The Future of Banking Is...You're Broke

[BeyondGeography]

Our present financial ruin is being turned into a business model.

The latest wave of tech-based financial startups have a new angle on the banking sector: They’ll assume that everyone is out of money, then try to monetize their brokeness.

So-called neo-banks, or challenger banks, have been all the rage in Europe and Australia for the past few years. Now they’re starting to get attention here in the US, with names like Chime, Varo, SoFi, Current, GoBank, and even—heaven help us—booyah!. Yes, the exclamation point is part of the name. Like Yahoo!. Cutting edge, I know.

These neo-banks have been trying to make money in the usual ways: By taking a cut of credit or debit card transactions, collecting interest on consumer deposits, and making loans. The usual banking stuff. Their come-on is that they’re super-convenient, all-digital, mobile alternatives to the big banks. Better yet, they’re focused on their customers’ “financial health,” as one neo-bank CEO told me, and easing the “pain” that people feel around their money.

What makes that pain go away? At Chime and Varo, you can get what sounds a little like a neo–payday loan—your paycheck cashed, up to two days before your actual payday. Checking accounts at these startups are often free, and the companies will let you go $50 or $100 into the red before they start charging any overdraft fees. Some have automated savings accounts that invisibly funnel a few dollars from your paycheck into savings.

These neo-banks aren’t necessarily even banks at all; some are apps that facilitate transactions, which are then carried out by partners that are banks. Others have applied for bank charters while touting their homegrown technology stacks and hyperpersonalized product offerings (based, of course, on your personal data). But all of them say, explicitly or by intimation, that they’re mission-driven. Their mission is the hot mess that is your finances.

The hot mess is very real. Seventy-eight percent of Americans live paycheck to paycheck. Student loan obligations in this country total $1.5 trillion, and researchers believe they’re cutting into millennials’ ability to buy homes, have kids, and save for retirement. More than 40 percent of households have some credit card debt: The average liability is more than $5,000, and the poorer you are, the more you’re likely to have.

So what better fix than to slap a slick veneer of tech over basic banking services, push the ouroboros paycheck cycle up by a couple of days, offer some basic budgeting tools, and call it a revolution in consumer banking?

... Whether it’s due to competition from banks, each other, or bigger tech companies, neo-bank startups will inevitably go out of business, leaving consumers stranded. That’s pretty disruptive when you’re talking about your checking account. And at some point, the neo-banks will have to make more money, which means their offerings will get less generous over time.

A second problem is more serious. Ultimately, no amount of friendly design, accessible features, and overdraft protections will solve the underlying problems that made these services necessary in the first place. No neo-bank can erase the student loan debt or the 40-year stagnation in wages or the unexpected medical expenses or the crippling reality of America’s existential brokeness. The neo-banks have promised that they’ll ease your pain, but that’s just morphine for the real condition. When it comes to the actual sickness, you’re still on your own.

https://www.wired.com/story/the-future-of-banking-is-youre-broke/