Community bank
getty

Fintech startups like Chime, Aspiration, and Daylight are emerging to take on traditional banks–that’s not new news. What many people don’t realize is how they’re changing the definition of “community” in banking.

The common thread between many of these challenger banks is their focus on specific market segments. Today, there are segment- or affinity-based challenger banks for:

Environmentally-conscious consumers. Fintechs like Aspiration (with nearly 1 million customers since its launch), Ando, and Greenpenny are committed to fighting climate change. They personalize their product offerings with features like cash back on purchases from firms with environmentally friendly policies and debit cards made from renewable materials or upcycled plastics.
African-Americans. Dedicated to closing the racial wealth gap, OurBanc, Greenwood, and First Boulevardcater to the unique financial needs of African-American consumers. First Boulevard, for example, offers Cash Back for Buying Black(TM) with up to 5% cash back on debit card purchases at participating Black businesses.
LGBTQ consumers. Daylight provides LGBTQ consumers with debit cards in their preferred names, even if they don’t match their legal identification. In addition, Daylight connects members with a financial coach to learn more about how their identify impacts their money, and to get advice and guidance from an expert in LGBTQ money matters.
Gig workers. Fintechs like Qwil, Oxygen, and Lili serve gig economy workers who have unique banking needs like: 1) Inconsistent and/or unpredictable income patterns; 2) Credit needs; 3) Health (and other) insurance needs; and 4) Tax requirements.
Young physicians. With high debt-to-income ratios (thanks to outrageous student loan balances) and only moderate income as a resident or newly-practicing doctor, young physicians are often turned down for loans from traditional institutions. Panacea Financial was co-founded by two physicians to address the needs of medical students, residents, and attending physicians.
Disabled consumers. People with disabilities can’t accumulate more than $2,000 in assets without risking the loss of some of their benefits. To address this issue, Purple’s ABLE account lets its customers optimize which account is used for qualified disability expenses (transportation, medical, etc.) and automatically moves funds from their checking to the Purple ABLE account.

Other examples of affinity-based fintech startups include Nerve serving musicians’ banking needs, Cheese serving Asian-American consumers, and Karat Financial, a fintech for the creator economy.

The dictionary defines affinity as “a spontaneous or natural liking or sympathy for someone or something.”

While the segments being served by the fintechs mentioned above may be affinity groups, it’s not their “natural liking” or “sympathy for someone” that makes them attractive banking segments–it’s their unique banking and financial services needs.

MORE FOR YOU

Geographical-based financial institutions–of which most are, even the megabanks–serve a wide swath of affinity groups. This makes it difficult for them to: 1) identify the unique needs of specific consumer segments, and then 2) develop and deploy products for each segment.

In effect, community is no longer synonymous with geography.

Customers of niche-focused fintechs are better examples of “communities” because of their shared needs. Affinity is the new community.

The state of California recently prevented Chime–a fintech serving the sizable niche of low- to middle-income consumers–from using the words “bank” and “banking” in its marketing materials.

As a result, we have a dilemma: what do we call fintechs like Chime, Aspiration, and Current? “Challenger banks” and “Neobanks” have the word “bank” in the description, which violates state and national regulations.

I propose we call these companies “community fintechs.

We have financial institutions called community banks, so why not refer to these startups as community fintechs?

Diversification is Key to Community Fintechs’ Growth

Emily Man of Redpoint Ventures points out that community fintechs are thought to have limited addressable markets, but she claims that they benefit from:

Network effects which lead to low customer acquisition costs;
Strong community alignment that reduces customer churn; and
High propensity to generate engagement and primary institution status that leads to higher revenue per customer.

I agree with the first two points, and the first half of the third, but I’m not sold that community fintechs will necessarily have higher average revenue per customer (or “user” as the VCs like to call people).

As of now, few (if any) community fintechs are doing anything from a lending perspective, and if they are, it’s just a credit card offering (which a lot of people think are dying off thanks to buy now, pay later programs).

In order to achieve higher ARPU, community fintechs will diversify outside financial services.

And they’ll be well positioned to do so.

Many banks and credit unions have tried to create new revenue sources outside of traditional financial products, but have struggled because they don’t understand which segments of their customer base want which products and services.

With a narrow focus on a particular segment of the market, community fintechs will be better positioned to understand which non-financial products their communities want–and will be better positioned from a technology-perspective to integrate with partners to provide those products and services.

Neobank Revolut is a good example of a fintech already launching this tactic with its plan to offer travel services to its customers. But as a general market challenger bank–i.e., not a community fintech–Revolut with struggle to gain traction because the digital travel market is mature with well-ingrained behaviors. Without a segment-based focus, how will Revolut differentiate?

The key to community fintechs’ growth is finding adjacencies–non-financial products and services that meet the unique needs of their community.

A community fintech focused on young parents, for example, might launch, acquire, or partner with a kid’s clothing subscription service. In essence, the key to community fintechs’ growth is embedded finance and embedded fintech.

Embedded finance forecast
Source: Lightyear Capital

We need a new label for these fintechs because it’s getting to the point where traditional banks and credit unions are the challengers, not the startups. To compete, community-based financial institutions will need to:

Re-focus on products versus experience. The obsession with “customer experience” is misguided. Improving the customer experience of an inferior product is like bolting an escalator to a horse buggy. Is it innovative? Sure. Is it a good use of limited resources? No way. Generic deposit and credit products are the horse buggies of banking.
Re-ignite new product development capabilities. For the past 30 years or so, community-based financial institutions have basically outsourced new product design and development to their technology providers. The vendors develop tech platforms designed to support a wide range of institutions–not cater to the individualized product needs of specific segments.
Re-define their charters. Credit unions’ re-chartering of the past 15 to 20 years from select employee groups to community charters was a poor strategy for some. To some extent, community fintechs are what those credit unions were before they refocused their charters. Neither makes a profit (that was a joke). Prediction: Many credit unions will retreat from community charters and, in effect, try to become community fintechs.
Re-think who their community is. Are all community banks doomed? No–far from it. Some are in communities that have–to a certain extent–unique (or differentiated) needs. A community bank in east Texas serving a population heavily dependent on the oil and gas industry may find unique product needs in that community that a community bank in the suburban New York City wouldn’t find in its “community.”
Find synergies on the commercial side of the coin. One potential advantage that established banks may have in fighting off the community fintechs is their commercial lending relationships. Many community banks have developed deep knowledge of certain industries thanks to their lending business. Leveraging this into a community- or affinity-based strategy on the retail side may be viable approach for community banks.

Read More