The global cryptocurrency market cap surpassed $2.9 trillion in November following a rally from digital coins Bitcoin and Ethereum, according to data from CoinMarketCap.com.

The volatile asset class has attracted the attention of consumers and investors worldwide. Traditional institutions, which have historically taken a cautious approach to crypto, are deciding how they want to participate in the space amid a growing consensus that the popularity of digital assets isn't going away any time soon. 

And neobanks, whose mission, in most cases, is to differentiate themselves from the incumbents, see the space as a new frontier where they can offer their customers a safe avenue to access crypto and educate themselves on the booming market. 

From allowing customers the opportunity to earn Bitcoin rewards to offering custody services for digital assets, banks and fintechs are carving out strategies and services tied to crypto as regulators seek to catch up with guidance.

The pandemic's impact

"It's hard to imagine a more perfect set of circumstances to bootstrap and bring this type of technology into the mainstream," said Diogo Mónica, president and co-founder of Anchorage Digital, the first crypto firm to receive a national trust bank charter. "The pandemic did multiple things. It forced everybody to work remotely. And these crypto projects are primarily decentralized projects. And so they already supported fully remote from day one."

The stimulus and the elimination of travel and most workers' daily commute afforded many with the time to explore alternative asset classes such as crypto, said Mónica, who co-founded Anchorage in 2017.

"The amount of stimulus and the money printing by the Federal Reserve just speaks directly into the narrative that we have a highly inflationary system and highly inflationary monetary policy. Bitcoin, as a store of value, is highly deflationary," he said. "All of this, tied together, both from a macro perspective and from an individual perspective, led everybody to either have time to learn or participate or dedicate themselves full time into researching and building protocols."

For financial institutions, the interest in crypto has been growing over the past several years, starting with the 2017 run-up, Mónica said, referencing the year that Bitcoin climbed from $1,000 to nearly $20,000.

"Institutions were extremely interested in the space, and it takes some time. It took them a couple of years to become comfortable to really run through all the compliance requirements," Mónica said. "We really saw [in 2020], during the pandemic, the fruits of those types of investments, which were obviously 18 months to 24 months in the making. It's fascinating, because the 2017 run-up was really the thing to catalyze institutions to come in a meaningful manner."

Banks' growing interest in crypto is a boon to Anchorage's business. The bank, which gained its trust charter from the Office of the Comptroller of the Currency (OCC) in January 2021, uses a digital asset management system that stores customers' passcodes online through a combination of multiparty, multifactor authentication, advanced fraud detection and specialized hardware.

The San Francisco-based crypto custody firm recently announced a partnership with banking core Finxact, which essentially adds crypto capabilities to Finxact's core systems. 

The partnership allows the banks and financial services companies that use Finxact's core banking platform to offer their own customers access to crypto products and services, Mónica said. 

"It's just such an exciting time for us," Mónica said. "We're seeing just a lot of business and a lot of different things coming to our plate and we're trying to help as many institutions as possible build products coming into the space."

Starting gun

For Tulsa, Oklahoma-based Vast Bank, it was an interpretive letter the OCC published in 2020 that helped put its cryptocurrency strategy in motion.

The letter, issued by former Acting Comptroller Brian Brooks, essentially gave nationally chartered banks the green light to provide cryptocurrency custody services and hold unique cryptographic "keys" associated with cryptocurrency on behalf of customers.

The letter was the starting gun Vast Bank was waiting for, encouraging the firm to roll out a service it knew its customers were already interested in.

"We met with the board and our shareholders, and we made the decision to re-prioritize things, to put the customer first and be able to offer things that customers around the country were asking for, which was a national bank that is safe and sound and that they can trust to be able to participate in this digital asset cryptocurrency world," Vast Bank CEO Brad Scrivner told Banking Dive in October. 

Since launching at the end of August, Scrivner said the bank's new offering has allowed the firm to significantly grow its retail customer base.

"We're probably at about 50% of what it took us 40 years to build, in terms of our retail customer population, in just those eight weeks," he said. 

The service has garnered interest from both high-net-worth crypto players and new entrants, or the "crypto-curious," Scrivner said. 

"They're wanting to make sure that when they do come into the environment, they feel that it is safe and secure and they trust that the institution is not going to be gone. That has been a really good growth factor for us," he said.  

Growing appetite

Other traditional institutions are finding ways to fold crypto offerings into their existing products and services to satisfy the growing appetite and interest for digital assets. 

Blue Ridge Bank, a Charlottesville, Virginia-based institution that provides banking-as-as-service (BaaS) for a large portfolio of fintechs and neobanks, offers its consumers access to Bitcoin at 19 branch and off-site ATMs.

The bank, which launched the service in February 2021, is partnering with ATM operator BluePoint ATM Solutions and Bitcoin ATM software provider LibertyX to facilitate access to the cryptocurrency.

Quontic Bank, a digital-first community bank headquartered in New York City, launched a checking account in 2020 that rewards consumers in Bitcoin. The product, still in beta, appears to be the first Bitcoin rewards program offered by a U.S. bank.

For every purchase made through its debit card, Quontic pays the consumer 1.5% back in Bitcoin. 

"It was something of a heavy lift for us," Quontic CEO Steven Schnall told Banking Dive in April, "but we believe that there's a place for Bitcoin in people's portfolios. We did a lot of surveys and found that there was a huge percentage of the population that was interested in Bitcoin, but didn't necessarily want to take the risk to acquire it themselves, or thought it was too volatile or didn't know how to go about getting it."

Other financial institutions are seeing the business-to-business potential the space offers by banking the cryptocurrency firms themselves. 

Customers Bank announced in November it had partnered with around 20 cryptocurrency clients, joining trailblazers Signature Bank and Silvergate Bank in offering banking services to digital asset institutions.

