Revolut, Monzo, Starling etc.
Lot’s of my friends use them but I don’t see the point. I use online banking / applepay (amex) and paypal, and have never had any problem paying for anything.
What problems do these fintechs try to solve? I understand there are some useful perks for internationals, but surely there’s more to it than that?
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The main reason these became popular, had been that they (often known as challenger banks, or neo-banks, but are usually not actually a bank) allowed people to have a digital bank account, where they otherwise would not be approved.
• Free debit account for those blacklistd from banking.
• No monthly fees (free, but there upsell).
• No overdraft (because they block the overdraft).
• For those unable to have bank account, it gives them a bank-like debit account.
If you go into the ghetto, you'll see various "check cashing" places, which will usually sell prepaid debit cards and whatever else. These Fintech companies give a digital (app) account, with a similar debit card.
People who use those "check cashing" places, are usually unable to open a bank account, due to being blacklisted already. (Look on YouTube, there was a local professor who did research into them).
Often, these people are "unbanked" because normal banks won't let them have an account at all -- because they have accrued unpaid fees, and not paid them, and likely bounced endlessly, and then refuse (or are unable) to pay the monthly account fees, or the overdraft fees. So, the banks blacklist them from any future account.
Example: There was a guy in one report who assumed that an overdraft was like a credit line, and that he could just keep overdrafting, and somehow not pay fees. He would be someone, who would have to use a Fintech account, after being blacklisted.
(Side note: imagine being such a financial risk that banks won't even let them have an account at all. That's often their target client).
Since so many people have been blacklisted, and don't want to pay account fees... in come the Fintech companies, who give them an online account... with an account number, routing number, and a debit card.
The Fintech isn't a bank, but will have an agreement with some small bank to use their banking license, for their Fintech.
Often, the structure of the agreement has the Fintech as the actual client of the bank -- with the accounts being under the Fintech, not the bank.
(That is how Chime and others have been able to take/freeze/withhold money in the account, and people are effectively trapped, because it isn't a bank).
Obviously, this creates a dubious scenario with the FDIC insurance, and other factors, and many of the small banks they use have encountered various regulatory issues, often because the bank (and Fintech) will often use "creative" math to claim sufficient reserves (etc), to meet FDIC compliance.
In reality, if the Fintech collapses, the account holders may (or may not) be covered by FDIC insurance, all depending on how the bank contract is phrased...
I mention a lot of these points because we looked at a couple of them before; and the actual documents were almost unreal, with such a looming potential disaster.
(In reality, if a WSO user went out a bought a banking license from a defunct local bank, you would be more legitimate than most of the FinTechs out there).
The Fintech will try to play the edge of claiming they are "not a bank" (in documents), but will claim to offer banking style accounts due to (often questionable) use of that small bank's banking license... but is usually some flavor of banking fraud, if looking closely.
They often offer HYSA now, but are often in a situation worse then SVB, and merely haven't been noticed yet on a larger scale, because their clients are mostly young, often ghetto, and often are used to having banking issues, so it continues to fly under the radar, usually.
Look at the details/banks affiliated with:
• Chime
• SoFi
• Block / Square / CashApp
• PayPal / Venmo
• Synchrony Bank, Sutton Bank, etc.
• (etc)
Issues (Chime Example):
• "Chime is not a bank and Chime customers do not have a customer relationship with its banks. Chime can and does cancel user accounts without notice; moreover, it is not required to provide a reason for the cancellation to the customer or even have a reason. Customers cannot appeal to banking regulators to retrieve their deposits, which may not be returned in a timely fashion." (Chime Wiki).
• Chime has promoted financial advice to account holders, suggesting they light a money candle, and "manifest" (wish) money into their account. (LOL)
• From 2020-2022, Chime had 3,500 CFPB complaints of them closing accounts and withholding money.
• Worth a read:
https://en.m.wikipedia.org/wiki/Chime_(company)
Yea, not a fan.
Note: I'll try to come back and edit with better info, and to be more coherent, but I wanted to quickly mention a few of these points until then.
Plenty of articles like this...
https://www.americanbanker.com/news/fdic-rebukes-sutton-bank-piermont-b…
Saw the updated OP details:
• N26 -- German bank, pulled out of US market.
• Monzo -- British, launched US version of UK service, but heard that they might be pulling out.
• Revolut -- British, I believe they make money from Forex money transmit services.
• Wise -- revenue from forex, similar to Revolut.
There are many many others, and most marketed domestically.
The international money transfer type of Fintechs, do at least offer that forex/remittance service. However, the others are more of a bank-alternative.
