Tuesday, December 6

Banks Take on Neobanks on Fees and Technology

In business, sometimes, the strategy is to be first — jumping into markets with new products and services, striving to capture consumers’ mind share, wallet share, and loyalty.

And sometimes, the strategy can be to follow, but to be better and bigger, too.

In financial services, we’re seeing that the traditional financial institutions (FIs) are, in many key areas, eliminating the competitive advantages that had not all that long ago been forged by the neobanks.

The small, digital-only upstarts, at first glance, run leaner than their larger brethren, unburdened by legacy tech, by brick and mortar operations, and thus can duplicate some traditional FI offerings without the attached fees.

It can be argued that the neobanks gained some ground with consumers by eliminating overdraft fees. Back in June 2021, we saw a salvo fired by Ally Bank, which eliminated overdraft fees on all accounts. By the end of that year, traditional firms such as Capital One began to eliminate overdraft and NSF fees from accounts; JPMorgan followed by giving customers more time to cure overdrafts; other banks such as Citi have eliminated the fees entirely.

To be sure, there’s a bit of mindfulness on publicity at play here — and an effort to stay ahead of regulatory action. After all, the Consumer Financial Protection Bureau said earlier this year that, as banks collected billions of dollars in overdraft fees, they’d effectively priced some consumers out of being able to afford traditional banking services.

More recently, the CFPB has fined Regions Bank a total of $191 million in customer redress plus a civil monetary penalty tied to overdraft fees.

In the past several days we have seen further forays by the marquee names in banking encroach on neobanks’ territory:  JPMorgan said this week that it would offer, for some of its customers, early access to their direct deposits.

And here, we note, is that there’s some competitive disadvantage for the digital players – chiefly in the form of scale.

And capital.

After all, it takes money to make money. And up until the huge volatile swings in the market, the fact that until the cost of debt and the cost of capital started clipping VC wings, the neobanks could depend on a steady flow of dollars to back their innovations. Debt is increasingly showing up in the funding mix, as noted here last month — and debt, of course, has its costs. Venture debt in the U.S. totaled $17.1 billion for the first half of this year, up 7.5% from the first six months of last year, according to PitchBook Data. VC funding totaled $147.7 billion for the same period of 2022, down 8% from 2021.

The banks, by way of contrast, are flush with capital, flush with checking and debit card account openings and on credit card fees, too — which in turn are the spigots that can fund their new initiatives (even if they lose money for a while). They have the data and the decades of experience, in another example, to move into BNPL, even in the midst of turbulent macro headwinds.

And eventually, being first?  Well, that winds up mattering less than who winds up sticking around.

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