When Billie Simmons and Rob Curtis started the LGBTQ-focused digital bank Daylight last year, they didn't seek to just "stick rainbows" on the product to market to the group. Instead, they decided to focus on building a product that met the specific needs of the population.
Fueled by the growth of plug-and-play banking infrastructure, startup niche banks have cropped up that cater to specific demographic or interest groups, such as people in the LGBTQ community, African Americans, Latinx consumers, immigrants, students, people who are disabled and those interested in climate change. There are even digital banks for gamers.
These startups — which typically have a licensed sponsor bank such as MetaBank or Bancorp as well as banking infrastructure from Galileo, Unit or Marqeta — say they aren't just a marketing front-end but are offering specific products that consumers can't get elsewhere. But many have similar basic features such as mobile-first, free checking and no fees, so they face challenges to stand out in a crowded field of neobanks.
Traditional banks have not met the specific needs of these groups, these upstarts say. Meanwhile, the bigger digital banks such as Chime have grown so large that they are targeting much broader swaths of consumers.
"For LGBT people, money matters are different and left behind by wider incumbent banks," Curtis said.
For example, Daylight has a feature for its debit card and mobile banking app where customers can sign up with their preferred name, regardless of the name on their legal identification. "That's really important for trans and nonbinary folks," Curtis said. "It's a cumbersome process to get legal documentation changed."
Ando, which appeals to those concerned with climate change, shows what percentage of your checking account dollars are being invested in areas such as wind energy, electric batteries or green buildings. "We're improving banking by moving from no transparency or accountability and no direction to better direction" of your money, said Ando CEO JP McNeill.
Others such as Greenwood, co-founded by rapper Killer Mike, focus on Black and Latinx consumers.
Spinning up a bank can take about a month and a half, said Itai Damti, CEO of banking-as-a-service startup Unit, which handles things like account origination, reconciliation, know-your-customer checks and settlement.
"In each case what we're looking for are use case [innovations] more than just the [demographics]," said Ryan Falvey, co-founder and managing partner at Financial Venture Studio, who has invested in startups in this area such as Dave, Propel and Point.
Daylight also has two community features for consumers: peer-to-peer advice from others on the platform as well as advice from financial experts. People in the LGBTQ community often have specific financial questions or concerns that others may not have, from adopting a child to gender confirmation surgeries to just saving for retirement, Simmons said. "It's a community of like-minded individuals to support individuals through what's often a confusing and lonely process," he said.
Community is one way niche banks can differentiate themselves, said Sean Park, founder at venture firm Anthemis. "It's more about the community because the infrastructure and even the products are becoming commoditized," Park said.
Because the banking technology and infrastructure has gotten relatively easier to set up, there's been a flood of competitors. "Usually even if you have something interesting and unique, it's not really defensible. If it catches on, everybody copies it," Park said.
John Ciocca started Purple, which uses Bancorp and Galileo, for people with disabilities. Purple is helping as many as 60 million people in that demographic maintain their disability benefits, because in certain states, if a person's assets exceed $2,000, they can lose those benefits, he said.
"What we consider differentiates us from Chime and others is we tailor the experience and features to the unique needs of people signing up for disability benefits," he said. "We make people feel at home, because we're taking care of your needs like a community bank."
While many of these banks are quick to point out that they aren't just about marketing, many neobanks do have particular expertise in data and user acquisition, and they outsource core banking, said Joe Floyd, a general partner at Emergence Capital. "They have two core competencies: data and user acquisition. Neobanks are here to stay — especially if they focus on niches. They can acquire customers more cheaply and strategically and get top-tier customers for the right products because they have better data."
Distribution, quickly acquiring customers and product differentiation give these banks an advantage over incumbents, Damti said. "The more distinct and tight-knit the population is, the more you can take advantage of this dynamic," he said.
Some believe that challenger banks are unsustainable businesses because they focus on marketing to certain groups and are just a "debit card for X." But Falvey says that's not the case, and many of these startups offer a "fundamentally different user experience."
"What's happening is deep innovation on what the product looks like," Falvey said. "The products are quite different than what incumbents are offering. They're acquiring users at a fraction of the cost that incumbents are."
Still, customer acquisition costs have risen, which makes unit economics challenging unless a bank reaches large scale, Park said. "Unit economics for a lot of these businesses aren't fantastic," he said. "If you can get to 14 million customers like Chime, then yeah, you can figure it out."
Because there are so many competitors now, it's hard to stand out, so not many will make it, Floyd said. "The challenge is not all of them will fulfill their potential," he said. "You'll have a few big horizontal banking platforms. A few will find big enough niches. Most are great seed investments and terrible growth investments."
But some interest groups may not be tight enough or have a "unique financial need" for a business to be built on, Damti said.
The community should have clearly unmet product and emotional needs, and should be self-organizing and viable long term, Curtis said. "Certain groups — freelancers, students, etc. — may be bonded by common functional needs, but it will be tricky to convert that into a community over the long term," he said.
One challenge is turning all those customers into revenue. Many start with checking accounts for their customers, which don't generate much revenue, or credit cards, which generate interchange fees. But the overall goal is to gather customers and eventually sell a range of products, from loans to mortgages to specialized services.
"It's the exact same strategy as Wells Fargo or Citibank in the 1960s: Get the top of the wallet, then grow wallet share," Falvey said. "They're employing a strategy we know is a recipe for success."