Customers Bank, whose cryptocurrency clients include Genesis, Blockfills, GSR and San Francisco Open Exchange, said it has collected $1.5 billion of zero-cost deposits from crypto businesses since the beginning of October.

"This should allow us to add potentially billions of dollars in deposits to our franchise, which is really defining for a $20 billion bank," said Customers Bank CEO Sam Sidhu. 

The Wyomissing, Pennsylvania-based bank is just one of a few institutions willing to bank cryptocurrency clients, but there is room for many more, Sidhu said. 

"We think that this industry today is $65 billion to $75 billion, at a minimum, in deposits, so we can't even take them all," he said. "I think there's a broad enough industry that a lot of players can enter." 

Consumers are curious

Several consumer-focused neobanks are addressing the knowledge gap that exists around crypto, hoping the ability to offer newcomers the service, paired with education and guidance, will help provide those interested in the asset class with the security they're seeking.

Paybby, a challenger bank serving Black and Brown communities, plans to add cryptocurrency investing to its platform by January 2022. 

CEO and founder Hassan Miah emphasized the platform will have a focus on education when it offers its users the service. 

"We want to do it in a safe and profitable way for our community," he said. "It's a great new investment class, and the people of our community should have access to this investment class just like anybody else. And we intend to ensure that that happens."

Digital bank MoneyLion, which went public via a SPAC in 2021, launched its own cryptocurrency capabilities in September, enabling its customers to buy and sell digital currencies within its app. The company said eligible customers will initially be able to buy and sell Bitcoin and Ethereum, and round up their debit-card purchases in Bitcoin.

"We're giving them lots of bite-sized ways to get in," MoneyLion CEO Dee Choubey told Banking Dive at October's Money20/20 conference in Las Vegas. "It's an asset class, and potentially a technology framework for the future, that a lot of people want to learn about. … The mission has always been to create financial access, and we believe that crypto should not be limited to those in the know, the usual people that come to this conference."

Stuart Sopp, CEO of challenger bank Current, which also plans to provide crypto services to its nearly 3 million customers, said there is a "need and a demand for a company like Current to explain and shepherd people into this new world."

"There's a bunch of things and a bunch of value happening in cryptocurrencies that is not easily explained," Sopp told Banking Dive in April, following the close of the company's $220 million Series D fund-raise led by Andreessen Horowitz.

Like Anchorage's Mónica, Current's chief technology officer, Trevor Marshall, said he believes the pandemic created an environment where more consumers became curious and ready to engage with digital assets. 

"The COVID/Bitcoin bull run of 2020 really changed people's perspective. When it became available for trading and in Cash App, in Robinhood and other very accessible places, people started to put skin in the game and started doing research," he told Banking Dive during the Money20/20 conference. "It demystified a ton of what we were encountering previously, when we talked to our customers, which was, 'Isn't that that bad thing?' … Now it's associated with generally positive things, or at least it's more well understood."

The new 'shadow bank'?

But not everyone shares the same optimistic curiosity toward cryptocurrency as some fintechs and their customers. 

Regulators and some members of Congress have raised the alarm regarding the rise of cryptocurrency, and have indicated digital assets need more supervision.

"Crypto is the new shadow bank," Sen. Elizabeth Warren, D-MA, told The New York Times in September. "It provides many of the same services, but without the consumer protections or financial stability that back up the traditional system. ... It's like spinning straw into gold."

In a report that addressed stablecoins, a class of cryptocurrency that is pegged to a fiat currency such as the U.S. dollar, regulators said they want to see more oversight of the digital asset, and have asked Congress to pass legislation that would require that issuers of stablecoins be insured depository institutions subject to the same regulations as traditional banks.

In a statement accompanying the report, Treasury Secretary Janet Yellen said stablecoins have the potential to support beneficial payments options, "but the absence of appropriate oversight presents risks to users and the broader system."

Two weeks after the report was released, however, Federal Reserve Governor Christopher Waller, in a speech, challenged some of the report's policy recommendations, saying limiting stablecoin issuance to banks would stifle innovation and competition in payments.  

"While regulations are necessary, they also limit free entry into at least some of the markets in which banks operate," Waller said. "As a result, regulatory oversight can insulate banks from some forms of direct competition."

Meanwhile, a "short statement" regarding an interagency "crypto sprint" involving the OCC, Federal Deposit Insurance Corp. (FDIC) and the Fed, is expected to be released soon, Acting Comptroller Michael Hsu said.

The OCC will also provide clarity on its recently concluded review of crypto-related interpretive letters, Hsu said. 

Hsu, who has displayed a more cautious approach toward crypto than his predecessor, said in June he would revisit Brooks' actions regarding crypto. 

The message from both the interagency statement and the OCC's clarification of the interpretive letters is that "the agencies are approaching crypto activities very carefully and with a high degree of caution," Hsu said. 

"We expect banks to do the same. To the extent the OCC's prior communications have been interpreted as tacit encouragement to engage in crypto activities, the forthcoming releases will clarify that safety and soundness is paramount," he said.

The releases "should not be interpreted as a green light or a solid red light, but rather as reflective of a disciplined, deliberative and diligent approach to a novel and risky area," Hsu said.

"We will proceed carefully and cautiously and will hold banks to the same," he said. 

As regulators continue to observe and craft guidance for the crypto space, Sidhu said he believes regulators and crypto companies are searching for the same thing: clarity. 

"The regulators, generally, at the top level, are supportive of banks working with crypto companies. And crypto companies, similarly, are looking for clarity because there's so much they're doing that no one's ever thought of before," he said. "There's no parallel to it, so they also want lines drawn."

While a growing number of financial institutions are choosing to revamp or eliminate overdraft fees, most aren’t doing enough to meet a critical need among their customers, Dave CEO Jason Wilk said.

