What PerkStreet’s Demise Means For “Neobanks”

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For this post, we’re joined by Matt Harris, managing director at Bain Capital Ventures, who breaks down PerkStreet’s demise and what it means for other alternative banking players.

By Matt Harris, Managing Director, Bain Capital Ventures

This past week has seen a metric ton of vitriol poured on the management team of PerkStreet, an ambitious startup “neobank” that announced it was going under.  None of their customers will face losses on their deposits, nor necessarily interruption of service (most can continue as Bancorp customers), but their accumulated rewards (apparently around $1M) will not be honored.  This prompted a respected pundit to call them “slimeballs” and threaten to strangle them … pretty high stakes for some earnest entrepreneurs who were trying to change the banking industry.

More interesting has been the commentary from the fintelligensia who have been watching these “neobanks,” the term generally used to refer to the non-banks offering banking services like PerkStreet, Moven, GoBank/GreenDot, Bluebird/Amex and Simple (NB: I am an investor in Simple and a fan of Moven). As somewhat of an insider here, I can offer some perspectives on what the demise of Perkstreet means, and what it doesn’t mean.

To begin, we need to define the competitive framework a bit.  The major divide is between those players who are targeting the un- and underbanked (Bluebird, GoBank, assorted other GPR players), and those who are targeting consumers who are currently fully banked but dissatisfied.  I assume product managers at Amex and GreenDot would dispute the contention that they are focused on a lower socioeconomic demographic, but I would submit that distributing through Walmart and Rite Aid, plus having 10-day holds on remote deposit capture checks, says something about the customer segment you’re expecting.

The un-/underbanked pitch is about a good enough product for a deeply underserved segment, and most of the competitive advantage comes from nailing the marketing and distribution. The products for the merely dissatisfied face a higher bar. They need to appeal to a specific segment with a defined set of needs, and meet those needs well enough to get them to switch banks. Given that the average bank customer stays loyal for nearly 10 years, and in light of how hard it is to transfer vital information like bill pay recipients, etc, this is no mean feat.

In the days when yield was a driver, ING Direct did a remarkable job in driving customers and deposits, though they rarely earned the status of the primary DDA provider.  PerkStreet targeted a similar demographic, namely those who are interested in switching banks to gain an economic advantage (in their case, rewards). This was always going to be a losing play, in my view. That strategy suffers from the same logic as Groupon: when you target customers who are inherently price-oriented rather than loyal, you will end up with disloyal customers and therefore less valuable customers.  When you add the “tax” of a rich rewards program on top of that, it’s a double whammy.  Put simply, the cost to acquire will always outweigh the lifetime value.

Simple and Moven target a very different segment:  the 21-35-year-old, technologically sophisticated, mobile first, fee sensitive and experience oriented psychographic.  Just look at the twitter feed for @simplify to see evidence of this. Simple’s customers identify with the (non)bank, and are rooting for it.  Brett King’s cult of personality (in a good way) at Moven is producing similar results.  People have been trained to choose the bank that has the closest branch to their residence, but now they can choose a bank the way they choose other brands they associate with: because they share the values of that brand and they admire the excellence of the product and the accompanying service.  Admittedly, and deliberately, this is not for everyone, but it is for a coveted set of Apple-purchasing, Starbucks-drinking, Ideo-admiring, Uber-using, Nest-thermostat adjusting, AirBNB-frequenting early adopters.  Given how much of the growth (nearly all) for Simple and Moven has been viral and free, and how valuable this segment is once you get them, there is little question about the core economics of these companies.  The only remaining question, which is quite real and important, is how big this segment will ultimately be.

Some of the analysts have pointed out that the infrastructure costs imposed by processors and banks make it impossible for these neobanks to make money.  I can tell you that this contention is false.  Bancorp is an extraordinary partner to these fledgling companies, and the economics get very attractive as you scale.  If we re-entered a period where rates were more than zero, that would be a highly profitable kicker.  While the exit of TxVia to Google took out one excellent processing alternative, FIS has raised its game considerably in the past two years, and Galileo and i2c are very progressive companies.  The only remaining friction point is the onboarding process, as detailed in this blog post, but I believe this will be largely mitigated in the next few quarters.

Focusing on brand, product excellence and outstanding service, instead of customer bribery, and building on top of best-in-class infrastructure providers can be a profitable and winning strategy for a banking service provider like Moven or Simple.  From there, it gets even more interesting.  The reason why these companies are important to mainstream banking is the long-term impact of the migration of this segment to these neobanks.  As these folks begin to seek mortgages, will they tack back to Citibank?  As they begin to look for investment advice, will they call Merrill Lynch?  Methinks hells no.

Even more disruptive is the mobile payments opportunity.  Over the past three years, I’ve watched with bemusement as the banking industry chased the mobile wallet will o’ the wisp like a bunch of six-year-olds playing soccer.  I’ve met with dozens of retail bankers, and I always ask why they are so obsessed with creating a mobile wallet when they already have real estate on a majority of their customers’ smartphones with their mobile banking app.  Mobile banking apps come with high levels of authentication and low cost payment rails baked in, and in the case of Simple’s customer base, are used literally every day.  The traditional retail bankers either laugh or grimace, and try to explain to me that the payments people don’t really talk to the DDA people, that they run on different systems and that the mobile banking features and functionality roadmap is already set for the next 30 months.  So I’ve stopped asking, and just settled in to watch the neobanks, with their modern, unified code bases and agile teams, do an end run around the mobile wallet cluster$&*@.  I welcome you to sign up for Moven or Simple and enjoy the show with me.