In some respects, 2021 was a good year for neobanks—also called challenger banks, digital banks, or online banks—like Chime, Varo, and Current.

The 10 leading neobanks in the US grew by a little more than 10 million accounts in 2021, from 23.3 million to 33.5 million, according to Cornerstone Advisors.

Looks—or in this case, growth—can be deceiving, however. Despite the positive growth numbers, recent neobank news has not been encouraging:

  • Dave—a fintech, not some random guy—said that capital constraints have limited its ability to invest in the second half of last year.
  • MoneyLion faces investor skepticism as it burns cash, according to the Financial Times.
  • Varo Bank could run out of money by the end of the year. According to the Fintech Business Daily, “with $32 million in salaries and $38 million in marketing spend in Q1, costs continue to far outweigh non-interest income.”
  • In May, Chime confirmed reports that it’s delaying its planned IPO in light of the decline in fintech stock valuations.

The Case Against Neobanks

It would be easy to attribute the negative neobank press to the overall fintech funk permeating the industry right now. But there are market factors impacting neobanks that are closing the door to new neobanks coming into the market:

1) The megafintechs have better economics and business models

Cornerstone’s research found that only about half of the top 10 neobanks’ customers—17.6 million consumers—call their account with those fintechs their primary checking (or spending) account.

In contrast, more than 15 million consumers call PayPal or Square Cash App their primary checking or spending account provider. That’s just a small percentage of the roughly 272 million accounts Americans have with these “megafintechs.”

Do the math: Neobanks have to acquire two customers to get one primary spending account customer.

Fintech Business Weekly reported that Varo’s cost of customer acquisition is $45. That means it costs Varo $90 to acquire a primary (ie, engaged) customer.