- Investment into digital-only banks or “challenger banks” from
venture capital firms this year is at $2.5 billion, already
surpassing 2018’s record total of $2.3 billion.
- The increased interest in digital-only banks comes at a time
when VCs curbed dealmaking efforts in fintech overall during the
second quarter of 2019.
- A big selling point for challenger banks has been their large
customer base compared to other fintechs.
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Venture capitalists are falling in love with the idea of taking
down some of Wall Street’s biggest players.
Digital-only banks, also known as
challenger or neo banks, are quickly becoming the latest big
bet amongst VCs, who see the threat they pose to traditional banks
as a good investment opportunity.
Year-to-date funding for challenger banks has already surpassed
2018’s record of $2.3 billion, according to a new report on fintech
CB Insights. Through July, digital banks have raised
approximately $2.5 billion across 55 deals.
Interest in digital banks from VCs comes at a time when the
number of fintech deals in the second quarter (367) dropped to the
lowest its been since the fourth quarter of 2016 (329). The slip
represents a 23% decrease in the number of deals done in the second
quarter of 2018 (476).
From the US (Chime, Varo) to Europe (Monzo, N26) and Latin
America (NuBank), disrupting where Main Street holds its money is
an appealing concept across the globe. Big banks have taken notice
of these young, agile companies aiming to steal some of their
a survey published in February from Fraedom, a credit card
specialist, 80% of bankers believe digital banks would have an
increased impact on their business in 2019, with 30% labeling them
the biggest disruptive threat.
Some have attempted to address these young competitors head on
with digital-only offerings of their own. The most notable amongst
them was Finn, JPMorgan’s
failed banking app for millennials. One of the main reasons for
Finn’s lack of success was due to the
uncertainty around its launch internally, highlighting the
difficulties large financial organizations can sometimes face when
attempting to create fresh, innovative products.
Part of the allure that challenger banks hold is their ever
expanding customer base. In a time when
customer acquisitions for startups are high, digital banks have
managed to grow some of the largest audiences among fintechs.
According to the report, of the 25 fintechs that have amassed
more than a million customers, excluding those in India and China,
seven are challenger banks. Brazilian NuBank (12 million) and a
UK-based Revolut (six million) led the way for the group, which in
total accounted for over 30 million accounts.
The report also highlighted the trend among challenger banks to
expand beyond their country of origin. Specifically, it highlighted
nabbed a $400 million Series F round in July and is valued at
$10 billion. The mobile-only bank, which counts Goldman Sachs and
Sequoia Capital as investors, recently opened its second
Mexico and reportedly has plans to move into
The US is also lining up to as another battleground for
challenger banks. In addition to homegrown Chime and Varo,
UK-based Monzo and
German-based N26 have both gone live in the States in the past
Source: FS – All – Economy – News
VC firms have poured .5 billion into fintechs like Chime and Varo this year. It's the latest threat to disrupt Main Street banks.