"It's been great to see this transition of banks getting rid of overdraft, but ultimately, they're still missing the mark," said Wilk, who founded the Los Angeles-based neobank in 2017.

Ally Bank, Alliant Credit Union and Capital One made headlines in 2021 by eliminating the fee levied on customers when they overdraw their bank accounts. (Bank of America and Wells Fargo have since drawn attention for reducing their reliance on the fees.)

Other institutions, such as PNC, Huntington Bank and Frost Bank have introduced programs and policies that help customers avoid the charge, such as alerts, grace periods and access to lines of credit.

But the measures aren’t necessarily addressing the fact that some customers want and need access to cash while in a pinch, Wilk said. 

"Over 50% of people are overdrafting knowingly because they need access to additional funds to go buy things like gas or groceries and so on," he said. "Getting rid of overdraft solves part of the problem, but it also can hurt customers who are relying on those funds to get by, even though it's a very expensive credit."

The average cost of overdraft fees in the U.S. rose by 22 cents over the past two years, hitting a record average of $33.58, according to a Bankrate survey released in October. 

Dave, which started off 2017 as a personal finance tool to help customers budget and avoid overdraft fees, entered the digital banking space when it launched accounts last summer. The fintech also has a job-search feature called Side Hustle, a product it says has helped users earn more than $200 million.

While most neobanks and a growing number of traditional firms are embracing the no-overdraft-fee trend, Wilk noted that most come with limitations.

Many policies that advertise no fees for overdrafting require customers to have direct deposit and be a member of the bank for a certain period, Wilk said, adding Dave has no such stipulations. 

Dave customers can’t overdraw their accounts and are given the option to access up to $250 in credit per year if their accounts are low. 

Customers can access the no-interest advance the same day they join, a feature Wilk said "makes a very big difference for someone that's looking to get out of a financial bind."

Outside of a $1 monthly fee it charges each customer for the account, the fintech, like most challenger banks, makes its money off of interchange. 

Going public

Dave announced in June that it plans to go public via a merger with a blank-check company sponsored by Chicago-based investment firm Victory Park Capital. The deal values the fintech at $4 billion.

Wilk said the reasons behind the decision to go public are threefold. 

The proceeds generated from the public listing will help the company invest in innovation and mergers and acquisitions, attract top talent and build trust among consumers, Wilk said.

"There were a couple acquisitions we lost out on this past year-and-a-half, due to losing it to companies that had less of an offer than we had, but ultimately, had a public currency to give away, which we did not," Wilk said. 

Wilk said the public listing will also help the startup remain a competitive employer as it seeks to grow its workforce.

"It's such a hot market for talent right now," he said. "When you're comparing an offer at a major tech company that is giving away public stock options versus private, we think that this is a huge leg up in a competitive market."

The drive to attract top tech talent also played a role in the company’s decision to implement a "virtual-first" model and adopt a national payscale for all employees amid the pandemic, Wilk said. 

Dave employees can live and work anywhere in the U.S., except for Hawaii, and all salaries are based on the California labor market.

Finally, Wilk said the company’s goal to build trust among its customers also contributed to its decision to go public. 

"We're trying to ultimately become the primary bank for our members," he said. "Having that trust on the Nasdaq, that we're a publicly traded company, with a reputation of being a public business, we think is also very helpful."

Wilk said the fintech considers customers who spend at least $1,000 a month on their Dave debit card as customers who use Dave as their primary bank.

Dave, which doesn't have its own banking charter, partners with Tennessee-based Evolve Bank & Trust, which holds its customers' deposits. 

Dave says it has around 11 million customers that use its personal finance tools, and around 1.3 million customers currently using its digital banking platform.

UPDATE: Jan. 14, 2022: The Conference of State Bank Supervisors (CSBS) dropped its lawsuit against the Office of the Comptroller of the Currency (OCC), weeks after the fintech Figure Technologies adjusted its banking charter application to indicate it would seek deposit insurance from the FDIC.

“The federal banking laws are clear. Financial service companies, like Figure, that send and receive customers’ money or lend money, must obtain FDIC insurance in order to operate under a federal bank charter,” Margaret Liu, CSBS’s executive vice president, said in a press release. “State regulators are prepared to revisit this issue should the OCC take any future action to entertain a bank charter application from a company that will not be FDIC-insured.” 

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Figure Technologies has updated its national bank charter application to include the intention to obtain deposit insurance, an amendment the fintech expects will end an ongoing lawsuit that is slowing its efforts to earn the charter from the Office of the Comptroller of the Currency (OCC), the company said.

The blockchain technology startup submitted its initial charter application to the OCC in November 2020, a move that spurred the Conference of State Bank Supervisors (CSBS) to sue to block the application's progress.

The crux of the lawsuit, which the CSBS filed against the OCC in December 2020, is related to Figure’s original attempt to gain a charter without seeking insurance from the Federal Deposit Insurance Corp. (FDIC). The CSBS argues that under the National Bank Act, the OCC lacks the authority to charter a full-service national bank without obtaining deposit insurance.

Ashley Harris, Figure Technologies’ general counsel, said the company decided to amend its application to include FDIC-insured deposits to save time. 

"We still feel like the law would have come out on our side if it were to go through litigation, but we just don't want to continue to wait for that to happen," she said. 

Harris said Figure filed the amended application with the OCC in December, and the company plans to file the remaining applications with the FDIC and Federal Reserve once it receives conditional approval from the OCC. 

"We want to confirm that there is a real appetite at the OCC for approving the bank charter before we go down the path of applying to the FDIC and the Fed, which will be a large lift," Harris said.

In a May motion to dismiss the CSBS lawsuit, the OCC argued it has the authority to reasonably interpret the National Bank Act to determine that a national bank is not required to obtain deposit insurance to lawfully commence "the business of banking."

