Exploring the "niche" banking trend

As part of Alloy’s inaugural client conference, Natalie Seidman, our VP of Enterprise Sales, hosted a session about the emergence of niche banking and its impact on the incumbents. Billie Simmons, Co-founder & COO of Daylight, an Alloy client and neobank serving the LGBTQ+ community, Ryan Falvey, Founder & Managing Partner at Financial Venture Studio (an investor in Daylight) and Alloy’s GM of Fintech, Charley Ma joined the panel to weigh in.

What is niche banking?

Natalie started the conversation by asking the speakers to define “niche banking.” Although he disagreed with the term, Ryan described niche banking as meeting the needs of sectors that are underserved by traditional financial services. He pointed out that communities served by “niche banking” are usually relatively large communities but widely dispersed, for example, students.

Billie didn’t necessarily agree with the “niche” term either, pointing out that it implies that they are small communities. The LGBTQ+ community, for example, is made up of 30 million people in the US and has niches even within the community. Instead, she sees “niche banking” as an opportunity for providers to harness technology to deliver hyper-personalized experiences to these sectors, which Charley pointed out is much easier with a digital offering.

We agree that “niche” isn’t the best term and have started to substitute the word for other more accurate descriptors, such as values-based banking or simply neobanking, to acknowledge that many of these segments are actually large groups of people.

How has consumer behavior changed?

The group returned to the theme of personalization. Apps like Instagram and Tiktok have programmed their algorithms to provide a feed that captures a user’s attention, and customers expect their banks to deliver an equally personalized experience.

"Customers are no longer satisfied with being served with a one size fits all product."
- Billie Simmons, Daylight

Consumers of financial services don’t just compare a provider with its immediate rivals but with apps in general. The industry is undergoing a fundamental shift from competing with peers to delivering a best-in-class, fully customized digital experience. To illustrate the point, Billie explained how Daylight compares itself to streaming workout platform Peloton as much as a direct rival like Chime.

What’s driving the rise of values-based banking?

Consumer behavior is not the only driver to the rise in values-based banking options; technology also contributes to the growth of digital banking alternatives. In the past, the barriers to entry in financial services were high. These days, it’s more straightforward to build a product to meet the needs of a specific sector, following the lead of apps that have acquired users by focusing on a particular feature. Ryan argued that technology has made it easier to secure a competitive advantage by simply removing negative features from products offered by the incumbents.

Where does this leave the incumbents?

In Charley’s opinion, the competitive landscape has broadened, and fintech companies are forcing the incumbents to reassess who they serve and what kind of experience they deliver. Charley has also detected a greater openness to partnerships between banks and fintech companies, few of which have banking licenses.

Billie explained how Daylight has partnered with bigger banks for two reasons. Firstly, to advocate for change within the industry by improving inclusivity for the LGBTQ+ community and reducing discrimination. Secondly, Daylight can leverage an incumbent’s expertise to offer products that it can’t develop internally. For example, some of the bank’s customers are at risk of losing family support, so could JP Morgan or Citibank, two of its investors, help to create an insurance product to replicate this safety net?

The investment opportunity in values-based banks

On the subject of investors, Natalie asked the speakers what they think is behind the significant flow of funds into fintech generally and values-based banks. Charley highlighted the opportunities to build billion-dollar businesses, many of which don’t yet exist. The pandemic has provided a significant headwind, as branches closed by the incumbents seem unlikely to reopen.

"It’s not a winner takes all market."
- Charley Ma, Alloy

Ryan agreed that the financial sector is experiencing a once-in-a-generation transition from physical to digital. He also noted that a lot of the newcomers are avoiding low-margin customers and looking to offer their services to the incumbents, which is pushing up valuations.

Should values-based banks build or buy?

One of Daylight’s biggest challenges is finding engineers so at the moment, buying IT solutions makes more sense than building in-house. In the case of its partnership with Alloy, onboarding was simple because Alloy Onboarding integrates with Daylight’s existing tech stack. Billie added that no matter what new product ideas she comes up with, they tend to exist already.

According to Ryan, solutions provided by fintech companies like Treasury Prime, Plaid and Alloy can launch a bank and help the founders figure out what’s working and what isn’t. They may have to scale down their reliance on these tools as the business matures, but they’re typically the quickest way to market.

"The infrastructure needed to launch is completely different from the infrastructure needed to support 10 million customers."
- Ryan Falvey, Financial Venture Studio

Predictions for 2022

Charley echoed Ryan’s point about the prospect of neobanks moving up the food chain and targeting higher-margin clients, such as asset managers or startup employees. Billie predicted that financial products will continue to become even more personalized. Ryan was excited by the amount of talent willing to forego the reliable salary at a big bank or tech company in favor of joining fintech companies, which he believes bodes well for the future.

The crypto conundrum

With the session drawing to a close, the conversation turned to cryptocurrencies and the strategies pursued by values-based banks. As Daylight’s priority is to design products that provide financial stability, cryptocurrencies don’t currently feature in its pipeline. However, if someone comes up with a crypto product that offers value to the bank’s community, Billie would consider it.

Ryan sees potential for the underlying technology. He believes non-fungible tokens (NFTs) and decentralized autonomous organizations (DAOs) could upgrade some of the financial sector’s legacy infrastructure, while other crypto tools could eliminate counterparty risk and help restore trust in the ecosystem which took such a hit during the 2008 financial crisis.

To niche or not?

Finally, Natalie wanted to find out whether community banks and credit unions should consider narrowing their client bases and ‘niching down’. Billie has heard of some banks trying to refocus on their original customer base, but Ryan argued against this strategy. His advice would be to serve their communities better by making their offerings more relevant.