Getting to the Point on Challenger Banks

When it comes to the neo- and challenger banks, there’s no shortage of skeptics. Most of the critics offer some version of, “who needs another one of these?” or “they’re all the same,” or “these neobanks won’t survive.”

They’re wrong.

In fact, we think the neobank/challenger bank space in the U.S. is one of the most exciting categories in fintech.

“Who needs one?”

Depends if you define the market as those people who are unsatisfied with their current bank or who pay exorbitant fees for bank services like overdraft. If so, that would be about 150 million US consumers. If you think the debit market will become decoupled from primary checking accounts — as we’ve started to see happen with Square and Venmo — it’s basically everyone.

“They’re all the same.”

If that’s the case then so is every bank in the U.S. The simple fact that you can open up one of these accounts online differentiates them from the vast majority of incumbent financial institutions, where you need to find a branch and go inside to open a new account. Bring your mask.

“These neobanks won’t survive.”

The ones that can differentiate themselves through product experience — by solving a use-case issue (such as Dave or Propel) or by defining high value segments — represent a significant threat to incumbent banks as they are competing on an axis that the incumbents don’t cover. If the question is survival, we’re far more skeptical of the thousands of banks in this country that have neglected to update their product offerings since the early days of the Reagan administration.

Meanwhile, the opportunity is massive: the debit card market is one of the largest and most competitive parts of the consumer financial services industry globally. Nearly 200 million Americans currently have debit cards — that’s 90% household penetration — and Americans spend over $3 trillion annually using these cards (approximately 67% of the total card spending in the U.S.). Even with that penetration, the industry has grown rapidly for the last decade — with nearly 10% annual growth as digital payments become increasingly omnipresent. Since debit is a lower cost payment method than credit, most industry analysts expect debit transaction growth to continue to outpace credit card payments, especially as we see declining check usage in the U.S.

As for younger consumers, debit’s penetration with “Gen Y” even more heavily favors debit over credit (in part because of marketing restrictions imposed by the CARD Act). There are approximately 77 million consumers in this demographic alone. The majority of the “heavy debit” users in this country — who put more than 75% of their spending on debit — are under the age of 45.

Obviously, debit is still a large and under-addressed opportunity, especially with a younger generation of consumers.

It is really too bad that younger, tech-savvy consumers love the nostalgia of spending time in bank branches, remain big on offline signups, like paying fees to monolithic corporations and really appreciate the anodyne card designs and non-existent reward programs on offer from the incumbents… (that’s a joke; they don’t like these things.)

Into this opportunity steps Point, a company we invested in last year. We met Point founders Patrick, Sid and Kenan last year after an introduction from our friend Jeff Morris at Chapter One. This team was laser-focused on creating the most beautiful, engaging and pro-consumer spend experience available in the world. The speed at which they’ve built, refined, rebuilt and strengthened their technology stack, integrations and product experience is simply breathtaking. We’re thrilled to see the newest launch of Point go live today and are excited to be along for the ride!