PerkStreet Financial made waves in 2008 when it opened its doors with a rewards-based, online-only checking account. The venture-backed firm aimed to eliminate operating costs by keeping it all online, and since its inception, Boston-based PerkStreet gave out more than $4 million in rewards to its customers and garnered accolades along the way.
Fast-forward five years, and PerkStreet has run out of money to pay those rewards. The company announced Aug. 12 that it would shut down later this month and would be unable to pay rewards to customers who hadn’t yet cashed in their perks.
“We needed to raise more capital to continue the company and were unable. Banking is just a really hard space to start a company, even more so with venture funding. The payback dynamics are so different than other tech sectors,” CEO Dan O’Malley told Banker & Tradesman via email.
Suppressed interest rates rendered deposits essentially worthless, and continued downward pressure on interchange caps also pushed down revenue at PerkStreet, he said.
While O’Malley didn’t name it as a culprit, consumer apathy probably didn’t help matters.
“People are relatively apathetic about their banking. They may complain about it, they may not like it, but for the most part, it’s kind of a pain to move,” said Jim Bruene, founder of Financial Innovations and publisher of Online Banking Report. “It’s been interestingly difficult for non-traditionals, especially Internet-only type banks, to grasp a lot of market share.”
But that’s not stopping a handful of plucky startups from trying their damndest.
No FDIC Support
Ron Shevlin, a senior analyst at Aite Group, dubs these new financial services startups “neo-banks.” Many aren’t actually banks and, therefore, can’t use the word “bank” in their name, or apply for FDIC insurance, but all the same, they propose to offer consumers similar products to a bank or a differentiated experience.
Moven is one example. It partners with several banks on the back end – its primary relationship is with CBW Bank in Kansas – and concentrates its energies on offering a differentiated front-end experience, which CEO Brett King calls a “lifestyle application.”
“It’s designed to help you understand how you use your money on a daily basis rather than just a payment gateway,” he said.
When a Moven customer swipes their debit card or withdraws cash from an ATM, he or she receives a real-time receipt that puts that particular transaction into the context of his or her traditional spending habits. For example, if you swipe your card at Starbucks, that instant update will tell you how much you’ve already spent at Starbucks that month and your remaining balance.
Moven, which went live in May with $4.2 million in capital, has now attracted more than 3,000 customers, and King says it’s also a win for the smaller, regional banks it partners with, which get to grow their own deposit base with no additional effort.
Meanwhile, Lending Club has made considerable headway in the peer-to-peer lending space, offering three- to five-year term consumer loans with straight-line amortization via an eBay-esque loan origination platform.
CEO and founder Renaud Laplanche said the majority of his borrowers are younger professionals, in their mid-30s, who are borrowing to refinance credit card debt at a lower rate. The average loan, he says, is about $12,000 and while the interest rate varies, a three-year loan typically carries a 13 percent interest rate.
His investor base skews older, usually people in their mid- to late-40s who are saving for retirement and looking for a better return on their money than they might get at a bank. Lending Club, Laplanche said, offers returns between 6 and 9 percent.
Secrets To Success
While Internet-based financial startups like Lending Club, Simple and Moven have only been able to capture a small share of the market thus far, that may change if tech-savvy millennials ever shift their banking preferences.
Shevlin echoed Bruene’s points about consumer apathy and pointed to recent data from his firm showing that millennials largely prefer big banks.
“You can come out with a great value proposition and great technology, but you’re asking people to make fundamental changes in the way they’ve done something in an area they just don’t care that much about,” Shevlin said.
Concentrating staff and money in the digital realm may ultimately prove one of the keys to a successful financial services start-up.
Lending Club, for instance, launched on Facebook and relies heavily on word of mouth to grow its customer base.
Likewise, King has a staff of just 16, but he’s counting on Moven’s relatively low overhead to help drive his company’s growth.
“The cost of acquisition is where this model is going to make or break. A traditional bank can’t compete with your ability to grow in scale,” King said.
And despite PerkStreet’s failure, O’Malley doesn’t think that potential start-ups in the financial sector ought to be discouraged.
“While it’s very difficult to build a new company in the space, I would still encourage others to do so,” he said. “It’s sorely needed.”
Email: lalix@thewarrengroup.com
