Contrary to popular belief, the acclaimed explorer Christopher Columbus was not the first European to discover the Americas. It was the Vikings.
Norse sagas from the time corroborate this theory, telling the tale of Leif Eriksson, son of Erik the Red, as he pioneered a route from Greenland, across the Davis Strait to Newfoundland and beyond. The sagas describe North America as a land of unspoilt riches – a miraculous bounty of game, timber and pastures, hither to unimaginable to Dark Age Europeans.
Fast forward 1,000 years and it’s fair to say that the USA very much remains a land of opportunity for a particular group of European explorers – challenger banks. But where treacherous waters and crude boat design once discouraged these foreigners from attempting to cross the Atlantic, an onerous regulatory regime and virtually unnavigable banking licence application process is now deterring them. As a result, the country’s neobank ecosystem has lagged behind Europe’s, as Eric Garretson, CFO and fintech strategy leader of NBKC Bank, explains.
“Thanks to the easing of banking regulations, European challenger banks are free to move money, provision accounts and hold customer funds without necessarily having to partner with another bank on their home continent,” says Garretson. “By contrast, obtaining a bank charter in the US is still an extremely complex, costly and time-consuming process. Even for those new banks that do succeed in gaining their charter, the safety and soundness exams that come with being regulated can prove an insurmountable challenge. That’s why, until now, so many neobanks have refrained from attempting to establish themselves in the US.”
Just as foreign banks have traditionally failed to make the move Stateside, so too have American fintechs struggled to overcome their domestic market’s barriers to entry. However, change appears to be on the horizon, with three of Europe’s leading digital-only banks launching in the US over the past year. Monzo and N26 both experienced impressive customer take-up in the few months following their American debuts, in 2019, and Revolut would no doubt have enjoyed equal success had it not completed its US roll-out just as the global pandemic struck at the end of March, 2020.
Not only this, but the USA is currently witnessing a boom in homegrown challenger banks, with new players such as Current, Stash and Moven all looking to take a bite out of the Big Four’s apple pie. Chime, one of the first neos to be born in the USA, is currently valued at $5.8billion and saw its customer base quadruple from one to four million in 2019.
You may be wondering why challenger banks, both European and American, are all of a sudden opting to undergo the painstaking process of obtaining a US bank charter. The fact is, they’re not. Instead, they’re taking the far easier route of partnering with existing American banks in order to operate off the back of their US licences. Existing American banks like NBKC. “I love where we’re positioned as a bank – right at the forefront of fintech partnerships,” says Garretson.
“Considering how difficult it is for a fintech company to come over here and spring up its operation without a whole host of regulatory challenges, we’re at a real competitive advantage.”
It would seem that love is in the air of America’s neobank ecosystem. Following Monzo’s engagement to Northwest Ohio’s Sutton Bank, N26 popped the question to SoCal’s Axos Bank. Over on the east coast, Revolut has hooked up with New York’s Metropolitan Commercial Bank and Chime has jumped into bed with Bancorp Bank (the 10th largest bank in Delaware, the second smallest state in the country). As an international reader, you may never have heard of any of these American partner banks – in terms of size, they’re more akin to Wells, Somerset, than Wells Fargo. However, that’s precisely what makes these partnerships such a match made in heaven, as Garretson explains.
“As we were launching our fintech strategy, we went out and met with numerous different startup founders and management teams,” he says. “Time and time again we listened to them complain about how long it takes for a fintech to partner with a large bank. First of all, you need to find a person at the bank to talk to, and then you have to wait for your proposal to move up the chain in the organisation until it reaches a decision-maker who actually has the power to say yes or no. Add to this the extensive amount of due diligence and contract negotiation that has to take place before onboarding can start and it can take 12 to 18 months to strike up a partnership with a big bank. Most new fintechs can’t afford to wait over a year before kickstarting their operations.”
It’s for this reason that many of those seeking to establish a foothold in the US are forgoing partnerships with major incumbents in favour of working with smaller ‘community’ banks, as they are known. Although it holds a considerable $1billion in assets, NBKC remains a relatively compact institution by American bank standards, and thus can still deliver the efficient, hands-on customer approach typified by the 5,000 or so other community banks in the US.
“My team members and I are the decision-makers in our organisation, and we’re consequently able to vet ideas very quickly and determine whether a particular fintech is indeed something that we could actually work with or not,” says Garretson. “Startup founders and management teams are exceptionally busy people who hate having their time wasted, so it’s great being able to swiftly analyse their business’ needs and provide them with a rapid response concerning a potential partnership. It’s this level of agility that larger institutions are simply unable to replicate.”
However, NBKC’s offering to fintechs exceeds merely allowing them to piggyback off its charter as a bank of record. From its corporate office in Kansas City, Missouri (not Kansas City, Kansas), the bank works hand in hand with its fintech partners to help them turn their innovative concepts into reality.
“We are a pilot bank for startups,” says Garretson. “As soon as they present a new idea, we provide them with our 20 years’ worth of expertise to help
them to develop a product that’s ready for distribution. As part of our fintech strategy, we also consider whether we can bring any of these products in-house to improve our own efficiency and deliver new customer-facing solutions that will support our nationwide expansion.”
NBKC’s eagerness to act as both partner and mentor to startups and challengers perhaps stems from the bank’s own fintech heritage.
“We originally started out as an online mortgage lender, way back in 1997,” says Garretson. “The internet was very much still in its infancy, as was online lending, which meant that there were still a lot of faxing and FedEx deliveries taking place. However, we were as digital as you could be back then, and we’ve carried that ethos forward through the years. We consider ourselves to be a fintech that provides banking services, as we believe that fintech companies generally provide a better customer experience than traditional banks.”
Despite identifying as a fintech itself, NBKC is not looking to partner with any old challenger that knocks on its door. As in other areas of its business, the bank’s partnership policy is one of quality over quantity. “We don’t want to be a bank that partners with anybody – we’d rather carefully choose the right fintechs to work with, according to both of our needs and capabilities,” says Garretson. “Over the next three to five years, I envisage us forming 30 to 40 really solid relationships with select companies so that we may effectively help them to pilot their programmes and distribute their products. Nevertheless, we’re keen to put our name out there to let fintechs know that we’re open for business and would love to hear their ideas.”
So, thanks to community banks like NBKC, fintechs and challenger banks the world over are finally being given their ticket to America.