In the U.S. today, there are at least 40 digital-first challenger banks. The U.K. has more than double that.
Now granted, you can debate what is and isn’t a challenger bank until you’re blue in the face. Does it mean mobile-only? True checking accounts or merely payment tools? Are they backed by FDIC insurance? There is no one definition, but honestly, it doesn’t really matter.
Regardless of how you slice it, the overarching commonalities boil down to this: These entities use the power of innovation, digital technology and data to disrupt and redefine “banking as usual.” They challenge the status quo.
Collectively these upstarts definitely have bankers on edge, and some are starting to mess with bankers’ heads in a big way. For instance, Chris Nichols, Chief Strategy Officer for CenterState Bank, says Marcus by Goldman Sachs poses a real threat. He also closely monitors challenger banks N26, SoFI, Varo and BankMobile.
“When someone like SoFi takes a customer from us, it’s much harder to get them back,” Nichols says. “This group presents more of a long-term, existential, threat.”
However, in some respects, their disruptive potential has been overblown. Ron Shevlin, Director of Research at Cornerstone Advisors, points out that some like Simple and GoBank “have been around for years now and have done little damage.” He also observes that too often banking executives only hear rosy, self-reported figures that may mislead traditional players about their significance.
With that context in mind, here are the eight challenger banks legacy institutions should keep an eye on.
1. BankMobile — Hooked Up With T-Mobile
Parent Company: Customers Bank
Category: Mobile bank
Notable Milestones: 1.8 million account relationships, primarily with college students; relationships with 800 college campuses.
Notable development: Partnered with T-Mobile in November 2018 for the soft launch of T-Mobile Money banking account, provided by BankMobile.
- Vibe Up, a free all-digital checking account with mobile check deposit
- 1.00% APY on balances up to $15,000
- Online bill pay
- P2P mobile payments
- Budgeting tools
- No overdraft fees
- Fee-free ATM access
- Credit card with “card shutoff” tool
- Personal loans and student-loan refinancing
The creation of father-daughter team of Jay and Luvleen Sidhu (CEO and President respectively), BankMobile is an evolving banking-as-a-service platform. The subsidiary of Customers Bancorp built relationships with colleges and universities by helping them manage student fund disbursements in return gaining the opportunity to have these funds deposited in a no-fee BankMobile account.
With this arrangement “we acquire 400,000 new accounts per year at a cost of $10 per acquisition versus $300 to $500 per acquisition via a branch,” Luvleen Sidhu told The Financial Brand in an earlier interview. Revenue is generated primarily through debit card interchange fees.
The T-Mobile partnership is the first example of BankMobile’s plan to be the platform for other verticals that want to offer banking services without becoming a bank. According to Sidhu, the bank’s target market, in addition to students, is low- and middle-income Americans.
A T-Mobile Money account is very similar to Vibe Up but with two differences. First, T-Mobile subscribers can earn 4% interest on balances of up to $3,000 as long as they deposit at least $200 a month. (The account is available to non-subscribers.) And secondly, the “Got Your Back” feature covers overdrafts up to $50 for free. Funds can be deposited using mobile check deposit, by transfer from another bank, or direct deposit.
So far, BankMobile customers wishing to deposit cash, must convert it into a money order or cashier’s check and scan that with their phone.
“If BankMobile leverages a partnership with T-Mobile effectively, this combination could be successful,” observes Jim Marous, Founder and Publisher of The Digital Banking Report. “Despite BankMobile being a mobile-based bank, T-Mobile’s 5,000-plus locations — which might grow after a merger with Sprint — could effectively create a new national bank with thousands of branches almost overnight.”
2. Chime — Super Slick App
Category: Mobile banking and money management app (in partnership with the The Bancorp Bank)
Notable Milestone: 2 million account relationships
- No-fee, no-minimum transaction account
- Visa debit card; automatic savings; early-paycheck direct deposit
- Highly rated app that tracks spending, savings, and paying friends
- Daily balance notifications and instant transaction alerts
- Mobile deposit
- Free ATMs
- Split-the-bill feature
- Cash-back rewards for certain purchases and bill payments
- Cash deposits accepted at Green Dot retail locations
Often portrayed as the bank for Millennials, Chime wows them with its slick app and the absence of fees and minimums, and a “round-up” automatic savings feature common to many challenger banks. When customers make a purchase, the app rounds up the amount to the nearest dollar and deposits the difference in savings.
