Is a Subscription Model the Answer to Challenger Banks’ Profit Problem?

While many neobanks keep struggling to find profitability, the NorthOne business banking app is counting on its simple, low-cost flat monthly fee — and rapid growth — to buck the trend. The fintech targets Main Street firms with an array of financial management tools integrated with core financial functions.

If you were inclined to wager, would you put your money on Intuit’s newly launched digital banking app or on one of the many startup challenger banks with names like NorthOne, Rho and Mercury to emerge as a major threat to traditional financial institutions in the small and midsize business market?

Oddsmakers would probably favor Intuit or possibly other Big Tech entrants. But before you place your bet, read why one of the challengers at least has no fears about Intuit or H&R Block or any other business-oriented platform — traditional financial institutions, for that matter.

Launched to the public in August 2019, NorthOne had just over 170,000 small businesses signed up for its banking app 12 months later and was growing at the rate of 20% to 30% a month, according to CEO and Co-Founder Eytan Bensoussan. That number is a drop in the bucket compared with the five million small business users of Intuit’s QuickBooks accounting software who will now be offered banking services through QuickBooks Cash, thanks to Intuit’s partnership with Green Dot Bank.

Bensoussan and his Co-Founder, COO Justin Adler, are unfazed. For one thing, there are 30 million small businesses and self-employed professionals in the U.S., so there is plenty of business to go around. And while Bensoussan acknowledges that there can be a good use case for combining an accounting package and a banking account, he also makes an interesting observation:

“What we’ve actually found is when one of the large non-bank competitors announces their intentions to get into banking we actually get a big bump of folks saying ‘Uh oh, I’m worried that I’m going to be forced into a walled garden in their ecosystem. I need a bank account that can be more of a ‘Switzerland’ for me’.

“Their concern, Bensoussan told The Financial Brand, is that they would be committed to using a big company’s tech stack and their software solutions if they use their bank account. NorthOne, by contrast, is neutral to everybody.

Traditional financial institutions inclined to dismiss all this as an intramural sideshow may be missing a key point: Both Intuit and NorthOne are gunning for the small business clients of banks and credit unions. The Intuit gambit is covered in another article on The Financial Brand site. This article focuses on NorthOne, whose unique subscription-based banking model combined with a package of mobile features designed to make managing finances and banking much simpler for Main Street businesses could well represent where all financial institutions will end up, sooner rather than later.

What Makes NorthOne Noteworthy?

Timing may not be everything but it sure helps when you get it right. Bensoussan acknowledges that as of yearend 2019-early January 2020, small business owners would tell him that the NorthOne app was “sort of a curiosity” — something for the business to think about.

Then came COVID-19.

“In the environment where shelter-in-place orders have become a reality this [mobile app] has become the safest option,” says Bensoussan. “It lets them run their business from home or wherever they are working from.” Adds Justin Adler: “In the same way that you saw a lot of retail shops suddenly say, ‘I need to become an ecommerce business,’ Main Street businesses said, ‘I need a solution that doesn’t require me to go to a branch or to wait on hold for two hours to just talk to someone’.” NorthOne’s sign-ups took off at that point, helped by a temporary waiver of its monthly fee.

Bensoussan grew up in a family of small business owners. He says he saw first-hand the constant tug-of-war between the professional side of the business — the knowledge and skills the owners possessed — and the “commercial” requirements of running the business, especially the financial aspects. Later, working at McKinsey on several financial services accounts, he saw first-hand the complexity underlying so many business banking products. Adler, as a serial entrepreneur, saw how financial management can weigh down a small company that otherwise has a great skill set and great ideas.

The two set out to create a banking experience for small businesses without so much friction and complexity. They partnered with Radius Bank to be able to offer deposit accounts and a debit card and for access to the payment system. (Radius, which is being acquired by LendingClub, has multiple fintech partnerships.)

