online/web, mobile, or money management, most banks are just crap at it.

Largely, I started using Simple because I wanted better tools for managing my money. I would set up bills and budgets and then I could look at the app and it would tell me a "safe to spend" amount, once all the bills were taken care of.

Then I moved onto One Finance, which got bought by Walmart and they neutered a lot of their features, but similar idea.

I'm now on Qube, which has a monthly fee, which I'm hoping helps them stay independent, but it sounds like they're struggling for income anyway.

Qube has features like: Virtual cards for every bill, a debit card that can't be charged unless you approve the spend (optionally), family accounts (my kids have their own debit cards now, I can pay them for chores with a transfer), "envelope savings". It's actually quite compelling compared to my other brick and mortar accounts.

Those do sound like decent features, although I'm not sure I'd pay a monthly fee for them personally. (I did envelope savings via YNAB for a while; I suppose having it integrated directly into my bank account might make things smoother?) I certainly agree that banks are pretty bad about improving their features and general UX.

My comment was largely responding to the total lack of self-awareness in the article, which treats concepts like "tech company rebuilds complex legacy system" and "unregulated banking innovation" as being obviously good things in and of themselves. (The article seems to be part of a web3 blog, so no surprises there.) Taking the idea more seriously, I would expect neobanks to fail in a few different ways:

1. Being bought out or cut off by actual banks who decide they can offer new services directly without giving middlemen a cut of the money.

2. Enshittification. Lure in customers with low fees, then gradually add to the fees and start harvesting personal information for advertising.

3. Fraud. Seems to be a default option for many ambitious go-getters handling other people's money in a lightly-regulated environment.

I'm feeling rather cynical about both tech and finance these days, but I wouldn't mind being wrong for a change.

I don’t know if you’ve used a neobank, but you’re underestimating the value of really fancy website. Interacting with traditional bank apps and websites is painful. Simple, which shut down, was a phenomenal service that made it a joy to bank with.

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