Why consumer neobanks are making B2B pivots

Call it the Amazon and AWS model.

The cloud computing arm of the online retailer was born in 2006 as a side service selling information technology infrastructure to other businesses. "It was a capability they realized they could monetize really well," said Christoph Stegmeier, a senior partner at consultancy Simon-Kucher & Partners. In the last two years, direct-to-consumer neobanks and digital banks have been doing the same: diversifying their income streams and boosting profitability by selling technology or software — sometimes the very same that underpins their own operations — to other companies.

In some cases, this pivot is a necessity. Challenger bank HMBradley clashed with its original sponsor bank over the pace of its growth in 2021 and had to waitlist new customers for 18 months before hopping to a larger provider in early 2022. But the damage was done. In November, CEO Zach Bruhnke announced that HMBradley would wind down its consumer operations and, instead, start selling its technology to banks in 2024. Its proprietary ACH and wire transfer monitoring capabilities may be first to market.

Fintech

Challenger bank HMBradley winds down consumer products, pivots to B2B

The neobank's original problem was that it grew too fast. Its latest is that it's grown too slow.

By Catherine Leffert

November 16

For others, the B2B strategy sits alongside the B2C operations as another revenue stream.

The need to pivot became more pressing 18 to 24 months ago, when interest rates went up, funding became scarcer and investors started looking more deeply into profitability than scale, said Stegmeier. Moreover, "investors are more familiar with technology, licensing revenues and subscription revenues" of selling software to businesses, he said. They prefer it over the revenues neobanks receive for bank-like activities.

According to recent Simon-Kucher research into neobanking profitability, none of the eight neobanks with publicly available financial statements that it tracks in the U.S. were profitable in the past 18 months. (Simon-Kucher defines neobank as a digital native bank without branches, typically with some disruptive element in its approach, launched since the mid-2010s, and aiming for the wider banking relationship rather than a single product such as lending; it may or may not have a license.) Worldwide, nine out of 33 were profitable.

"To get scale, you need to spend to reach customers," said Stegmeier.

Dee Choubey, co-founder and CEO of MoneyLion, echoes the sentiment.

"When we took the company public in 2021 our go-to market was direct to consumer," said Choubey. "We realized if we continued down that path we would have to spend a lot of dollars and be very capital intensive to continue our growth just by acquiring customers ourselves."

Moreover, as interest rates rose in 2022, "You couldn't rely on going to the capital markets every other year and raising $100- or $200-million dollars to keep fueling your growth," he said. "You had to do it organically."

MoneyLion, whose banking services are provided by Pathward, a $7.5 billion-asset institution in Sioux Falls, South Dakota, turned its 2022 acquisition of embedded finance platform Even Financial into that source of growth.

In March, the company rebranded the platform to Engine by MoneyLion. Engine supplies what it calls channel partners — such as news sites, financial services providers, credit agencies and more — with search, comparison and recommendation engines that match visitors with financial product offers. These could be loans, insurance, credit cards or savings accounts. Some of its channel partners include CNBC, Experian and Credit Sesame; some of its product partners are Citi, SoFi and LendingClub. 

Channel partners can choose to present these marketplaces as white-labeled or co-branded webpages hosted by Engine by MoneyLion or as embeddable widgets on their own sites. They can also customize the user experience using MoneyLion's application programming interface.

"It puts us in the middle of providing a lot of services to both sides of the marketplace," said Choubey.

At the end of 2021, Choubey estimates that MoneyLion was a 100% direct-to-consumer business. In the third quarter of 2023, about 36% of MoneyLion's total revenue was generated from its enterprise business.

Some fintechs  offer the direct-to-consumer products and platforms they have built to other entities, including banks.

Greenlight Financial Technology, which provides banking services to families, started selling its feature set to employers, banks and credit unions in 2023 while maintaining its direct-to-consumer app. On the app, deposits are held by Community Federal Savings Bank, a $637 million-asset institution in Woodhaven, New York.

Greenlight now has several dozen bank and credit union clients that pay Greenlight a monthly software-as-a-service fee and extend the product to their customers or members for free.

"The mission is to get this in everyone's hands," said Matt Wolf, senior vice-president of business development at Greenlight. "Financial institutions have this amazing scale and scope."

Most partners are choosing a light-integration, co-branded app approach where users register for Greenlight through their primary bank and download the app from Apple and Google's app stores. Greenlight also provides application programming interfaces to help banks create a white-labeled product. It has developed a mobile software development kit so partners can offer the product through their own app rather than as a separate app; Greenlight will go live with this feature in 2024 with an unnamed bank partner.

Nerve, a neobank that initially targeted people in the music industry in 2021 before expanding more generally to "creators," launched open application programming interfaces in 2022 for companies such as ecommerce sites or artist distributors to embed in their websites and apps. The APIs will let creators who use such services open free deposit accounts, send and receive instant payments, and more.

Spiral, a challenger bank that originally targeted philanthropy-minded consumers with its direct-to-consumer app, now positions itself as an "impact-as-a-service" platform that helps financial institutions embed sustainability, social impact, and environmental, social and governance principles into their businesses. For instance, it partnered with Quontic Bank in New York City in August to launch an online portal that lets customers examine Quontic's philanthropic activities. In September, it rolled out a feature with Nbkc Bank in Leawood, Kansas, to help customers donate to charities directly from their accounts and acquire an annual donation report for tax purposes.

Starling Bank in the United Kingdom, unlike the other fintechs mentioned here, is not what American Banker defines as a neobank in the sense that it holds a banking license rather than relying on a chartered institution to provide financial services. But it faced similar problems in its quest to grow. The digital bank, which launched in the U.K. in 2017, wanted to expand to other regions. But Brexit and other complications of operating in foreign countries inspired an alternative.  

"We thought a better and more profitable way to expand internationally would be to license software to other banks around the world," said Alexandra Frean, the chief corporate affairs officer at Starling. "We used the success of Starling in the U.K. as our proof point." The company developed its Engine by Starling subsidiary about 18 months ago. Engine (not to be confused with MoneyLion's Engine) is designed to sell the software that runs Starling — including its Management Portal, the dashboard that gives employees insight into the ledger and individual customer details — to other financial institutions that want to launch digital financial products.

In November, Engine by Starling announced its first two clients: Salt Bank in Romania, whose digital bank will become available to customers in 2024, and AMP Bank in Australia, which is launching a digital brand for small businesses comprising of one to 20 employees.

These neobank executives feel their B2B offerings are complementary to, rather than competitive with, their D2C apps.

"Given the enormous need for financial products and the number of Americans that change financial products any year, there is no way we would be able to service all of them," said Choubey. "By powering the marketplace, we can at least take fractions of the economics." MoneyLion earns revenue from both channel and product partners. It will also build ads for its partners, partially with the help of its 2021 acquisition of digital media company Malka Media.

Depending on the product, MoneyLion's products may appear in a partner's search tool powered by Engine. Choubey likens the situation to searching for a product on Amazon, where the Amazon Basics brand will show up alongside bigger names.

"The consumer chooses the one that fits their lifestyle," he said.

Greenlight uses its consumer app as an innovation lab of sorts to test new features before it pitches them to banks.

"We don't have a preference of whether it's a family paying us directly or a financial institution that sees value in offering this service," said Wolf. "The work we do with our Greenlight direct-to-consumer product pays a lot of dividends for what we do with banks and credit unions."

Starling speaks to potential clients all over the world, excluding the U.K.

Going forward, Stegmeier foresees a greater focus on embedded finance, where neobanks partner with larger companies to integrate banking services rather than keeping their own brand at the forefront.

"Embedded finance will be the name of the game in five years," he said.