Adler and Bensoussan also spent months talking to small business owners before writing a line of code. Unlike some challenger banks, NorthOne doesn’t target VC-funded startups. They do serve some start-ups and freelancers, but the majority of their customers have a handful or perhaps a dozen or two of employees, according to Bensoussan.

Their goal was to create a business banking app as easy to use as most consumer applications. “We thought of how easy it is to set up an Instagram account,” Bensoussan states. “And then we said: ‘How close can we get to that in banking?’ Why would it take more than three or four clicks to send a wire? We kept on simplifying to the point where anybody should be able to pick up this banking app for their small business and actually start using it within minutes.”

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Subscription Model Simplifies Often Complex Bank Fees

One of the most striking characteristics of NorthOne is its pricing model. In much of the challenger bank world, particularly for those companies that target the consumer market, the model has been a free basic service, sometimes supplemented by a premium account level carrying a fee. In many cases the model is dependent largely upon debit card interchange or other payment-derived fees. Many observers have questioned whether this approach is sustainable, and with the onset of the pandemic, when transaction revenues plummeted, some challengers faced pressure from their investors.

NorthOne set out to create transparent pricing structure — with no surprises. Initially it had a three-tier subscription setup, related to transaction volume, but they changed that in June 2020 for a single, flat fee for everybody: $10 a month for unlimited use of the NorthOne app to pay bills, transfer money, send checks, open an FDIC-insured bank account from the app, and get integrated access to many financial management platforms such as QuickBooks.

“Some people charge by the fee sheet, some people charge by the number of debit cards or by the number of payments you do a month. There’s a million ways to cut it,” says Bensoussan. “We just make it as simple and intuitive as possible.”

There are a handful of services, such as wire transfers, for which there are separate fees, Bensoussan states. However, the CEO says there’s no markup on those.

Harking back to his family’s businesses, Bensoussan says they were always willing to pay for value — such as services from an accountant or a lawyer and a bank account. They didn’t expect such services to be free. Overall what NorthOne is doing is making bank pricing simpler, predictable and “deliberately lower than most when it comes to classic bank pricing.”

“Customers of banks think they’re paying $29 a month but then the little ones and twos that hit you over the course of the month can add up to an average of $70 to $80 when you thought you were on a much lower plan,” Bensoussan explains. “We wanted to eliminate that.”

Accountholders can cancel at any time, he adds.

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Key Current Features and Plans for New Ones

A glance at NorthOne’s website demonstrates that the product is more than a mobile banking app for businesses. It has many of the money management features of consumer apps, but they have been geared to business needs. This includes such functions as cash flow reporting, automatic transaction categorization, transaction search and read-only access for a firm’s accountant. Because many small businesses still deal with cash, NorthOne offers cash or check deposits or withdrawals at 300,000 ATMs, and, of course, enables mobile check deposits.

The app also allows API integration with QuickBooks, Xero, Shopify, Wave and other ecommerce and accounting tools commonly used by small businesses. These are real-time, direct connections — no third parties involved.

“We’ve heard repeatedly and loudly from both business owners or their bookkeepers that they don’t trust aggregated data,” Bensoussan states. “They say it captures about 80% of the truth, so they have to spend hours a week going back and verifying the accuracy and filling in the blanks.”

The most popular feature, however, is NorthOne’s sub-account capability. As Adler explains, a client can create “virtual allocations of money” directly through the app for taxes, payroll, rent, or a major equipment purchase.

“If you are like a high transactional business and you want to save money for taxes you can set aside a certain percentage of every deposit, or deposit from a certain source, to go into the pay-your-taxes subaccount,” he explains. “Without requiring a controller set that up business owners know they can spend money confidently without worrying that they’re not going to make payroll.”

While some large banks offer sub-accounts, Adler states, typically a business will have to go into a branch to set them up.

NorthOne does not do any lending. “Currently there is no shortage of ways for businesses to get working capital or credit in the market,” Bensoussan observes. “So lending for us is somewhere in the future … maybe.”

Right now, he adds, “we have many things we can work on just giving business owners more time and creating more value for them.”

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