The single unified framework for operating a neobank

Originally published November 1, 2021

Nov 02, 2021

0/ These days everyone talks about "neobanks" like they're all the same. It turns out that how you get the charter & run your service has BIG consequences for your neobank. Recover from your Halloween Scaries 🎃 with this fintech🧵 on the 4 operating frameworks for neobanks 👇🏾

Full post:

These days everyone talks about "neobanks" like they're all the same.

It turns out that how you get the charter & run your service has BIG consequences for your neobank.

Recover from your Halloween Scaries 🎃 with this fintech 🧵 on the 4 operating frameworks for neobanks.

Let's first talk about this fancy operating framework*. It really is just based on:

A) how you get the bank charter (rent, build, buy) B) how you run your service (rent, build to own, build to rent)

*Only applies to US neobanks w/ debit cards w/ FDIC insurance

Onward!

#1: Rent the bank & build to own service

The sponsor bank model. Rent a charter from a bank & build your own service.

(+) Faster to launch vs charter. Bank handles direct FDIC regs. Building service lowers cost (-) Have to pay sponsor bank. Need to run products by bank.

#1 is a classic model & most of the biggest neobanks you know are using #1 as an operating framework.

Use #1 if you want Tier 2 economics, product flex, time to market.

Players: @Chime, @Current, @Aspiration and a whole thread worth over here:

Samir @heysamir_

0/ Fintechs get a ton of coverage, but did you know that behind every fintech challenger is an actual bank that powers it? Fintechs use these banks to "rent-a-charter" to access the regulated financial system and park member deposits. But who are the banks behind the fintechs?

#2: Rent the bank and rent the service

The BaaS partner model. Rent a bank charter & service from a BaaS firm that is a bank or partners w/ banks.

(+) Fastest launch, BaaS handles FDIC and product compliance. (-) More expensive to rent both. Rely on BaaS for products.

#2 can be done w/ @GreenDotBank (charter + service BaaS) or other fintechs (partner + service BaaS) like @treasuryprime, @unit_co_, @stripe.

Use #2 if you want Tier 1 time to market & can handle Tier 2/3 economics & product flex.

Players: @Stash @Wealthfront (& more in 👆🏾 🧵).

#3: Build the bank & build to own the service

Go and get your own bank charter & build your own service on top.

(+) Building both means lowest unit costs. Max product flexibility. (-) Longest time to market. Costly direct bank + product compliance.

Few firms have gone with #3 b/c it takes so long to do and nearly all start with #1.

Use #3 if you want Tier 1 product flex & are okay with Tier 3 time to market. Tier 1.5 economics w/ lower txn cost but higher compliance + capital cost.

Players: @VaroBank, @Square

#4: Buy bank & build to rent service

Full-stack BaaS. Buy a bank to get charter & build service to use and rent.

(+) Building lowers unit cost. Near max product flexibility. B2B + B2C scale (-) Long time to market. Costly direct bank/prod compliance. Compete w/ clients.

#4 is rare like #3 b/c it isn't easy much easier to buy vs. build. Also B2C + B2B GTM can be hard.

Use #4 if for Tier 1.5 product flex (depends on bank you buy) w/ faster Tier 2/3 time to market than building bank. Tier 1.5 economics like #3.

Players: @teamjiko, @GreenDotBank

Now the nerdy among you might wonder why there aren't 9 operating frameworks if there are 3 bank charter options x 3 service options?

Well - most combinations don't actually result in a neobank and the rest just haven't been tried (as far as I know).

So what's missing?

Rent bank + build to rent service: You're actually a service BaaS!
Build/buy bank + rent service: You're actually most traditional banks!
Build bank + build to rent service: You're actually a sponsor bank!
Buy bank + build to own service: None. Might as well rent service?