In the business world, sometimes the strategy is to be first – to enter markets with new products and services and strive to capture the attention, wallet and loyalty of consumers.
And sometimes the strategy can be to follow, but also to be better and bigger.
In financial services, we see traditional financial institutions (FIs) eliminating in many key areas the competitive advantages forged by neo-banks not too long ago.
The small, digital-only upstarts run at first glance more streamlined than their larger brethren, unencumbered by legacy technology and brick-and-mortar operations, and can therefore duplicate some traditional FI offerings without the associated fees.
It can be argued that the neobanks have gained some traction with consumers by getting rid of overdraft fees. Back in June 2021, we saw a salvo from Ally Bank eliminating overdraft fees on all accounts. By the end of the year, traditional firms like Capital One began removing overdraft and NSF fees from accounts; JPMorgan followed by giving customers more time to cure overdrafts; other banks like Citi have eliminated fees entirely.
Sure, there’s a bit of mindfulness involved here in terms of public relations — and an effort to stay ahead of regulatory action. After all, the Consumer Financial Protection Bureau said earlier this year that as banks raked in billions of dollars in overdraft fees, they effectively blocked some consumers from being able to afford traditional banking services.
More recently, the CFPB fined Regions Bank a total of $191 million in customer compensation plus a civil fine related to overdraft fees.
In recent days we’ve seen more forays into neobank territory by the big names in banking: JPMorgan said this week it would offer some of its clients early access to their direct deposits.
And here we find that there is a competitive disadvantage for the digital players – mainly in the form of size.
After all, you need money to make money. And to the huge volatility in the market, the neo-banks could rely on a steady flow of dollars to support their innovations until the cost of debt and capital started clipping VC wings. Debt is increasingly appearing in the funding mix, as mentioned here last month – and debt, of course, comes at a cost. According to PitchBook Data, venture debt in the U.S. totaled $17.1 billion in the first half of this year, up 7.5% from the first six months of last year. VC funding totaled $147.7 billion for the same period in 2022, down 8% from 2021.
In contrast, the banks are capital-intensive, with checking and debit card openings and also credit card fees — which in turn are the spigots that can fund their new initiatives (even if they lose money for a while). ). They have the data and decades of experience to jump into BNPL in another example, even amid turbulent macro headwinds.
And finally being first? Well, that ultimately matters less than who ends up staying here.
We’re always looking for opportunities to partner with innovators and disruptors.