The OCC and the state regulators agreed to pause the lawsuit over the summer, amid Acting Comptroller Michael Hsu’s decision to review the actions made by his predecessor, Brian Brooks, regarding special-purpose national bank charters. 

Hsu said in November the OCC had concluded its charter review, and said determinations and feedback to applicants would be communicated in the following weeks. 

Securing deposit insurance from the FDIC means Figure will no longer have to partner with a third-party bank, and could accept its own deposits.

"I think there's clear authority for the OCC to charter a bank like Figure that doesn't take insured deposits, but unfortunately, the lawsuit is going to chill any potential applicants from seeking a charter," Harris said. "Even if the OCC also believes that they have authority to charter a bank like that, who's going to want to be tied up in years of litigation?" 

Figure, which was founded by former SoFi CEO Mike Cagney in 2018, specializes in loan origination, equity management and payments using the Provenance blockchain network.

Cagney said in a 2020 press release that consolidating the firm's compliance efforts to align to one regulator would cut costs and allow it to market a wider set of consumer products nationwide.

With the new amendment, Harris said she’s confident Figure’s new application is straightforward and doesn’t anticipate any further legal actions from state regulators.

"We think we now have a pretty plain vanilla application," Harris said. "It's going to take retail deposits, the bank will engage in lending and it will leverage blockchain for a lot of things, so that's special. But what should happen as a result of submitting our application is that the litigation will end. The OCC will point CSBS to our application and say, 'They haven't even applied for an uninsured bank charter. They've changed it.'"

Several bank trade groups, including the American Bankers Association (ABA), the Independent Community Bankers of America and the Bank Policy Institute, echoed the CSBS’s opposition to Figure’s charter application.

In a joint letter issued in December 2020, the groups wrote "the precedent-shattering approach of granting a national bank charter to an institution that accepts only uninsured deposits would violate the Federal law, the consistently expressed intent of Congress, and public policy considerations essential to the functioning of the nation’s financial system."

The groups warned that approving a national bank charter for such an institution "would provide a new pathway to evade the comprehensive regulatory regime established by Congress for banks and their affiliates."

Banking Dive reached out to the OCC for comment.

German neobank N26 is shutting down its U.S. operations to focus on expanding in Europe, the company said in November.

Accounts for the challenger bank’s 500,000 U.S. customers were set to be closed Jan. 11. Affected users “already have been contacted with further instructions on how to withdraw [their] funds and ensure a smooth closure,” the company said in a statement on its website.

The U.S. wouldn’t be the first market N26 has abandoned. The neobank discontinued its U.K. business in April 2020, saying the country’s withdrawal from the European Union would have made it impossible to operate with an EU banking license.

The move brings to an end N26’s 2½-year stateside odyssey that began when it launched its app to a 100,000-customer U.S. waitlist in July 2019.

The strategic turnaround has taken shape over the past nine months. Alex Weber, N26’s chief growth officer, told Banking Dive in February 2021 the company had planned to grow its U.S. employee base by 75% that year and boost its product and technology capabilities.

N26 may still do the latter — just elsewhere. 

“We are sharpening our strategic focus on our core business in Europe for the time being,” Weber wrote in a statement to Bloomberg.

N26 said it wants to expand into more countries in eastern Europe and still plans to launch services in Brazil. The challenger bank also said it will aim to move U.S. staff to other areas of its business “where possible,” according to CNBC.

Warning signs consistently emerged, indicating the neobank hasn’t always been on the most solid footing. N26 paused signups for new U.S. customers in August and re-implemented a waitlist as its agreement with sponsor bank Axos was waning.

The neobank laid off 10% of its New York-based workforce in May 2020, citing challenges related to the COVID-19 pandemic. Nicolas Kopp, N26’s U.S. CEO, also left the company early in the pandemic.

N26 has faced regulatory issues abroad, too. German financial regulator BaFin in June ordered the challenger bank to pay €4.25 million ($5 million) because it submitted anti-money laundering-related suspicious activity reports late.

A month earlier, the regulator ordered N26 to fix deficiencies in its IT monitoring and customer due diligence and appointed a special commissioner to oversee its progress.

BaFin most recently imposed a cap on N26’s growth, limiting the challenger bank to no more than 70,000 new European customers per month. The company, however, announced the cap alongside news that it had closed out a funding round worth $900 million — giving N26 a total valuation of more than $9 billion, higher than the market cap of its home country’s second-largest bank.

N26 will use that $900 million in funding to develop new products from Belgrade, Serbia, Business Insider reported. Investment products are among the financial services N26 wants to add among its European user base, the company said.

N26’s fall in the U.S. illustrates, too, how tough it can be for a foreign challenger to break in to the American market. U.K. challenger bank Monzo, for example, withdrew its application for a banking charter with the Office of the Comptroller of the Currency (OCC) last month.

"In our industry, the level of synergy moving from Europe to the US is not like WhatsApp that you can internationalize easily," N26 co-CEO Max Tayenthal told Business Insider last week. "We had to build the bank from scratch with different licenses, agreements, and payment rails.”

N26 misses out on some revenue streams, such as net interest, that fully licensed retail banks here can take advantage of, Robert Le, a senior emerging technology analyst at PitchBook told the publication.

“If you asked me four years ago, I would have said we'd launch in a new market every year, but it's complex enough as it is, and you shouldn't underestimate that complexity,” Tayenthal said.

BM Technologies plans to acquire First Sound Bank, a Seattle-based community business bank, in an all-cash deal worth $23 million, the banking-as-a-service (BaaS) provider announced in November.

