A neobank can be defined as an internet-only bank, a virtual bank, or a digital bank. But what defines their success?
To start, let’s look at two different types of neobanks. The first is the neobank that’s actually a bank. That’s us at Quontic.
Type two is the neobank that’s simply a fintech marketing for consumers to open up a checking account or savings account on their mobile app. They offer certain benefits like getting your paycheck two days early if you sign up for direct deposits, or up to $100 overdraft leeway without charging you, or the ability to see your credit score, or budgeting tools, or what have you. These are valuable features, but does that compensate for the fact that those neobanks aren’t actually banks?
‘Type two’ neobanks have a bank in the background where the customer deposits go. You’ve heard of software as a service (or SaaS)—well, these background banks offer something called ‘banking as a service’ (or BaaS) for these neobanks. And Chime is the poster child.
Chime has a BaaS bank behind them, and like other ‘type two’ neobanks, they’re a mobile app, not a bank. The reason they are apparently “succeeding” is because they’re amassing millions of customers. On the one hand, Chime and other non-bank neobanks have hit the jackpot when it comes to marketing. Their customers are gig-economy worker millennials who are tired of the big bank behemoths that charge fees, apply minimums, and don’t care about their customers.
But on the other hand, Chime and other non-bank neobanks have limited revenue sources. One such source is called an interchange fee. When a customer opens up a mobile checking account within the neobank’s mobile app (i.e. some bank in the background that’s just white-labelling to the neobank), every time that customer swipes their debit card, the BaaS bank earns an interchange fee. Then that bank shares the interchange revenue with the neobank. That appears to be the neobank’s primary revenue driver.
So everybody’s asking: Will the non-bank neobanks ever turn a profit, and does that even matter? Some would say that Facebook originally had no revenue; now look at them. Amazon didn’t make much money initially; we see where they are. On the contrary, we had Pets.com; they made money but not enough. Same with theGlobe.com; they had a billion-dollar market cap and no revenue!
That’s where Quontic stands apart in the world of neobanking.
Not only are we a neobank—a digital-only bank—but unlike the ‘type two’ neobanks, who don’t have a viable source of sustenance and have questionable longevity, we are also a Community Development Financial Institution (CDFI). We take the deposits that we aggregate online-only and use them to make loans in low-income communities and to low-income households around the country. There isn’t another neobank that can tell that story.
We are helping low-income families achieve the dream of homeownership, and we’re doing it as a neobank—online.
Do you, as a customer, care what I use the money you deposit at my bank for? If I use it to fund the oil and gas industry, or to fund firearms manufacturing? Some people are socially conscious, and so it might be valuable for them to know that they’re depositing their money at a bank that not only pays them the amongst the highest interest rate in the market on that checking account (more on those products in my next post), but also uses their money to help low-income families achieve the dream of homeownership.
Primarily we serve three subsets of low-income lending: The first is that we lend in low-income census tracts in an effort to revitalize communities that are underbanked. The second is our lending to the truly low-income, low-wealth borrowers. In addition to our proprietary Community Development Loan products, we also use FHA loans to accomplish this goal. It’s amazing—with FHA loans we can provide up to a 96.5% loan-to-value on the purchase of a home. We can oftentimes also layer on top of that grants and forgivable loans to bridge the down payment and closing costs that low-income borrowers have a difficult time putting together. The goal is to get them between 96.5% to 100% covered. On top of that, in order to get people in this target market ready for homeownership, we also do a fair amount of financial literacy education and counseling for first-time homebuyers.
The other universe of people we lend to is those who are indeed low-income, and thus underbanked, but may have equity in their home or other resources, such as family gifts, to fund a reasonable down-payment on a new home. These include seniors, small business owners, gig-economy workers, minorities and immigrants who may have good credit but struggle to document sufficient income conventionally—because being low-income doesn’t represent the entirety of why a bank should lend to them.
We designed our Community Development Loan products for these customers, and offer them to owner-occupants (people buying a home for their residence), and to those looking to build net worth by acquiring an investment property. Owning real estate responsibly is one of, if not the best, ways to amass wealth in this country, and we do our best to encourage that. One way we accomplish this for low-income borrowers looking to buy an investment property is to focus on the income that the property generates (rather than income that the borrower generates), and we can make a loan that way—safely and responsibly.
In short, Quontic is a neobank bank and a CDFI with a mission to serve low-income communities and households by lending out our deposits safely and profitably. And so even though we don’t have as many customers as Chime, our business model has a double bottom line—sustainable profits for long term growth, and community building!
Quontic is the sustainable neobank. We may not be as big as some of the other neobanks, but we’re likely to be here tomorrow and the tomorrow after that.