Community banks are essential:
The fact that community banks can’t, by definition, outgrow the communities they serve is an important counterbalance for an industry that often treats people like numbers in a spreadsheet.
But how do we define a ‘community’ in the digital era, when we are now longer bound by geographic constraints?
Rob Curtis, CEO of Daylight, shared with me the following criteria for identifying and defining a community that is a good fit for a profitable digital banking play:
The community has to self-identify as a community, for the long term. Certain groups — freelancers, students, etc. — may be bonded by common functional needs, but those bonds are temporary because these groups don’t self-identify themselves as part of a permanent community.
The community has clearly identifiable and unmet product needs. If your product isn’t solving unique and meaningful pain points for the community then it’s just an affinity marketing play.
The community has clearly identifiable and unmet emotional needs. It can’t just be functional. There has to be an emotional need that you can satisfy. This helps you build your brand and improve customer retention.
The community has self-organizing, purpose-driven groups within it. These groups, if they value your product and connect with your brand, become an enormously important (low cost) acquisition channel.
I was curious to learn more about how fintech founders are applying these principles and building the next generation of community banks.
So I asked them.
I had the opportunity to interview the following founders:
I asked all of them the same three questions. Their answers, edited for clarity and length, are below.
1. Let’s start with the elevator pitch. Which community are you focused on serving and what product(s) have you built for them?
Mike & Evan @ Gather: Gather’s mission is to empower couples to have healthier conversations about their money. We’ve built a real-time finance engine that helps couples take control of spending with shared budgeting, trends, and thoughtful automation.
Rohit @ Stilt: Our primary target market is immigrants. That includes everyone who has moved or is moving to the U.S. We primarily focused on visa holders in 2016, when we launched, but over time as we got to know more communities we added them to our target market — DACA holders, refugees, asylum applicants, and green card holders. 90% of our customers are between 18 and 35 years old.
We started by doing unsecured personal loans, but we have since added a bank account (for existing customers only right now). In addition to the core lending and deposit product, we offer a host of other features. We can help them build credit, even if they don't take a loan with us. They can send money back home; we are live in 10 countries right now (soon 15 countries).
Rob @ Daylight: Daylight is the first and only digital banking platform in the U.S. designed specifically for LGBT+ people by LGBT+ people. Banks aren’t looking at the underlying problems that LGBT+ people have with regards to their finances. We break that down into three parts. Number one, it costs more to be gay — healthcare, mental health support, transition, having children, retiring to safe locations. Number two, once we are in the financial system we struggle to catch up — our financial literacy rates are lower, we struggle more to get loans and pay more for ones we get. And number three, all of that compounds over time — our homeownership rates are significantly lower than non-LGBT+ people and about half of us worry about having enough money to retire on (which is 40% higher than non-LGBT+ people).
The product we’ve built over the last 10 months is a mobile app with a prepaid spending card (which soon be migrated over to a checking account and debit card). There are two additional aspects to the product that are highly differentiated. First, we’ve built community and social features into the product. LGBT+ people learn about money from each other, so we’re allowing them to do that in a productized way. Second, we have a network of live financial coaches in the app that will help customers think about money mindset, about forming good financial habits, and improving savings rates.
2. A phrase that I heard when writing my last newsletter on this topic – “no problem is too small” – really resonated with me as a good guideline for community-focused fintech companies. There are a lot of problems in financial services that seem small in the eyes of big market incumbents that are focused on serving all customer segments, but are actually monumentally important problems for specific communities. For your community, what are some good examples of “small” problems that you are trying to solve?
Mike & Evan @ Gather: Research says when couples approach their finances as a team effort they are more likely to meet their goals. There’s a lot of other apps out there targeting both personal and couple finances but they all approach the problem like it’s a finance problem. We truly believe that by unlocking couples to have healthier conversations about their money their relationship gains an unfair advantage.
Rohit @ Stilt: We see lots of unique problems. For example, we get a lot of Filipino teachers moving to the U.S. to teach at schools and to come here they have to take out loans to pay for flights, lodging, and a fee to the agency that placed them in the job. These loans are typically at very high, payday loan-like rates. Our loans can be used to refinance the debt from those loans at a much lower interest rate.
Another example — we had a Cuban immigrant working in the New York Public School District. She didn’t have enough money to file for her visa, which typically costs somewhere between $3,000 and $5,000. That’s not a use case that most banks would even think about, but the impact that $5,000 can have is absolutely massive. It’s the difference between her staying in the U.S. or going back to Cuba, which could be a difference of several million dollars in income over the course of her life.
