Even the staid banking industry, one of the oldest in the world, is facing an assault by startups called “Neo-Banks,” and millennials are not afraid to ride the trend.
What, you ask, is a neo-bank?
A neo-bank is a bank that is completely digital with no physical branches at all. And, while traditional banks have increasingly relied on fees to earn hefty profits from customers, neo-banks are reinventing banking practices and offering fee-less banking services. So far, these banking start-ups provide only basic services like checking, savings and debit cards. Neo-banks can afford to provide service without fees and to pay higher interest rates because they don’t have the expenses of brick-and-mortar branches and other costs associated with running a large bank. If you are thinking that your traditional, large bank has digital services, too, like online banking and electronic deposits, these are only providing digital access to traditional banking services with the same structure and fee schedule. Whereas traditional banks rely on fees such as for use of ATMs, overdrawn accounts, or other services, neo-banks are able to forego even minimum balances. Moreover, neo-banks, unlike traditional banks, can pass on savings to their customers, paying higher interest on deposits than the big banks do. These neo-banks, which are already popular in Australia, China and Britain, are increasingly receiving venture capital backing and taking depositors away from large banks.
Millennials are comfortable, but what about regulators?
While the millennial customer is comfortable banking without seeing a branch, instead using the phone and internet to do all transactions, the financial regulators (those stuffed-shirt bankers) have not been as comfortable. In the U.S., to receive a banking license and open and run a banking institution, you need to file an application with articles of incorporation, a list of bankers who can pass an FBI background check, a minimum amount of capital and coverage by the Federal Deposit Insurance Corporation (FDIC). Most neo-banks don’t have a charter and have to maintain a relationship with a traditional bank to park their money, in order to receive deposits. Varo, a neo-bank founded in San Francisco in 2015, looks like the first one that will be issued a banking charter. Varo’s founder and CEO, Colin Walsh, describes their typical customer as a millennial and says, “One thing that’s been interesting for us is how important the tone of voice is when you’re dealing with millennials, making sure you’re not being patronizing but also helping guide them toward a better outcome … The other thing that was interesting for us to learn early on was how many people are hands-off with their money. They just want technology to help them get to the answer.” Varo offers checking and savings accounts, online bill payment, a debit card, a line of credit and loans (which are backed by an established bank, Bancorp Bank), and algorithms to help customers forecast their cash flow, income and bills and makes suggestions to improve their finances.
The impetus for neo-banks has been to provide basic services to customers with higher interest rates and fewer fees. Who wouldn’t want that? While they are not yet able to provide all the services of an established bank, as Chris Britt of Chime, another up-and-coming neo bank has said about the future of banking “…there’s no way there will be a financial services industry that is charging consumers $30 billion a year in overdraft fees.” And if millennials continue to open neo-bank accounts, he’s sure to be proven correct.
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