So-called neo-banks have been getting a lot of press lately for “reinventing” the financial services industry. It appears that everything old is new again.
It might help to start by defining what a neo-bank is. Companies like Chime, Monzo, N26, Revolut, and Simple are often described as neo-banks, challenger banks, or digital banks. They have no branch network, offer individuals the ability to open accounts online, and encourage customers to primarily interact with them digitally.
In the United States, these companies do not have bank charters. They place their deposits with a third party, and oftentimes they are using that bank’s processing platform or a third party.
Has there ever been another financial service that works with third parties to offer products primarily aimed a new generation of financial services customers?
The list of actual banks reveals the answer. All of these banks, with the exception of BBVA, have experience in serving as a bank for prepaid program managers. (BBVA has issued prepaid cards for its own programs in general spend and incentives categories.) They have experience in managing the third-party relationship, onboarding customers, and making transactions happen for cardholders.
The only difference here is that program managers who position themselves as neo-banks offer accounts with a different back office structure.
Looking at the history, it is easy to see the parallels between the next generation of “banks” and the prepaid industry.
Over a decade ago, prepaid companies were marketing to “Gen. Y,” who grew up and were replaced by “Millennials” as the next big target market, who themselves are being replaced by “Gen. Z.” Prepaid cards were leaders in offering tools like mobile alerts, person-to-person transfers, and remote deposit capture. Payroll cards also were the first to offer services that allowed people to access their direct deposits early.
Another place where prepaid cards took the lead was in offering high interest savings accounts. Companies like NetSpend offer saving accounts through their prepaid programs that pay up to 5% in interest.
The first real challenger bank was launched by a prepaid company – Green Dot, who took the lessons it learned from years in the prepaid industry and built a new product type.
The point here is not that prepaid did it first, but rather that the neo-banks, challenger banks, or whatever you want to call them, do not need to reinvent the wheel. Instead they can learn lessons from the experience of prepaid programs. They also should look at the issues that prepaid programs are facing and see where there is common ground. Both product types face issues when it comes to FDIC insurance and brokered deposits, customer service across the value chain, and preventing fraud. Understanding these commonalities will create a better environment for companies and accountholders alike.
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