Rob @ Daylight: The ability for trans and non-binary folks to put their name on their card. Here’s why this is an important issue — if you’re at a 7-Eleven at 11:00 at night and your card says Steve on it, but you’re presenting as Vanessa you are going to be subject to increased levels of violence. We’ve seen some initiatives at banks try to solve this problem, but it’s a terrible user experience. You have to continually see and use your deadname, even after you get your real name on the card. We solve this problem end to end — you sign up with your legal name for KYC and that’s the last time we use it. Every touchpoint from there will have your real name.
Here’s another one — many trans people have multiple credit reports and scores. Why? Because they have a single social security number, but multiple genders and names. So they end up with partial credit histories floating around in the system. This would traditionally have been seen as an edge case not worth worrying about, but that’s no longer true. There’s 1 - 1.5 million trans people in America. One of the frontiers that we want to start looking at is merging credit histories for people who have the same social security number but multiple genders and multiple names.
The headline for a community bank has to be ‘we’ve got your back’. And that means rolling up your sleeves and focusing on some of the unsexy stuff like this.
3. Given your intense focus on your community, I’m curious how you think about your business model and growth trajectory. Inherent to the community bank model is a trade-off – a smaller TAM, but a more engaged and loyal customer base with potentially higher revenue per user and a more valuable (orthogonal) data set. How do you think about this for your company?
Mike & Evan @ Gather: Our target audience has growth loops built right into our business model: gain 1 customer means they’ll invite their partner to join the conversation. We’re seeing switching costs are at an all-time low right now. However, when your partner joins the fun we’ve created life-time value that makes our product extremely sticky.
Rohit @ Stilt: All of today's big banks started by focusing on a very small segment of the population within a specific geography. Every niche bank needs to start by focusing on unique use cases for a specific population and nail those first.
Big banks have trillions of dollars in deposits and their primary customer base is going to continue to work with them, but younger generations have different values and they are going to put their money with the companies that align with those values.
Neobanks today, including us, will continue to chip away with those emerging generations and expand our customer base as we solve for more and more use cases.
Rob @ Daylight: We’ll know we’ve succeeded when we’ve got our first ‘Daylight baby’.
Here’s the lived experience for having a child if you’re an LGBT+ person — you’re going to need money ($55,000 - $130,000). You’re going to need to prepare yourself emotionally and prepare your relationship. And you’re going to need to figure out if you’re going to adopt or do surrogacy. It’s overwhelming.
Customers want help having a family. They don’t want help with a component of that. And so we want to help them with the money. We want to help them with the mental health and relationship preparation. And we want to help them connect to the right adoption or surrogate provider.
If I can close a surrogacy referral on my platform, I’m going to make more off of that than I am on interchange for quite some time. We’re taking a much broader view on how we can create value for our customers.
I want this, over time, to be the user interface layer for the entire LGBT+ lived experience. I want to focus on share of lifestyle, which will include share of wallet, share of health, share of family, and share of leisure.
(Sourced from This Week in Fintech)
Stay single or pair up?
Visa abandoned plans to acquire account aggregation provider Plaid. The move was most likely determined by Plaid, whose enterprise value has grown prodigiously over the last year as the fintech category exploded, and who now faces a hyperactive IPO and SPAC market.
Short take: M&A activity is a useful heuristic for figuring out which sectors in financial services are growing and which are shrinking. In a contracting market it’s eat or be eaten. In an expanding market an antitrust lawsuit can be a blessing in disguise.
Mortgage is 🔥
Embedded lending and banking services platform Blend raised a $300 million Series G. Neat Capital, a home financing fintech, closed a $22.5 million Series B. Brace, a digital mortgage platform, raised a $15.7 million Series B. Mortgage marketplace OwnUp raised $12 million. Real estate securities marketplace Lex raised $6 million in seed funding. LoanDepot, a mortgage lender, filed for IPO. Home Point Capital, a mortgage provider, filed a registration statement for an IPO. And Spruce launched a new tool for closing home sales.
Short take: Finally! The entire mortgage industry badly needs to be reinvented. I’ll be writing about this space more soon 👀
The Coming Subscription Fight
Minna, a subscription management service for banking apps, raised $18.8 million.
Short take: In 2019 people spent $640/year on digital subscriptions, up 7% from 2017. There’s no way, with all of us locked in our homes, that this trend didn’t massively accelerate in 2020. Consumers’ lives now revolve around subscriptions and there is a role for someone to help them manage them. The question is whether banks will be able to seize this role or whether it will belong to someone lower in the stack (iOS and Android are already very good at this).