Eyal Lifshitz is Founder and CEO of BlueVine, the leading provider of small business banking.
2021 was a record-setting year for fintech investments and exits as digital banking continues to draw a lot of attention.
Fintechs in the banking and banking-adjacent spaces raised piles of cash this year, and some enjoyed successful exits (Nubank went public in one of 2021’s biggest IPOs). In tandem, countless businesses—fintechs and companies you may not expect—recently added, or are in the process of adding, banking capabilities.
A search for “banking lead” or “head of banking” on LinkedIn renders a long list of job postings of companies searching for talent, hoping to cash in on the sector. Investors are bullish, too. Another bank for another segment raises capital seemingly every day. There are banks for creators, for gig workers, for kids and teens, and many other segments.
This is unsurprising. The North American digital banking market is predicted to reach a valuation of more than $800 billion by 2026. With the advent and proliferation of banking as a service (BaaS) platforms, it’s never been easier for nonbank companies to launch banking products like basic checking accounts.
We’re beginning a race that’s bound to become a marathon, and some of these players may turn out to be amateur joggers. It’s much tougher to navigate banking than it looks, and the distance to the finish line is incredibly far.
To succeed in such a complex and competitive space as banking, you need more under your belt than intent and product know-how. Like a good marathon runner needs a coach, nutrition and cross-training, digital and neobanks need deep expertise in infrastructure, risk, and compliance servicing, and a laser-focus on a user segment—not to mention significant capital and a model that can outrun the competition.
Here’s what newcomers must understand to become ultramarathoners in the digital banking race:
Debit Card Is Step Zero
It’s easy for companies to launch bare-bones checking accounts with transaction activity, a debit card and a companion mobile app. However, this is a basic function, not an attractive banking offering.
While customer needs depend on your user segment (more on that later), at the minimum, a bank should have a robust mobile offering mirroring a web experience and seamless options to move money, transact and pay. It also requires integration with third-party services, access to insights and analysis, and the ability to collaborate with other parties (e.g., couples with one another, small-business owners with their accountant). Customers have also come to expect access to credit and budgeting.
The key here is to stay hyper-focused on your segment and its needs when building your product suite. Digital banking newcomers might be in for a rude awakening when it comes time to expand beyond the basics. This requires legwork on the back end, data infrastructure, money movement flows, internal tools and security. You’ll likely allocate significantly more resources to the behind-the-scenes aspect of the product than you expected.
Building on top of existing services or utilizing BaaS offerings to merely offer customers debit cards is far from competitive against all of the innovation spurred by full-stack providers. Ultimately, to get to the finish line, digital banking players need to go much deeper and focus on what capabilities will work to their customers’ benefit, whether they’re catering to consumers or large enterprises.
Risk And Compliance Underscore Everything
Underestimating risk is common in fintech. In digital banking, risk is everywhere even if you’re not a lender. From a customer identification program to transactional monitoring to payment processing, there are countless instances where you’ll need to manage risk and sometimes even supply capital upfront.
All enduring banks—especially those massive behemoths neobanks seek to disrupt—boast a decades-old, strong foundation of expertise in some of the most challenging areas of finance (such as know your customer, know your business and anti-money laundering procedures). Your company must comply with the same rules and regulations that these incumbents do, even as a nonbank.
Risk management is critical in digital banking for two main reasons. First, whether your company can effectively grow is contingent on your ability to scalably manage risk and compliance in an online-only environment. Online fraudsters are everywhere and catching them, whether in onboarding or through tracking suspicious account behavior, requires sophisticated risk infrastructure, advanced fraud and transaction AI models, and expert fraud prevention teams. The required level of investment in these areas is massive and ongoing, but it is critical to distinguish fraudsters from good users.
Second, managing risk accurately allows you to deliver a better customer experience. Customers’ ability to quickly and seamlessly open an account and access their funds hinges on your risk management capabilities. With robust controls in place, your customers can enjoy things like better service, a more advanced feature set and higher limits.
Product Is Just One Part Of The Training Plan
Because customers depend on them to store and manage their money, digital banks need to meet a higher bar of quality and reliability than nonfinancial online services. The product is only one component of the overall customer experience.
As you scale, you’ll need to build significant capabilities on compliance, operations and customer support in addition to risk management. These areas require hiring internal teams with vast expertise, as well as investing considerable time and money in purchasing or developing related systems and integrating them into your platform.
When entrepreneurs set out to build a digital banking service, some don’t realize they will need a 200-person support and operations team. They’ll have to invest millions of dollars in case management and AML systems, or they’ll need to integrate something such as a multichannel customer communication tool. These investments are critical to deliver the service that customers are expecting. Sometimes, it’s even more important than your UI.
It doesn’t take much to start a digital or neobank at this point, but it takes a lot to be a great one. Just as a world-class runner dedicates their time to long, slow distance runs at a predetermined pace, an enduring fintech founder commits to greatness that same way: one step at a time, especially when the course gets tough.