So their target customers are basically those who have been blacklisted from traditional banking?
Surely these companies wouldn’t be so popular if that was it.
It depends on which FinTech company.
Not every Fintech does the same thing, and not every Fintech offers banking to the same exact target market.
In many cases, they operate to fill the gap of people who (for whatever reason) can't open a normal bank account.
They market to certain target markets, as a way to have banking, without fees.
This unbanked niche was largely what caused the non-bank fintech sector to grow wildly, often in the hopes of making money off up-selling other services.
In other cases, the product is marketed as a method to transfer money (peer-to-peer), without fees, or low fees. (Think PayPal and PayPal's Venmo).
Here is the edge -- many Fintechs try to offer "banking" services because the market for "unbanked" people is huge, and apparently growing. It's a niche that serves a captive population, because they need banking (direct deposit), and ability to pay (cashless) with a debit card, but they don't have access to a normal bank account. They can't simply walk away from these fintech apps, if it's their only way to receive a direct deposit (e.g. to receive pay, welfare, unemployment, stimulus, etc), or to pay with a card. Otherwise, an employer (or the government) has to send pre-loaded debit cards -- the Fintech "bank account" allows them to "bank" via the fintech app (and debit card) instead.
Other Fintechs might only sell pre-paid debit cards, and nothing else.
Some other Fintechs might provide remittance/forex service (think Revolut, Wise, with a service similar to Western Union).
There are even Fintechs that offer "banking" to small business, without paying fees, etc. (think Novo, Mercury, etc). These tend to be the same market as those who can't open a personal bank account.
A few Fintechs (Square, Toast, etc) offer merchant processing (Visa/MC/Amex/Discover).
Other Fintechs offer credit repair/reporting services (think Self, Kickoff, etc), or a secured credit card.
Some will offer a mix of services, like banking, credit repair, payday advance, student loan servicing, etc (think SoFi, Chime, etc)
It varies, with many possibilities. FinTech refers to the overall category.
My issue with most FinTech is that they often mislead consumers and present themselves like a bank, and then ultimately might engage in dubious activities without recourse, because then they aren't a bank. It's as if someone said "...trust us, we're a bank" but then (after withholding customer money), "...but we're not a bank, so it sucks for you..." They have famously withheld customer money, and closed accounts, and then conveniently avoid accountability based on not being a bank. They also offer HYSA rates that their finances can't actually sustain. I see that as grossly deceptive and at least bordering on fraud in many cases.
To explain a popular FinTech option...
Square's CashApp ("Trash App" according to my analyst, lol) -- the reason that CashApp became popular was that CashApp provided: (1) a routing number and account number, (2) fee-free money transfer to other CashApp users, (3) debit card, (4) later allowed stock/BTC purchase, (5) minimal/no KYC info, allowing use of fake names in some cases.
During covid, CashApp became popular because of account/routing number, which could be used to receive a direct deposit. This allowed to appear like a legitimate account, to receive stimulus, unemployment, welfare, paycheck, etc, but was often used for much of the covid-era fraud.
(Especially a couple years ago, if you search about CashApp, you'll see many of the results involve fraud or scams, often tied to the account/routing number being used , that would otherwise get flagged by banks. To a certain extent, I believe CashApp allowed to avoid KYC compliance, at least partially, but I can't remember, as it's been a while since I read the report).
Not to doxx myself, but we were one of the PE firms (perhaps one of many), who looked into buying MoneyGram, a few years back (briefly considered, at huge discount).
Around that time, MoneyGram was offering a few services similar to some of the competing FinTechs. That led us to research several FinTechs, as a potential alternative, etc.
Ultimately, we didn't buy it (another firm did), but the details we learned about some FinTechs, left a sour taste, when you realize how many of them actually operate.
I hope that helps to explain.
Definitely, thanks a lot man haha. Funny yet concerning at the same time.
Not sure if you would be able to answer this, but how have these companies been able to secure VC/growth funding and become so big if they are so ethically/legally murky?
If you guys want a laugh, check out Chime encouraging people to "manifest" money (e.g. to wish/hope for money).
I have a difficult time taking them seriously when they are offering/selling candles to manifest (wish/hope for) money as a financial strategy.
Especially considering thousands of CFPB complaints about their activities, combined with the financial advice of wishing for money, I have difficulty viewing them in much of a positive light.
If you are into manifesting (hoping/wishing) -- that's fine -- but I don't consider it wise financial advice to suggest to your clients.
I don't think I have ever seen a financial services company ever suggest something like that. What a joke.
That is just my opinion.
Chime Manifest Link:
https://www.chime.com/manifest/
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