Neobanks catering to self-employed see influx during pandemic

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Some challenger banks that offer banking services to freelancers and entrepreneurs say demand for their services is growing as more freelancers enter the workforce, either by choice or necessity, as a result of the coronavirus pandemic.

“A lot of jobs will not be coming back next year,” Ryan Conway, head of business development at Oxygen, a digital bank for freelancers and contract workers, said in a May interview.

“As people are looking for their next employment opportunities, we think a lot of those people are going to try freelancing, and they're going to need a bank that understands their unique challenges,” Conway said.

Those challenges could include separating personal and business activities, tax planning, budgeting for an irregular income and handling payments.

Lamine Zarrad, co-founder and CEO of Joust, acknowledged that many freelancers are also losing business right now.

“But we see that as a short-term impediment to the sector,” he said. “We’re going to have a V-shaped recovery, probably in the next eight to 12 months, where society is going to get adjusted to a new way of life and there are constant, predictable opportunities for freelancers. Then they will need tools like ours that put things on autopilot for them.”

Eytan Bensoussan, co-founder and CEO of NorthOne, said his company saw activity dip and rise at different rates over the last few months, depending on where customers live.

Eytan Bensoussan, co-founder and CEO of NorthOne
NorthOne, co-founded by Eytan Bensoussan, focuses on small businesses with 20 or fewer employees and offers mobile check and cash deposits, dedicated accounts for taxes, and connects to accounting software and payment processors.

“So much will depend on the second wave and whether or not it is material, but right now, we are seeing a lot of optimism among our customer base,” he said, estimating that 80% of customers expect revenue to increase over the next 12 months.

The companies declined to give exact figures, but said they are continuing to attract an audience.

Zarrad said March was his company’s highest-growth month.

Bensoussan estimates that NorthOne opened 30,000 to 40,000 accounts by March, but the monthly growth since has been at least 100%.

Lilac Bar David, co-founder and CEO of Lili, said her customers number in the tens of thousands and that the pandemic has been “an encouraging period.”

In a report from July of 2019, Javelin Strategy & Research stated that 16 million Americans were either entrepreneurs or self-employed consumers.

But the number of people who count freelance work or sole proprietorship as their primary source of income has grown rapidly since the pandemic started, said Ian Benton, senior analyst in digital banking at Javelin.

The number of business neobanks has grown as well.

Azlo and Bank Novo were two of the first and launched a few years ago, said Benton. Lili and NorthOne launched in the summer of 2019, while Joust had its public launch in January. Oxygen Bank rolled out its services to the public in May, and Wave Money expects to be widely available by the end of the summer.

“A lot of these guys are filling in where banks have dropped the ball,” Benton said. “Banks haven’t innovated in small-business banking for a long time.”

What they offer

Business neobanks tout low or no fees and a slick digital-only experience, meaning customers can onboard their accounts within minutes at home. (At last count, only eight of the top 30 U.S. banks offer digital onboarding to customers.)

Some of the challenger banks also provide help with expense categorization, cash flow analysis, taxes, invoicing, payments and other tasks that entrepreneurs normally do manually.

Many solo entrepreneurs and small-business owners "are kept outside of banking and forced to use consumer products that are not designed for business use, so they compile these Frankenstein solutions of 10 different tools just to engage with their clients,” said Zarrad, whose company developed a banking platform that caters to solo business owners, or what he refers to as “solopreneurs.”

Lamine Zarrad, co-founder and CEO of Joust
"We’re going to have a V-shaped recovery, probably in the next eight to 12 months, where society is going to get adjusted to a new way of life and there are constant, predictable opportunities for freelancers," said Lamine Zarrad, co-founder and CEO of Joust.

Joust is merging with a similar company to build out its services. Zarrad said that when the merger is completed, in about 90 days, the combined company “will provide a small business with virtually everything they need, from incorporation to document management and access to credit, all on one dashboard.”

NorthOne, which focuses on businesses with 20 or fewer employees, offers mobile check and cash deposits, dedicated accounts for taxes, cash flow reporting and more, and connects to accounting software and payment processors.

Lili, which serves full-time and part-time freelancers, generates expense reports, lets customers automatically set aside a percentage of each deposit into a separate “tax bucket,” and notifies customers of each transaction so they can swipe right or left on their phones to categorize it as a personal or work expense.

These companies have also been helping out their customers during the pandemic.

For example, Joust created a Paycheck Protection Program calculator that estimates loan and forgiveness amounts for customers, and refers them to one of two preferred lenders. It also ramped up publicity of its PayArmour platform, an invoice payment tool that allows customers to get a portion of their invoices funded on the same day, or a guaranteed receipt of payment within 30 days, for a 6% or 1% fee, respectively.

NorthOne, which charges monthly fees of $10, $20 or $50 depending on a customer’s transactions, removed fees for three months from customers in the restaurant business and those in the hardest-hit states, including California, Louisiana and New York.

The company increased its live support hours to accommodate the growing number of users who were chatting longer and seeking emotional as well as business support. NorthOne also partnered with Radius Bank for the first round of PPP loans and more recently with Cross River Bank to help its customers get funding.

Lili created blog posts with resources, such as information about grants and loans. Direct-deposit customers could also get their stimulus payments or PPP funds up to two days early.

Looking to the future

Benton said that he’s bullish on the long-term trend of business neobanks, but that many freelancers continue to use personal or small-business bank accounts that are ill-suited for their needs, unaware that these options exist.

“If one of the larger banks developed a standalone app or brand for the freelancer and entrepreneurial type or even if Square or QuickBooks created an app and acted as a bank account, that’s where you would see [this type of service] take off," Benton said.

He concluded in his 2019 report that traditional banks should offer digital account opening, invoicing and payment acceptance tools, mobile and online loan origination, expense tracking and tax tools, and cash flow analysis and projection.

“These neobanks are not necessarily a competitive threat today, but they are showing you how small-business banking should look in the future,” Benton said. “I think the real danger right now is silent churn, where you keep a checking account at your bank but the bank is not the relationship you care about.”

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Small business Fintech Small Biz Banking 2020 Digital Banking 2020 Coronavirus