The punishing power of disputes on neobank unit economics

The explosion of debit card neobanking startups has hit a wall, but not for the reasons many think. It wasn't a lack of product-market fit or sky-high customer acquisition costs that did them in during the '22/'23 downturn. The real culprit? The crushing impact of disputes on unit economics.

During COVID-19, flush with stimulus cash, consumers weren't as eager to dispute. Plus, even when disputes happened, they seemed smaller against the backdrop of ballooning spend and balances. Fast forward, and dispute fraud has surged to the forefront, eating away at margins with a vengeance.

Turns out, one of the few advantages legacy banks had been sitting on was a gold mine of data powering a solid dispute management system. It’s a system that either takes decades of data or a blend of AI and efficient ticket handling that's not built overnight. Neobanks, caught off guard, found themselves hemorrhaging money through forced provisional credits, unable to keep up without the right tech and processes in place.

The hope that 3DS security protocols could stem the tide of fraud, making the U.S. as fraud-resistant as Europe, hasn't panned out. Thanks to a complex financial ecosystem, sluggish tech adoption, and a tug-of-war over interchange fees, that lifeline seems miles away.

Neobanks, once the darlings of venture capital, are learning a hard lesson. Fraud, chargebacks, and a heavy reliance on manual operations over automation are tanking their business models. The industry's pivot to more niche, vertical solutions hasn't been the saving grace investors hoped for.

Reid Hastings of Netflix fame once quipped that had they known about credit card chargeback rules, PayPal might never have been. Ignorance was bliss then, but it's a costly lesson for neobanks now. In the fintech world, understanding and managing disputes isn't just a nice-to-have—it's make or break.