How to Compete with Fintechs – Rob a Page from Their Playbook

I recently wrote about Neobanks, 3rd party companies that pretend to be a bank by offering a robust digital banking platform.  If you haven’t read that article, you can access it Here . To summarize, a Neobank creates a compelling argument to some targeted group to move away from a “traditional” bank and come “bank” with them.  The argument is that the traditional bank is not providing the level of service that is expected but the Neobank will.  And typically, the Neobank will market to a specific demographic, say young millennials or Gen Zs, that are active with online gaming or new business owners.  Their messaging and even their online banking / mobile apps are branded and functionally oriented to the target demographic.  It’s not hard to see why this approach might be initially successful. The real question is whether there is a sustainability to each of these Neobanks beyond the initial novelty.

Which brings me to the latest news of one of these Neobanks called. Brex. Here is a very informative article that highlights the information I am about to present published by TechCrunch – Brex launched in 2017 with the specific purpose of focusing on serving startup companies. Now, I would say that helping new companies get their start is certainly a laudable goal.   And since many traditional banks are woefully lacking in SMB specific banking features and do not price services tailored to SMBs, it is not hard to see why Brex might have good success.  In fact, at the beginning of 2022, Brex had 1,100 employees, had 100% revenue growth over 2021 and got $300mm of VC funding that valued the company at $12.3 billion.  That sure sounds like a lot of success, right? Well, not so fast.

The article points out that in June, Brex sent a message out to the very startup SMBs that it was originally purported to help that they had until August 15th to close their accounts.  Huh?  That’s right. They determined that after a strategic evaluation of the profitability of its service that it is now “less suited to meet the needs of smaller customers”. Interestingly, Brex founder insisted that the company was still focused on assisting startups. However, the new profile of who would qualify as a Brex customer now includes a requirement that the business has some type of “professional” funding.  The result? Tens of thousands of Brex accounts are being essentially told, “we have a pool and a pond, the pond would be good for you …” The article suggests that the main reason it was ditching non-VC backed startups was due to its need to reduce its overall risk.  However, I suspect that since Brex was not profitable, it has figured out that it cannot make a profitable business by losing money on each customer but making it up in volume.

So. If you are a traditional financial institution, what does this mean for you?  I would say at least 2 things: If you know any businesses in your service area that were enticed to open an account at Brex, you should be targeting them to open accounts at your institution.  Secondly, you need to examine your Startup / SMB service offerings and determine whether what you are offering would be sufficient to bank a startup and hold them as a customer even when the next Brex comes out with a flashy marketing campaign. This means that you have a digital banking platform that is not placing your SMBs on your consumer online / mobile banking platform.  Conversely, you are not forcing SMBs to get your high-end Treasury online service, which has both much more features than an SMB needs and a higher, likely unreasonable monthly price point.  The best option for your institution is to have a system that has all of the features that an SMB might need while allowing for you to tailor the actual services on a case-by-case basis.  Does every SMB need to do full daily ACH files or outbound wires?  No. But some SMBs need to create an ACH file and/or wire.  And if they do, it is likely that the volume and velocity of these are likely to be small.  If a business needs to do a quarterly wire transfer, then your system should enable that, with controls that protect the bank and the business against any unauthorized wires that might be attempted that fall outside of the cadence of wires for this particular business.

Separate from the specific elements of the digital banking platform, community banks should consider building services that are targeted to assisting an individual to actually get a business started.  This could include elements such as:

  • A checklist of all steps necessary for a business to start in your locality
  • Periodic classes offered to assist new business owners to understand the accounting and other standard business practices
  • Access to retired business professionals that are associated with the bank who can serve as mentors to new business startups
  • Specific events periodically held at the bank where new startups can learn from speakers that are brought in by the bank as well as network with other new business owners
  • Specific training classes that help the new business understand how to effectively use the digital banking options available to them

The above list is by no means comprehensive.  Depending on your location and the type of likely companies you are trying to attract, your specific list would be tailored towards that target group. The main point is this: your non-interest service revenue is heavily weighted to business customers, so you have a vested interest in getting more business customers. You can use your calling officers to try to get existing businesses to switch to your institution.  Or you can create a program where you are effectively “growing” new business customers. If you are successful in creating such a program, then you will not only provide a valuable benefit for the communities you serve, but have a service that attracts individuals interested in starting a new business.  It would be a differentiator, separating you from your competitors, that could be a magnet for new start up accounts.

At the end of the day, there is a reason that an SMB would be enticed to accept an offer to bank with a Neobank.  The challenge is to examine YOUR marketing and YOUR service offerings to ensure that you are making the cogent argument to these current or future business customers such that they KNOW that your institution is providing a level of service targeted to their unique needs that mitigates any interest in some online banking option.  In effect, you don’t need to start your own Neobank, you can market services AS IF YOU WERE a Neobank.  It will take a concerted and coordinated effort but the payoff is new business customers that will pay fair fees for the valuable services you offer.