The combined entity will be named BMTX Bank and "will be a fintech-based bank focused on serving customers digitally nationwide," BM Technologies said in a press release. First Sound Bank, which has one branch in downtown Seattle, is expected to continue serving the greater Seattle market following the acquisition, the company said.

"This is a thrilling milestone for BM Technologies, and is a major step forward in executing our vision to create a disruptive fintech bank," Luvleen Sidhu, BM Technologies' chair, CEO and founder, told analysts. Sidhu will lead BMTX Bank as chair and CEO, and will be directly responsible for digital banking initiatives, the company said. Marty Steele, First Sound Bank’s president and CEO, will lead the combined company’s community banking division and also serve as chief operating officer of BMTX Bank. The deal, which is subject to regulatory approvals, is expected to close in the second half of 2022.

Sidhu likened the proposed deal to strategies taken by fintechs such as Square, LendingClub, Varo Bank and SoFi, which have successfully obtained bank charters over the past several years. 

"Similar to these other fintechs, we believe this is a critical step in order to create a sustainable, profitable company with numerous growth opportunities in the future," she said.

During the analyst call, Sidhu listed several strategic and financial benefits to the deal, including the ability to combine its financial technology and proprietary BaaS expertise with a bank charter.

The deal will allow BM Technologies to accelerate its earnings power by supplementing fee-based income with net interest income, she said, adding the deal will also allow the company to offer new products and services over time, "which will also help us better attract, engage and retain customers and help us fulfill our customer-for-life strategy."

"This move enables us to become a fintech bank that can support other fintechs to come to market, similar to what Cross River, WebBank, MetaBank and a few other players are doing today," she said.

BM Technologies, formerly BankMobile, was incubated by Wyomissing, Pennsylvania-based Customers Bancorp for five years before it was acquired for $140 million by special-purpose acquisition company Megalith Financial Acquisition Corp. in August 2020. 

While under Customers’ umbrella, the fintech originally had a direct-to-consumer model before shifting to a business-to-business one in 2016, in light of growing competition from challenger banks.

Sidhu said the company’s previous connection to a bank will give it a competitive advantage over other fintechs seeking their own bank charters. 

"We were born within a bank and operated as a bank for six years prior to divesting as an independent fintech company, which provides us with a huge competitive advantage relative to other fintechs hoping to become a bank," she said. "We strongly believe a bank is the most profitable way for us to operate our model, versus a bank partner model where we need to share in revenues and have less control over our financial future."

Customers Bank has continued to hold BM Technologies’ customer deposits following the spinout, but those deposits will be moving over to the new entity’s balance sheet over time, Sidhu said.

BM Technologies is open to exploring additional strategic M&A opportunities, Sidhu said, and plans to expand its product offering to include advice, crypto, investing and insurance over the next six to 18 months. The company plans to take a "build, buy, partner" approach to adding the new products and services to its digital banking platform, Sidhu said. 

"As a local bank, we remain committed to our community and are excited about the opportunity to leverage BMTX’s innovative digital banking technology, Banking-as-a-Service business model, low-cost deposit funding, and better access to the capital markets in order to scale our [Small Business Administration], commercial and private banking, mortgage, and other business lines," Steele said in a statement. "Together we are looking forward to this partnership to create a nationwide deposit gathering and lending platform with the power to deliver an integrated customer experience at the highest level."

Oportun, a low- to moderate-income (LMI) lending specialist, has agreed to buy neobanking platform Digit for $212.9 million — $98.5 million in equity and $114.4 million in cash — the fintech announced in November.

The deal, which was approved by the boards of directors of both companies, is expected to close by early 2022, Oportun and Digit said.

"This is a transformational deal that will expand our addressable market, accelerate and diversify revenue growth, and position Oportun for even more future success," Raul Vazquez, CEO of Oportun, said in a statement.

Oportun has had its eye on expanding into offering banking services for some time. The San Carlos, California-based fintech filed an application for a bank charter with the Office of the Comptroller of the Currency (OCC) in 2020, then withdrew it in October.

Under the deal, Digit will operate as a business unit within Oportun and continue to be led by Ethan Bloch, Digit’s founder and CEO, according to a press release. All of Digit’s more than 100 employees will join Oportun and continue their job functions, Oportun said.

"With this acquisition, we believe we will be able to quickly actualize a bold vision for an [artificial intelligence]-driven, digital-first platform that helps members daily when they need to borrow, save, invest, and bank," Vazquez said. "As a combined company, we will redefine what it means to be a neobank, with outstanding products and service that address the everyday financial needs of hardworking people."

Digit was founded in 2013 and provides personalized savings, investing and banking tools to 600,000 paying members, according to the press release. The proposed combination will give Digit and Oportun access to 1.4 million members, to whom both entities plan to cross-sell their products. 

Vazquez said the deal accelerates Oportun’s digital banking strategy.

"In Digit, we are purchasing a proven and scalable neobanking solution that gets us to market 3-5 years earlier than if we were to build it on our own," he said.

Oportun said it remains committed to pursuing a bank charter with the OCC and plans to amend elements of its charter application to reflect changes to its business.

In addition to revenue diversification with the addition of subscription, transaction and interchange fees, Oportun anticipates the deal will spur higher conversions and lower customer acquisition costs by making neobanking available to all Oportun and Digit customers. 

With the rise of neobanks — mobile-centric digital banking platforms known for low costs and easy user experiences — the tendency has been to rely on third-party core providers such as Temenos, Q2, Mambu, FIS and others. 

Current, a six-year-old New York-based neobank that counts 3 million users, went the less popular route of building its own core banking infrastructure. It’s an approach that may seem costly and labor-intensive, but the company’s chief technology officer, Trevor Marshall, said an in-house core lets it have more control over the user experience and offer unique products.