Chime’s success is notable in that it pays a paltry 0.1% on savings. Nor does it allow overdrafts and no line of credit is available. The app will let you write a check that Chime cuts and sends. Getting in touch with someone is not quick, according to several reviews: in-app will take two to five days, email longer.
Co-founder and CEO Chris Britt was quoted in The New York Times saying: “If you look ahead five years, there’s no way there will be a financial services industry that is charging consumers $30 billion a year in overdraft fees.” Chime makes its money from a cut of the debit card interchange fee.
In the spring of 2018, Britt said almost 40% of Chime’s users are routing at least part of their paycheck to Chime accounts, with “the majority [of direct deposit users] depositing their full paycheck,” according to BankRate.com. He also said that users average 40 transactions per month.
3. Finn — Chase Bank’s Millennial Play
Parent Company: JPMorgan Chase
Category: Mobile bank
- No fee checking and savings tied to a prepaid debit card
- Access to 29,000 free ATMs. Use emojis to rate purchases
- Track spending by time or category
- Send checks from the phone
- Mobile and direct deposit
- P2P service using Zelle
- 24/7 assistance available by in-app chat or phone
Finn rolled out nationwide in the summer of 2018, so it’s a newcomer in the challenger bank space. It makes this “must watch” list for two reasons. First (and this is pretty obvious), it’s JPMorgan Chase we’re talking about here. But more than having a huge brand presence and very deep pockets, Chase gets digital. As reported earlier, Chase has grown its active digital customer base by ten million customers to 48 million total and its active mobile customer base also by ten million customers to 32 million total.
Second, the availability of 24/7 phone support is a big differentiator from many fintech banking apps where phone contact is not available at all or very limited and customer response is slow, at best.
Finn is targeted to Millennials and Gen Z market segments. Chase is offering a $100 for opening a new Finn account (as long as you make ten qualifying transactions in the first 60 days). Importantly, Finn makes savings fun. It has several savings plan options including a “round-up” feature and lets consumers set their own savings rules. One example shown on the website instructs the bank to set aside $4 every time this account holder spends money in the food & drink category. This feature, as well as the weekly and monthly spending insights, are not available on Chase’s other mobile banking apps.
Although it’s largely a free account, there are a handful of fees for things like rush shipping of a debit card replacement ($5) and a 3% foreign transaction fee. And Finn currently pays a barely noticeable 0.01% interest rate on savings.
The money management tools have been described by some reviewers as good, but fairly basic for people with more complex expenses. And Finn has a similar drawback to other challenger banks — inability to accept cash deposits through an ATM, thus requiring people who work for tips to go through a cumbersome process to convert cash to a money order.
Like all challenger-bank apps, Finn is an endless work in progress. The fact that it is run separately from the rest of Chase, with many team members from outside banking, should enable it to retain a startup’s agility.
4. Marcus — Sucking Up Your Customers
Parent Company: Goldman Sachs
Category: Online bank
Notable Milestones: 2+ million customers and $35 billion in deposits.
- High-yield savings account
- High-yield CDs
- Short-term consumer loans
- Financial management (through the Clarity Money app, acquired by Goldman Sachs)
People may argue that Marcus doesn’t belong in a listing of challenger banks. It’s not a mobile bank and initially acquired customers through direct mail. However, clearly it is an online-only bank and has built the operation on advanced technology platforms using open-source software.
Whatever label you want to put on Marcus, it is a serious challenger with its no-fee unsecured loans and its high-rate deposit products an prospects for much more including robo advisory. That combination has propelled rapid growth of accounts loans and deposits. Marcus is already offering its savings products on the Clarity PFM app, BusinessInsider notes. Rate can beat rate, it’s true, but Goldman Sachs isn’t in the game to lose money. The lack of legacy IT and a legacy branch network with their attendant costs gives an edge to an already deep-pocketed player.
