FinTechs’ Latest Profitability Challenge Is Finding Business Models Beyond Interchange

FinTechs are facing an existential crisis now that the age of easy access to capital is over.

Investors — running the gamut from private venture capital firms to Wall Street activist investors and retail masses — are demanding to see profits. Sustainable black ink on the operating line nowadays trumps heady revenue growth rates. Cash flow is king.

A key staple of FinTech/neobank operating models — that’s interchange-related revenue — might be legislated away.

Amid the great digital shift, customers are used to fee-free offerings, so it’s no easy task for these digital startups to simply layer on new charges for alternatives to traditional banking. There’s no guarantee that the loss of top lines tied to interchange can be replaced.

Want another pressure point? In the wake of the collapse of Silicon Valley Bank in March, funding is harder to come by, while end customers — the individual and business account holders who might otherwise choose neobanks as providers — are parking their capital with marquee financial institutions (FIs).

In a conversation with Karen Webster, Sezzle Co-founder and CEO Charlie Youakim and Dave founder and CEO Jason Wilk said neobanks’ pivot toward profitability depends on finding new ways to empower consumers.

Apps and FinTechs, Youakim and Wilk said, can help give clients easy conduits into the traditional banking landscape, gain access to credit and find flexible ways of managing their money, without the fees that are hallmarks of traditional FIs.

The onus to expand financial access is especially acute given that more than 60% of U.S. consumers live paycheck to paycheck, according to PYMNTS and LendingClub research.

As Wilk noted, the pivot to profitability has no one-size-fits-all strategy as “there are lots of different neobanks, serving many different purposes.”

The metrics bear Dave’s and Sezzle’s strategies of helping consumers stretch their paycheck-to-paycheck dollars. Dave operates as a publicly traded neobank that has 1.9 million active monthly users as measured at the end of 2022. Sezzle, publicly traded in Australia, has plans to list on the NASDAQ in the United States and posted a profit the last two quarters.

Dave went public in 2021 and has made headlines for being backed by Mark Cuban among other investors. Dave’s genesis stems from addressing a pain point Wilk said he had trouble with while banking with incumbents: overdraft fees, which can cost consumers as much as $400 annually.

Finding the Pain Points

“Through 15 years up until the time I started Dave, I was hit with thousands of dollars in overdraft fees — and I was dissatisfied with the level of service I was able to get as a customer with not a lot of money in hand,” Wilk said.

The first product launched under the Dave imprimatur was an app that could connect with an existing checking account, setting up alerts to warn consumers if their accounts were at risk of “going negative” and paying what was tantamount to a 1,700% APR via an overdraft fee, he said.

In that way, holders could take action against being hit with fees of $35 to $100 on, say, a $5 charge that tipped accounts into the red. To that end, Dave would initially “spot” individuals (at first $75 but now up to $500, and where the average stopgap extended by Dave has been around $120 to $200 for the ExtraCash offering) for free to help them power through any short-term pain between paychecks.

Dave, in turn, charged $1 per month for the financial insights and the warnings, having linked to the primary bank accounts that provided the raw data pointing to the ebbs and flows of daily, monthly and upcoming transactions that could push users toward overdraft status.

In addition, the company had an early model where consumers could “tip” what they thought was fair for the service they received. The $3 or $4, on average, that individuals tipped was a good return on capital because Dave’s default rate has historically been low.

Although the anchor product remains fee-free cash advances, Dave’s model has evolved to include its own checking account, powered by a partner bank, and a Dave debit card, he said. Artificial intelligence (AI) modeling and direct deposit offer reliable income streams against which the company can underwrite the cash advances.

Alternatively, for the members who get those advances the same day they join, those users link their Dave accounts to an incumbent via Plaid. The Plaid data is fed into Dave’s AI model, which parses paycheck and other data.

Finding the Overlap — and Moving Beyond Interchange

Sezzle’s Youakim said there’s some similarity between his firm’s customer base and Dave’s. The consumers tapping into buy now, pay later (BNPL) find value in being offered installment options at the moment they are trying to make purchases in an environment where inflation has been ever-present and paycheck-to-paycheck pressures are predominant.

For both Sezzle and Dave, these customers are not the ones with $250,000 and above that are concerned with FDIC insurance and switching to big banks to make sure their wealth is safe. These are customers who want to bank with providers that cut out fees and help them improve their financial health.

“One of the sayings that our CFO has is that our customer is always in a recession,” Youakim said. “We’re trying our best to help that customer build up their credit score and get onto the next stage of their financial lives.”

Added Wilk, amid the banking crisis that’s underway, “this is where we show up and do our best work.”

The membership of $1 a month has helped build a community of consumers who in turn can take advantage of other offerings such as being connected to the company’s “side hustle” project that helps users apply for gig jobs and earn money from surveys.

Beyond the question of what happens to interchange, and with a wealth of diversified revenue streams, Dave makes money from helping process automated clearing house (ACH) and other transactions.

Youakim said Sezzle would make moves to diversify beyond interchange, perhaps through subscriptions. During what might be termed the tech apocalypse, the goal will be to think of where, when and how to expand services.

Both leaders talked about similar service expansions in their respective businesses as they both push to profitability. Many FinTechs are being compelled to expand services into verticals that compete with other FinTechs in order to expand gross profit, which is creating new competitive paradigms.

Wilk said Dave has been profitable before and will be profitable again. The company has been busy improving its variable margins and has found leverage and success in negotiating partnerships, which helps move toward profitability.

“We’re serving the majority of Americans,” said Wilk, who added that “they need help building their credit and help avoiding fees in their banking lives. They need help with financial recommendations, and none of this is going away soon.”