"Unfortunately, when I think of a checking account, I think of a parking lot — something I really don’t engage with much," he said. "Current is about movement. It's about being a big part of the way that you're interacting with your money, so you’re this hub of being able to get money in, being able to spend money out, and then being able to take your excess money and earn on top of it."

Current, whose average customer is 27 years old, has raised more than $402 million and is reportedly valued at $2.2 billion. Its goals align with many other neobanks that are seeking to become a "hub" for customers’ financial lives: N26, for example, once described itself as a "central cockpit" for customers’ finances. But Marshall said a smooth user experience, and access to leading-edge products, depend on a core that can support those outcomes. 

Current’s path to a self-built core began early in the company’s lifecycle, when it was experimenting with building pathways to money movement that didn’t depend on legacy rails. As an experiment, Current built a proof-of-concept on top of Ripple in 2015 that allowed users to send money to one another. (The company's ledger as it stands now is not built on Ripple.)

Current launched custodial banking products in 2017, and checking accounts for all customers two years later — both built atop a ledger it crafted in-house that allows for quick money movement and cost savings it says are passed onto consumers. 

'No one else in the middle'

Current Core lets the company tailor its offerings to customers' needs, such as the need for instant availability of funds, Marshall said. A customer who deposits funds into their account at a retail pharmacy can get instant access to the money without having to wait because Current doesn’t have to go through a third-party processor.

"We've built this integration with InComm where they talk directly to our core, so as soon as they're making these sort of requests to us, we can run all of the validation around whether or not this user can accept the load, and we can immediately make those funds available to the customer," Marshall said. "There is no one else in the middle."

Beyond debit, Automated Clearing House, direct deposit and peer-to-peer payments, Current has no-fee overdrafts through its core, along with gas hold removals at the pump, the ability to earn points while transacting at partner retailers, merchant blocking and dynamic spending limits.

Building a core platform in-house was a significant investment, the company said, but it argues that the gains outweigh the costs. Sapphire Ventures, an investor, wrote in 2020 that Current has achieved impressive unit economics "by building a cloud-native and horizontally scalable technology stack that brings core pieces of banking infrastructure in-house, resulting in meaningful cost savings that can be passed onto its users." 

The reach of Current’s custom-built core could ultimately extend beyond its customer base, an analyst argued.

"If I were the team at Current, and had spent the resources and, more importantly, the time to build that banking stack internally, I would want it to go beyond powering relatively insignificant features for my own customer base, " said Jason Mikula, a fintech consultant at 312 Global Strategies BV. "I'd be looking to monetize it as an 'infrastructure' play to other financial services providers — diversifying its revenue streams and building a narrative around a theme that is attracting increasing attention and funding from [venture capital firms] right now: 'fintech infrastructure.'"

Current’s focus is on delivering value for its customer base and the investment in a self-built core supports that effort, the company said.

"Part of the return comes from product flexibility. ... You can build products that others can't, and that's something that we're beginning to get the benefit of and that took a very long time to start paying out," Marshall said. "We’re able to take out very expensive per-transaction fees other partners would charge."

And while Current is committed to growing its product suite beyond banking and payments, the company has said it had no plans to become a bank. Instead, the company said it’s "focused on building the best, most innovative technology that can solve real problems for our members and enable them to change their lives through working with our partner banks to provide banking services."

Marshall said the company is exploring how the integration of decentralized finance (DeFi) offerings would work, in partnership with Compound, a DeFi protocol that allows users to lend and borrow crypto. Compound Treasury, an offering for non-crypto-native businesses and financial institutions, allows these businesses to access products including high-yield interest accounts powered by USD Coin.

Integrating Compound offerings within the Current platform will help take the friction out of onboarding, especially given that high-yield interest products are among the top requested features from customers, Marshall said.

"We’re constantly looking for more ways to deliver even more value back to our members," Marshall said. "Working with Compound Treasury, we’ll be able to give our members access to the protocol’s interest rates through a simple and unified experience that can enable even more people to improve their financial outcomes."

Jiko, the fintech startup that made headlines in 2020 when it gained a national charter after purchasing a small Minnesota-based community bank, said it is pivoting from its consumer-focused model and accelerating its business-to-business strategy.

"We always had this idea that at some point we would open up the [application programming interfaces]. We knew from the beginning that it wouldn't just be for the app," said Jiko co-founder and CEO Stephane Lintner, adding banking-as-a-service (BaaS) was a vision the startup had "early in its DNA."

Shortly after Jiko’s acquisition of Mid-Central Federal Savings Bank, which is based in Wadena, Minnesota, Lintner said the startup began receiving numerous inquiries from other fintechs who were interested in leveraging its technology. 

What makes Jiko’s services unique is that the platform replaces bank deposits with government-backed Treasury bills, which can be spent in real time by customers via debit transactions. The company says its debit card cash-back rewards program passes the interchange income back to the customer in the form of 1% cash back on qualifying purchases. 

"So many people were excited about what we were doing and we got an immediate demand," said Lintner, a former Goldman Sachs trader. "So we started thinking strategically, 'Can we accelerate this?' And we all came to the conclusion that it was the right thing to do."

Lintner said the company poured all of its energy into opening up the platform as soon as it could, a project it spent the bulk of the past year on.

Several partners are already lined up, Lintner said, which are expected to go live in the coming weeks. The company is in active conversations with around 40 other potential partners, Lintner added.

Jiko’s banking app is still available for consumers to download, and the company plans to keep enhancing its features, but its main use will serve as a "showroom" for Jiko’s technology, Lintner said. 

As an example of Jiko’s capabilities, Lintner pointed to a large transaction the platform facilitated in 2021. 

In February, the company announced it processed a $4.7 million debit card transaction as part of its 1% cash-back rewards program. The company claims the single transaction, a tax payment to the IRS made with Jiko’s debit card, resulted in $47,000 cash back to the customer, deposited directly into the customer’s account.