Marcus’ loans range from $3,500 to $40,000 at rates of 6.99% to 25%. The average loan in 2018 was $15,000 over four years with a 12% interest rate, according to Bloomberg BusinessWeek. That leaves plenty of margin room even with its online savings rate up at 2.25% (as of January 2019).
5. N26 — Platform Maestro
Category: Mobile bank
Notable Milestones: 2.3 million users and $1 billion in deposits.
- Checking/current account
- P2P transfers by phone or email (to other N26 users)
- Real-time push transaction notifications
- Money transfers into 19 different currencies via TransferWise
- Ability to set payment limits
- Mastercard debit card
- Personal loans
- Savings accounts
- Toggle debit card or foreign payments on or off
- Create up to ten sub-accounts (called Spaces) under one login to organize finances.
As testimony to the difficulty of cracking the U.S. market, The Financial Brand wrote in October 2017 that consumers would be able to sign up for a wait list and open an N26 account “beginning in mid-2018.” That wait list is still on the bank’s U.S. website. However, N26 is here in the U.S. with an office in New York.
The German-chartered mobile bank has been actively seeking a U.S. partner bank — one with a trusted brand name and the same focus on innovation. The fintech bank’s leadership says it will launch in the U.S. “sometime in 2019.” Interested consumers can join the wait list.
N26 takes a platform approach to banking. In Europe it partners with other fintechs for P2P money-transfers (TransferWise), savings (Raisin), investments (Vaamo), insurance (Clark), and lending (Auxmoney). It is expected that separate partnerships will be built for the U.S.
The bank uses a “freemium” model. The basic account is free but they upsell some services in a few premium accounts — both consumer and business. He also says the bank is “rebundling financial services” into one platform — overdraft, loans, P2P payments, foreign currency — out of one app.
And the name? 26 is the number of individual cubes in a Rubik’s Cube. The idea being that a complex problem can be solved in just a few simple moves when you know how, just like in banking and finance.
6. Revolut — The Amazon of Banking
Category: Mobile financial provider
Notable Milestones: 3 million customers — both consumers and businesses. Opening about 8,000 accounts per day. 1.2 million monthly active users. Monthly transaction volume $3 billion. Received European banking license in December 2018. More than 60,000 U.S. customers on Revolut’s waiting list.
- Checking/current accounts
- Three tiers of Mastercard debit card — standard, premium, metal
- Travel and phone insurance
- Direct debits
- Budgeting tools and spending notifications
- Spend money in 150 currencies at the interchange exchange rate
- P2P including notes and images; complete control over card features from within the app
- Allows customers to buy, hold and sell cryptocurrencies
- Launching commission-free stock trading soon
London-based Revolut is a frenetic combination of braggadocio and humility. It doesn’t even like to be called a bank. The four-year-old company began with an easier-to-acquire e-money license targeting currency exchange rather than current accounts. That strategy paid off as the upstart has shot past other U.K. challenger banks such as Monzo, Atom and Starling in numbers of customers in a much shorter span.
The company has added products at a blistering pace, sometimes resulting in service disruptions. As a result, the company is in the process of building an in-house payment processor and other systems. “This should drastically eliminate any service disruption as we scale to tens of millions of customers,” said CEO Nikolay Storonsky.
Thanks to its premium products, revenue has been growing for the financial upstart along with customers and transactions. Revenues stood at $16.9 million at the end of 2017, and the company said it broke even then, well before the premium accounts and cryptocurrency functions were added.
The banking license will be tested and sorted out first in Lithuania. After that they will expand it throughout Europe and in the U.K.
As TechCrunch observed, Revolut is bringing its app to America “with a combination of personal banking, crypto wallet and fee-free stocks trading.” When is it coming? Sometime in 2019 is about as close as it gets. Revolut has been looking for partners for some time in the U.S. and elsewhere. They have had a team of “international launchers” at work, according to a blog on Revolut’s website, but the company admits that “foreign regulation is very complex. … Striking partnerships in financial services takes a lot of time, especially when you work with the largest banks and payment networks in the world.”
