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  • Frank Tian

💸 The Formula of Neobank Profitability

95% of neobanks are losing money.

What are the profitable ones doing differently? 👇

Penny Crosman at American Banker analyzed 3 profitable challenger banks: Starling, Upgrade, and Dave.

Instead of solely relying on debit interchange fees, these profitable ones source their revenues from lending and diverse fees.

🟦 Lending: where money is made

◼️ Starling Bank has about half of its revenue from lending: mortgage and small business loans.

◼️ Upgrade started with credit products vs. an app + a debit card like most neobanks do.

However, building a lending book is not easy.

Renaud Laplanche, the founder of Upgrade and LendingClub: “It takes a lot of infrastructures, a lot of data to get started, for example, to build a track record of credit performance.”

Once the lending is built up, it is easier to bring in revenue than profitability.

Remember, loans from lending are called assets in the banking book.

🟦 Diverse fees

Besides debit card swipe fees, a variety of fees have generated additional revenue.

◼️ Software as a service fee - Starling licenses its in-house developed technology to other banks and fintechs.

◼️ Subscription fee - Dave charges a $1 monthly fee; Starling charges for add-on products such as a card for kids.

◼️ Tips - Half of Dave’s ExtraCash loan users leave an optional tip, with an average of $4.

🟦 Cost management discipline

Starling’s revenue model is not different from traditional banks, as acknowledged by Starling CFO Declan Ferguson, “But we’re doing that on a cost basis … “

Here are several ways the neobanks manage their cost:

◼️ Distributed workforce - Upgrade has most employees in Phoenix, Montreal, or remote vs. the rest in San Francisco.

◼️ Constant review - Starling recently reviewed acquisition channels and significantly scaled down digital marketing.

◼️ Automation - Upgrade uses automation to drive down expenses in operations and customer service.

Here is the full article

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