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Starting a Neobank is Easier Than Ever. These are the Teams Making it Possible

By Everett Cook

Last updated: Feb 15, 2023

Banking, an industry practically as old as industry itself, has seen a tremendous amount of well-funded disruption in the last decade with the emergence of neobanks. The interesting thing about the space is that investors continue pumping money into banks that are not technically banks. Instead of mucking around in years of regulatory paperwork, challenger banks have relied on the sponsor bank model, in which they partner with a traditional bank that does have a charter.

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Five interesting companies in the U.S. challenger bank space include:

1. Alloy

The New York-based identity operating system Alloy helps neobanks easily manage customer data, most applicable for Know Your Customer/Anti Money Laundering (KYC/AML). This allows for a stronger, more streamlined application process while preventing fraud, crucial for acquiring new customers.

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2. Galileo Financial Technologies

Acquired by fintech giant SoFi in April, Utah-based Galileo allows challenger banks to create everything they need to launch a payment product, including accounts, physical and virtual cards, and mobile apps.

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3. MANTL

Another New York-based API, MANTL claims it can reduce the time a user needs to open up an account to 2 minutes and 37 seconds. The company also streamlines customer and acquisition data into one easy interface, allowing neobanks to make quicker decisions to maximize growth.

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4. Dwolla

Specializing in Automated clearing house (ACH) payments, the Iowa-based Dwolla essentially makes it easy for challenger banks to move money in real time to customers without having to use a third-party site.

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5. Jumio

One of the more cutting-edge KYC tools on the market, Jumio uses AI and face-based biometric data like liveness detection to help banks verify their customer’s identities. The Bay Area company claims to have verified 225 million identities issued by over 200 countries.

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Typical of any industry that has received billions of dollars in funding, there has been a recent flood of challenger banks to the market. They follow the classic neobank model of spending millions in venture capital to acquire customers that have not been well-served by the traditional banks. This strategy works when your cost of customer acquisition is low, but it’s a problem if those costs are high. And as more and more businesses enter the space, customer acquisition costs are becoming largely unprofitable, effectively putting a pin in one of the key value props of a challenger bank.

As such, the neobanking market might look a lot different soon. In 2019, Grasshopper used a more than $130M raise to earn its national charter and become the first fully-digital commercial bank. Varo is not far behind, as it earned FDIC approval for deposit insurance in February and is now in the final stage of becoming a chartered bank. Whether or not more challenger banks will follow the same path remains to be seen, but now that there’s a blueprint to regulation, along with another potential recession following the mass unemployment of the coronavirus pandemic, we could see even more bank disruption in the 2020s than we did in the 2010s.

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