Despite admittedly underestimating growing pains, Storonsky remains supremely confident: “With the banking license now secured, commission-free stock trading progressing well and five new international markets at final stages of launch, we are living up to our reputation as the ‘Amazon of banking’.”
7. SoFi Money — Join The ‘Waitlist’
Parent Company: Social Finance, Inc.
Founded: 2011 (Sofi Money Beta Launch, June 2018)
Category: No-fee Mobile banking account
- Functional for SoFi’s approximately 500,000 members
- Available on a “waitlist” basis for nonmembers
- Deposited funds are swept into six banks
- Single high-interest checking/savings account
SoFi Money was the brainchild Co-Founder and former CEO Mike Cagney, who oversaw the acquisition of online banking start-up Zenbanx as the means to broadening the online lender into digital banking. Ultimately, Zenbanx was shut down and Cagney left the company. But the idea persisted and came to fruition under Cagney’s successor Anthony Noto.
SoFi’s initial business was refinancing student loans. It quickly expanded into other product lines, including personal loans and mortgages. Subsequently, as described in an earlier article in The Financial Brand, the firm set its sights on both wealth management and checking accounts, using an all-digital banking model, with no physical facilities. The goal is to leverage advanced customer insight modeling to provide an experience digital Millennials aspire to.
Technically still in beta, SoFi Money includes features designed to appeal to SoFi’s high-earning target demographic. For example, SoFi Money combines checking and savings into a single current account with an interest rate well above typical bank checking accounts. SoFi Money is offered through SoFi Securities, and funds deposited into the account are swept into one or more of six participating banks, which thus puts the funds under FDIC insurance. The account’s debit card is issued by WSFS Bank.
SoFi Money is integrated with other SoFi products, allowing customers to monitor loans and deposits. “We can use machine learning and data analytics to provide you with information about others that are your age and that are in a similar income bracket and what they’re doing from a savings standpoint and from a spending standpoint,” says Noto.
8. Varo Money — Almost OCC Approved
Category: Mobile banking/money management app in partnership with the The Bancorp Bank.
Notable Milestones: First mobile-only bank to get preliminary approval for a national bank charter.
- High-yielding savings
- Automated savings tools
- Early direct deposit
- Fee-free ATMs
- Cash deposits at Green Dot merchants
- Personal loans up to $25,000
- AI-based spend tracking
- Live customer service seven days a week
In a crowded field of challenger banks Varo Money stands out because it wants to operate as Varo Bank, N.A. It has a little over a year left to accomplish that. In September of 2018, Varo Money became the first mobile-only bank to receive preliminary and conditional approval from the Office of the Comptroller of the Currency to become a national bank.
The wrinkle is that the FDIC has not given its blessing. Varo has since been making adjustments to satisfy that regulator and then plans to reapply.
Unlike many other “point-solution” fintechs, Varo isn’t just a checking/savings account with a cool app. It offers loans, insurance, and the ability to link other bank account information. Like most challengers, Varo Money is an almost totally fee-free account, earning revenue on debit card interchange fees and interest from loans.
According to CEO and Co-Founder Colin Walsh, the essence of the Varo design is to give consumers the tools they need to see their whole financial picture; to be able to track expenses and understand where their money is going in a very simplistic way.
The app’s Forecast function uses machine learning to detect all the upcoming bills as well as when a person’s next paycheck is coming. And so the app shows them how much they can comfortably save or spend for the rest of the month. To be accurate, users must be paying bills through the app (Varo sends out checks for them unless it’s done online), and link other banking accounts to the app.
Deposits can be direct deposit, mobile deposit or transfers. But consumers can deposit cash only by going to a merchant that is part of the Green Dot network.
Walsh feels Varo Money is particularly suitable for the 70% of the people they initially surveyed who are “hands-off creditworthy Millennials.” People who don’t spend a lot of time managing their money and frequently find themselves in what Walsh calls “cash traps” — not enough money to pay their bills because of some unexpected expense.