"It shows that we can do large things — process large, million-dollar payments — and have a lot of money leave the bank because we have T-bills behind it," said Lintner, who claims the debit card transaction was the largest of its kind in history. 

Lintner said he is confident Jiko’s B2B focus — or "B2B2C focus," as he calls it — opens up the startup to a large market. 

"We have a massive opportunity to deliver our product and our vision at scale by embedding our digital product in your favorite brands. Because of who we are and how we built this, we basically have infinite scale," he said. "We really are one big infrastructure play that can power everyone up but still protect the consumer. ... We're not going to be spending large campaigns on the consumer, trying to get people to download the app or referrals — we’ll continue to do some of that — but the real focus is on our partners."

Similar pivot

Jiko isn’t the first fintech to shift its focus from a direct-to-consumer model to a business-to-business one. 

When faced with mounting competition in the consumer digital banking space from challengers like Chime and Varo Bank, BM Technologies — back when it was known as BankMobile — made a similar pivot.

BM Technologies, which was spun off from Customers Bank in 2020, turned its focus to B2B in 2016 after realizing it could carve out its own space in the market by offering banking services to large nonbank entities, CEO Luvleen Sidhu said at a conference in September.

The pivot paid off, Sidhu said, adding its partnership with T-Mobile helped the company grow T-Mobile Money into a $1 billion bank in less than two years.

Lintner said Jiko is seeing interest from lifestyle apps, new and established fintechs, as well as banks. 

"We're having interesting conversations with banks — banks that have too many deposits and want to compete with the fintechs but are not sure how to do it," he said. "It's an interesting landscape. We're launching a few [in 2021]. There'll be a lot more [in 2022]."

Neobanks have seen explosive growth over the past several years, both from players like Chime and Varo, who are targeting the broad consumer market, and a number of affinity challengers: fintechs offering specialized banking services for underserved or underrepresented groups. 

While Chime and Varo continue to turn heads with their growing user numbers and massive funding rounds, it's the latter category — the affinity neobank targeting the vertical market — that is poised to experience its own market expansion soon, PayPal Ventures Operating Partner Peggy Mangot said during a keynote address at the Finovate Fall conference in New York City in September.

"We're seeing so many of those emerge right now. It's incredibly exciting. What these vertical neobanks are doing is they're really marketing to appeal to a specific customer cohort," Mangot said referencing niche fintechs like the Asian-American community-geared Cheese and the LGBT-friendly Daylight as examples of affinity neobanks whose services address the needs of a specific community. "I have a hypothesis that there will be breakout verticals, and consumers will take on that additional relationship."

Consumers already use a number of fintechs or banking service apps to address their financial needs, Mangot said. An additional service that brings a sense of community and affiliation to a group or cause is an attractive proposition for some consumers, she added.

"A consumer may already have an account with Venmo for peer-to-peer payments, use Robinhood for equities and stocks, SoFi for student loan repayments, Empower for short-term loans, Ellevest for passive investing, as well as have a Bank of America account they don't want to close, but are transacting with a little bit less," Mangot said. "Then along comes a fintech for all. A perfect one that's targeting us, and it's providing us a community and benefits. Will they add No. 7? Yes, as long as enough value is exchanged."

But aspiring neobank founders, as well as those looking to invest in these startups, need to evaluate whether or not the fintech is "different enough," Mangot said.

"Is it different enough to persuade a cohort to create a relationship with this vertical bank? Is it different enough than a mass market neobank like a Chime or a Varo? Is it different enough than an account they may already have at a Chase or Bank of America?" she said.

The neobank advantage

In general, neobanks, whoever their target audience may be, have several key advantages over traditional institutions, said Mangot, who was the former general manager and senior vice president of innovation at Wells Fargo before joining PayPal’s venture arm last year. 

"I don't think I'm oversimplifying when I say there's two main advantages that neobanks have," Mangot said. "The first is product velocity, and the second is marketing effectiveness."

Not only does newer technology give neobanks the ability to ship their products at speeds much faster than traditional large financial institutions, but the agility of their compliance and risk management teams contribute to that speed as well, Mangot said.

"Neobanks have created these highly accountable, right-size legal risk and compliance teams, and the advantages of those teams is that they can assess risk, document risk mitigation and come to a decision and approve the new product upgrade," she said. "And they can do it in a period of time that's much faster than traditional financial institutions, and this gives neobanks an incredible advantage."

On the marketing side, Mangot said successful neobanks are savvy when it comes to digital acquisition. 

"They know their numbers. There's no confusion about customer acquisition costs or lifetime value of the customer," she said. "Contrast that with traditional financial institutions and there are three disadvantages that I see. The first one I would call brand vs. performance."

Traditional financial institutions have deep experience in broad brand marketing campaigns, Mangot said. But where they are lacking is in nimble digital acquisition and the ability to pivot to new channels depending on what may or may not be working. 

While managing multiple channels such as a website, app and brick-and-mortar branches, it’s difficult for traditional banks to attribute the marketing spend back to customer acquisition across channels and products, Mangot said.

"The last area is just simply data," Mangot said. "These large traditional financial institutions have many products, huge budgets, and they have many agencies and third parties in between them and data. So it's much harder for them to essentially know their true [customer acquisition cost] and a true [lifetime value], even for basic banking."

MoneyLion, an eight-year-old New York-based neobank, wants to become a destination for all of its customers' financial needs, including banking, lending and investing. 

It's a strategy that resembles competing propositions from other fintechs, but founder and CEO Dee Choubey said what sets MoneyLion apart is its approach to serve customers across the financial needs spectrum, from times of "excess" — through banking, cash management and e-commerce features — to times of need, with offerings such as its Instacash cash advance product, as well as personal and credit-builder loans.

