Launching a successful neo-bank is extremely challenging. It takes the already complicated task of starting a company and adds the difficulty of fierce competition, complex product development, strict compliance, and critical partnerships. A founder’s ability to stand out to investors – while capturing people’s interest before running out of cash – is an essential component of making it in this complicated space. The ability to understand financial analysis, develop enabling technology, and obtain trusted human validation are essential to bringing your company to product launch. Here are 10 considerations to keep in mind as you navigate the neo-bank landscape.
Financial Projections and Analysis
While the actual numbers will be scrutinized and subject to constant revision, the ability to create financial projections is essential. Not only will projections explain the viability of a product, but they’ll also demonstrate the founder’s ability to comprehend and speak intelligently on financial analysis. Founders must understand the language of balance sheets, income statements, and cash flows to convince investors their company is worth backing.
Putting too much credence into your projections is a common pitfall. The likelihood of an early-stage company hitting projections is slim. Knowing that, keep projections short term (monthly, quarterly) as comparisons between projections and actual numbers will come about more frequently and allow for standard revision. In addition, don’t develop unrealistic goals. It won’t look great for a company to significantly miss projections. Founders with a better handle on their business, including the ability to accurately project revenue, will improve the legitimacy of the business.
Having a thorough understanding of your unit economics – that is, the revenue and costs associated with a single customer – will be useful when rerunning financial projections and understanding customer profitability. Generally, analysis would incorporate actual company data and discounted publicly available market data. This is a key metric, and you should be prepared to speak to it in significant detail with as much supporting information as possible.
Any expense directly tied to generating revenue should go into a unit economic analysis. This would include customer support, hosting, and technology expenses to the extent they are estimable. This unit economic analysis would be expected to change over time as more favorable terms for the customer may be necessary to acquire market share. Unit economics wouldn’t necessarily be included in any model or financial information you share with prospective investors, but they would be an important driver of your overall financial model. By understanding unit economics, you can more easily rerun financial projections for changes in product demand.
Net Interchange Percent Analysis
Fintech companies can’t monetize deposits the way a bank can and can’t tie up capital by keeping loans on the books. Therefore, interchange income is generally the largest revenue-producing activity for an early-stage neo-bank. Accordingly, financial analysis should include a gross-to-net interchange percent analysis. This analysis would start with gross interchange received, and be reduced for items such as rewards, cost of risk, cost of funding, processing and servicing, fraud, and any other known incentive costs.
Financial analysis will need to focus on how many customers you can get, which is why the unit economic analyses previously mentioned are essential. If you are pre-product, there will be questions about how you are projecting the ability to obtain customers. There should be a specific focus on who is interested in this product, and customer validation from partners will be key.
Customer validation can come in different forms including enterprise partnerships and validation from potential customers. Are there any existing companies or demographics that have suggested interest in your product? In the absence of a product, this is an important way to validate an idea. Trusted human validation is the strongest verification, but there needs to be a product to demonstrate this.
Once you’ve launched, know your strategy to acquire customers. For example, the neo-bank client we interviewed for this article paid out 1.5% in rewards to attract new customers. These early customers were not profitable, but they did build up a visible customer base for the business.
The goal is not to sell many different products to existing customers, but instead to focus on one or two higher-yielding products. Everything else can be complementary, but too many products or initiatives can create what is referred to as “distraction risk” – meaning you should focus your efforts on the things you do best.
Detailed Hiring Forecast
Build a detailed hiring forecast that would drive your salaries expense forecast. It is important to think through the critical hires the company will need to make, and when during your development they will need to be hired. This hiring forecast should include all functional areas – sales, marketing, customer service, development, and compliance – and would serve as the primary driver of forecasted spend in those functional areas.
Generally, venture capitalists are looking to invest when there is something of a functioning product. In the absence of a product, connections to markets become more important. We recommend neo-banks think about how much capital you would need only to get you to the first value inflection point – a minimally viable product, X beta customers signed up, initial validation of your revenue model, customer acquisition cost (CAC), unit economics, etc. Without a minimally viable product, attracting venture capital interest will be challenging. In addition, any pre-product companies would be asked to give away much more equity.
Neo-banks will likely need a limited functioning product through a banking as a service (BaaS) provider prior to seeking venture capital. The neo-bank client we interviewed was self-funded by the three founders until they had a functioning product. They built the banking rails and utilized a banking as a service provider. By moving the business as far as they could without outside funding, they were able to maintain a large share of capital when seeking venture capital money.
Whenever your budding neo-bank obtains capital, it’s important to demonstrate the ability to effectively deploy the raised capital by enhancing product functionality or acquiring additional market share. Once you demonstrate the ability to provide investors with a return, future raises become less challenging. You should be able to speak to exactly what this spend will produce in terms of functionality and where it puts you in your overall product roadmap. You should also be prepared to speak to how you know this is a reasonable spend amount (e.g., having spoken with vendors).
Perfect the Pitch
The ability to effectively pitch your company will become important, as investors want founders that can capture people’s interest before they run out of cash. You can have all the pieces assembled, but that doesn’t necessarily mean the idea will catch fire. A strong pitch will demonstrate an ability to show strength in product offerings and be helpful with raising investor capital when needed.
Build the Team
Regardless of where you are with your product, the team is essential. An investor is not going to take on risk unless they are certain the founders are committed, and that includes having dedicated full-time resources on launching the start-up. If committing full time to launching the company is not feasible, there is potential to bring on another founder. However, this individual would likely command the lion’s share of the equity.
Consumer neo-banks are challenging, especially because of the strict regulatory environment. Part of your team buildout should include an expert in charge of compliance requirements. If this person doesn’t exist currently, there will need to be a plan in place to get them.
Be prepared to demonstrate expertise. Specifically, what will your technology team look like? Who can build code to bring this product into existence? Venture capitalists love people and track records and will perform due diligence on your team.
Knowing Your Partners
Do you have the team to be able to bring this product to market? Do you understand the different partnerships needed? There is a wide range of partners needed, and neo-banks can’t go anywhere without a BaaS partner. There are mature options available (Synapse, Q2, Kansas City Bank, Green Dot Bank, Starling Bank, BBVA), as well as local banks trying to get into the service. While a local bank may be a more affordable option, they likely will not have as well-developed an infrastructure already in place.
Who is running your card programs? Where will your deposits reside? All partners will be scrutinized by investors, so give significant thought to the partners you’re selecting.
Fintech accelerators exist to help founders bring their product along. Acceptance into a program will depend on having someone dedicated full time to the startup and being able to recruit the team necessary to bring an idea to product launch. This may be a good opportunity to surround yourselves with like-minded individuals and additional resources as you move towards product launch.
Wolf & Company is a full-service public accounting firm dedicated to servicing fintech clients along their journey. Whether your needs are related to accounting and tax consulting, cybersecurity, compliance, audit, or SOC and PCI testing, we have professionals committed to helping your business grow.