Protocol | Fintech

By focusing on niche communities, these digital banks try to stand out in a crowded field

Banks like Daylight and Purple are serving communities that have been overlooked by big banks.

By focusing on niche communities, these digital banks try to stand out in a crowded field

Upstarts like Purple and Daylight are trying to meet the specific needs of their customers.

Photo: Stephen Phillips/Unsplash

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."

Image: Yuanxin

Yuanxin Technology doesn't hide its ambition. In the first line of its prospectus, the company says its mission is to be the "first choice for patients' healthcare and medication needs in China." But the road to winning the crowded China health tech race is a long one for this Tencent- and Sequoia-backed startup, even with a recent valuation of $4 billion, according to Chinese publication Lieyunwang. Here's everything you need to know about Yuanxin Technology's forthcoming IPO on the Hong Kong Stock Exchange.

What does Yuanxin do?

There are many ways startups can crack open the health care market in China, and Yuanxin has focused on one: prescription drugs. According to its prospectus, sales of prescription drugs outside hospitals account for only 23% of the total healthcare market in China, whereas that number is 70.2% in the United States.

Yuanxin started with physical stores. Since 2015, it has opened 217 pharmacies immediately outside Chinese hospitals. "A pharmacy has to be on the main road where a patient exits the hospital. It needs to be highly accessible," Yuanxin founder He Tao told Chinese media in August. Then, patients are encouraged to refill their prescriptions on Yuanxin's online platforms and to follow up with telehealth services instead of returning to a hospital.

From there, Yuanxin has built a large product portfolio that offers online doctor visits, pharmacies and private insurance plans. It also works with enterprise clients, designing office automation and prescription management systems for hospitals and selling digital ads for big pharma.

Yuanxin's Financials

Yuanxin's annual revenues have been steadily growing from $127 million in 2018 to $365 million in 2019 and $561 million in 2020. In each of those three years, over 97% of revenue came from "out-of-hospital comprehensive patient services," which include the company's physical pharmacies and telehealth services. More specifically, approximately 83% of its retail sales derived from prescription drugs.

But the company hasn't made a profit. Yuanxin's annual losses grew from $17 million in 2018 to $26 million in 2019 and $48 million in 2020. The losses are moderate considering the ever-growing revenues, but cast doubt on whether the company can become profitable any time soon. Apart from the cost of drug supplies, the biggest spend is marketing and sales.

What's next for Yuanxin

There are still abundant opportunities in the prescription drug market. In 2020, China's National Medical Products Administration started to explore lifting the ban on selling prescription drugs online. Although it's unclear when the change will take place, it looks like more purely-online platforms will be able to write prescriptions in the future. With its established market presence, Yuanxin is likely one of the players that can benefit greatly from such a policy change.

The enterprise and health insurance businesses of Yuanxin are still fairly small (accounting for less than 3% of annual revenue), but this is where the company sees an opportunity for future growth. Yuanxin is particularly hoping to power its growth with data and artificial intelligence. It boasts a database of 14 million prescriptions accumulated over years, and the company says the data can be used in many ways: designing private insurance plans, training doctors and offering chronic disease management services. The company says it currently employs 509 people on its R&D team, including 437 software engineers and 22 data engineers and scientists.

What Could Go Wrong?

The COVID-19 pandemic has helped sell the story of digital health care, but Yuanxin isn't the only company benefiting from this opportunity. 2020 has seen a slew of Chinese health tech companies rise. They either completed their IPO process before Yuanxin (like JD, Alibaba and Ping An's healthcare subsidiaries) or are close to it (WeDoctor and DXY). In this crowded sector, Yuanxin faces competition from both companies with Big Tech parent companies behind them and startups that have their own specialized advantages.

Like each of its competitors, Yuanxin needs to be careful with how it processes patient data — some of the most sensitive personal data online. Recent Chinese legislation around personal data has made it clear that it will be increasingly difficult to monetize user data. In the prospectus, Yuanxin elaborately explained how it anonymizes data and prevents data from being leaked or hacked, but it also admitted that it cannot foresee what future policies will be introduced.

Who Gets Rich

  • Yuanxin's founder and CEO He Tao and SVP He Weizhuang own 29.82% of the company's shares through a jointly controlled company. (It's unclear whether He Tao and He Weizhuang are related.)
  • Tencent owns 19.55% of the shares.
  • Sequoia owns 16.21% of the shares.
  • Other major investors include Qiming, Starquest Capital and Kunling, which respectively own 7.12%, 6.51% and 5.32% of the shares.

What People Are Saying

  • "The demands of patients, hospitals, insurance companies, pharmacies and pharmaceutical companies are all different. How to meet each individual demand and find a core profit model is the key to Yuanxin Technology's future growth." — Xu Yuchen, insurance industry analyst and member of China Association of Actuaries, in Chinese publication Lanjinger.
  • "The window of opportunity caused by the pandemic, as well as the high valuations of those companies that have gone public, brings hope to other medical services companies…[But] the window of opportunity is closing and the potential of Internet healthcare is yet to be explored with new ideas. Therefore, traditional, asset-heavy healthcare companies need to take this opportunity and go public as soon as possible." —Wang Hang, founder and CEO of online healthcare platform Haodf, in state media China.com.

Zeyi Yang
Zeyi Yang is a reporter with Protocol | China. Previously, he worked as a reporting fellow for the digital magazine Rest of World, covering the intersection of technology and culture in China and neighboring countries. He has also contributed to the South China Morning Post, Nikkei Asia, Columbia Journalism Review, among other publications. In his spare time, Zeyi co-founded a Mandarin podcast that tells LGBTQ stories in China. He has been playing Pokemon for 14 years and has a weird favorite pick.

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