"We're building a data-driven 'super app' for hardworking Americans," Choubey said. "Eighty percent of Americans oscillate between times of excess and times of need, and it's never constant for them. Our ability to use our proprietary technology stack, our data advantage, and our intimate knowledge of our user base to build products for those inflection points really sets us apart."

MoneyLion began as a personal finance and lending platform. A few years into its operations, it added digital banking and investing. It had planned to roll out crypto in 2021, and a "buy now, pay later" offering is in beta. The company announced in February that it will go public through a merger with special-purpose acquisition company Fusion Acquisition Corp. in a $2.4 billion deal. MoneyLion also acquired financial planning technology firm Wealth Technologies in March, a move Choubey said will help enhance its ability to offer personalized insights.

"[Their technology] allows us to take details from the consumer, including age, income, retirement date, expenditure capabilities and provide very customized term-by-term guidance," Choubey said. The company will continue to integrate its capabilities into the MoneyLion platform.

Subscription-based menu of services

MoneyLion positions itself as a financial-services answer to Costco or Amazon. But customers can opt to subscribe to products on an "à la carte" basis. 

The RoarMoney checking account, offered in partnership with MetaBank, has a $1 monthly fee, while MoneyLion’s robo-adviser, which it calls Managed Investing, costs $1 per month. Instacash, or MoneyLion’s cash-advance product, has no monthly fee, but users pay $3.99 to $4.99 for instant access to funds. Meanwhile, MoneyLion’s Credit Builder Plus subscription offering, at $19.99 per month, includes access to credit-builder loans (annual percentage rates vary from 5.99% to 29.99%), banking and investing. 

"Once we’ve onboarded the consumer, once we've gotten their payroll [direct deposit], at every different inflection point, they will need different products," Choubey said. 

The company added a product marketplace in 2021, which includes offerings from Nationwide Insurance, and Choubey said the company is open to adding nonfinancial products.

"From a nonfinancial product perspective, you know, our ultimate vision is that MoneyLion is a daily destination, and that daily destination is a mix of, of course, financial transactions, but also how to live a better life," Choubey said.

Membership and cash advance products

As MoneyLion seeks to reach a broad swath of customers, its lending offerings have come under regulator scrutiny. The company disclosed in a June regulatory filing civil investigative demands in three successive years — 2019 through 2021 — concerning its membership model and its compliance with the Military Lending Act. The company also received investigative subpoenas from the Securities and Exchange Commission concerning a subsidiary, the Invest in America Credit Fund 1 LLC, through which MoneyLion’s credit and payroll advance products are financed. MoneyLion’s lending products are also the subject of inquiries and investigations from state financial oversight authorities from California, Minnesota and Colorado.

Choubey said the company is cooperating with regulators and is on a "very solid footing" with them.

"We operate in a highly regulated environment," he said. "There's lots of regulatory agencies that we report to and as we innovate and as we build new products, oftentimes they'll have questions. It's no different from any regulated institution."

Since MoneyLion’s credit-builder membership program levies a monthly fee on top of the loan APRs, some analysts contend that could mean a heavier fee burden on consumers when compared to similar offerings on the market.

"Many banks, credit unions, and some fintech startups offer similar credit-building loans for total costs as low as $60 on a $1,000 12-month loan, or about 15% of the total costs for a similar credit building loan from MoneyLion's," said Jason Mikula, a fintech consultant. 

Meanwhile, the Instacash cash advance offering also has some potential challenges, including costs consumers could rack up in the form of voluntary tips, instant-transfer fees, and the risk automated repayments may trigger insufficient-fund or overdraft fees, Mikula said. (MoneyLion, according to its website, said the company schedules Instacash repayments based on its analysis of the customer’s cash-flow patterns. Customers can also opt to receive funds in 24 to 48 hours without paying extra fees.)

Choubey said customers have opportunities to win back up to the entire monthly membership fee based on frequent engagement with the app.

"That's been one of our hallmarks for a long period of time — how we use engagement to educate and to lower the cost of financial products," he said.

Choubey said Instacash is designed to meet the evolving needs of customers with volatile income patterns.

"There are multiple models for delivering [earned-wage access] and conversations that we're having with regulators are actually very thoughtful and productive," he said.

MoneyLion reported its net revenue increased 98% during 2021's first quarter, reaching $33.2 million, compared with $16.8 million a year earlier. Choubey said the company generates revenue from transaction fees (including subscriptions), interest on lending (which accounts for 5% of the company’s revenue), "advice and affiliates," and interchange. MoneyLion said it counts 1.8 million customers.

The path to differentiation

Against the backdrop of competitors, MoneyLion sees its marketplace model as a differentiator.

"Our overall vision is to be a daily destination," Choubey said. "We're really transcending financial transactions to life transactions [and that] allows us over time to go from being a platform of single products ultimately to being an aggregator."

Stephen Greer, a senior analyst at Celent, suggests MoneyLion, like many neobanks, is on a path to diversify its revenue sources beyond interchange fees. 

"[That's] pretty important because they're going after deposit accounts which are fairly low margin, and fairly cheap," he said. "I wonder, with some of these neobanks, at what point do they reach a limit and afterward need to become a bank to start really growing."

He noted that MoneyLion, like many banks and fintech startups, is likely aiming to play an advisory role to its clients as a tool to grow wallet share. But setting itself apart in a sea of low-cost competitors may still pose a challenge for the company as it scales, Mikula said.

"As a nonbank fintech, [MoneyLion] partners with MetaBank to offer some of its products, constraining its ability to differentiate," he said. "MoneyLion has little competitive advantage versus other 'neobank' products, and its cash advance and credit building products are arguably worse for consumers — less transparent, more expensive — than similar features from Chime or Varo."