Variations on the digital challenger bank model championed in Europe are spreading globally with new entrants targeting niche customer pain points. Collectively this year, startups in our market map have raised over $1.7B in venture capital.

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Traditional banking products, including checking, credit, and savings accounts, are under threat from a new crop of digital-first startups.

Many of these startups are launching products without a bank charter and targeting a very specific customer base. What these startups share is the goal of creating customer-centric banking products that target underserved individuals and businesses.

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Why now for digital banking startups

Digital banking adoption among consumers and small businesses (SMBs) is at an inflection point.

Startups targeting retail and commercial banking have been emerging globally, spurred by favorable tech regulations, an uptick in mobile adoption, and shifting customer demographics.

While a handful of notable startups have already seen a big uptick in users (Revolut, N26, Nubank, Chime, and Monzo) and broken even operationally (Revolut, N26, and Nubank), we’re still in the early innings of banking disruption and the path to long term profitability will be difficult.

why profitability won’t come easy

One of the biggest challenges these companies face is that many operate without a bank charter or license. As a result, they can only offer limited services.

This forces startups to enter into costly partnerships with incumbent financial institutions and creates dependency risk.

Another challenge is that many of these startups grow fast by offering free accounts and services to lower-income customers. While these customers may be easier to acquire, they are tougher to monetize.

Incumbents Play Catch-Up

Incumbents are not standing still and are acting to protect their market share.

This year in the US, JP Morgan launched mobile banking app Finn and Goldman Sachs’ retail banking arm Marcus crossed 1.5M savings accounts. Both have access to significant financial capital to scale far beyond what’s available to even well-funded startup challengers.

Startups see positive momentum with customers who have lost faith in banks after the financial crisis and these challengers have the flexibility to be more creative with products. To stay ahead, startups need to launch products that capture more of customer’s wallet share before incumbents catch up.

Table of contents:

Market Map: The Startups Disrupting Retail & Commercial Banking

We define startups disrupting banking broadly to include mobile-first fintech companies that primarily focus on leveraging technology and software to digitize and streamline retail and business credit, checking, and savings accounts.

Using CB Insights, we mapped out the 60+ startups disrupting retail and commercial banking. We organized these companies according to whether they’re focusing on consumers or businesses, and their primary product (credit or debit). In addition, where applicable, we organized companies further by target demographic. Companies represented are privately held and have raised equity funding.

Scroll down to see an explanation on each category in this graphic. This is meant for illustrative purposes and is not meant to be exhaustive of all products and services offered by each startup represented.

Please click to enlarge. Scroll down to read a break down of each sector.

key takeaways

The digital-first bank business model is spreading: This cohort of 61 startups represents 14 countries across the globe. Africa and Asia are not yet well represented. Emerging markets represent some of the biggest opportunities for growth for digital banking because there are large populations of unbanked consumers with high rates of mobile adoption.

This cohort of 61 startups represents 14 countries across the globe. Africa and Asia are not yet well represented. Emerging markets represent some of the biggest opportunities for growth for digital banking because there are large populations of unbanked consumers with high rates of mobile adoption. Emerging markets in Asia could be the next growth market: Asia has 2 privately funded startups and there are some stealth companies looking to enter the market. Existing startups like the UK’s Revolut are also looking to expand in the region. Asia is highly competitive, with tech giants like Ant Financial and Tencent’s WeChat actively dominating mobile payments and expanding their reach in financial services across lending, wealth management, and insurance.

Asia has 2 privately funded startups and there are some stealth companies looking to enter the market. Existing startups like the UK’s Revolut are also looking to expand in the region. Asia is highly competitive, with tech giants like Ant Financial and Tencent’s WeChat actively dominating mobile payments and expanding their reach in financial services across lending, wealth management, and insurance. Regulators globally are lowering the barriers for tech entrants to bolster competition: This year, many countries and organizations issued tech-favorable regulations. This includes the EU’s revised payment services directive (PSD2), the UK’s Open Banking, the Hong Kong Monetary Authority’s virtual bank license, the US OCC’s Fintech Charter, and Brazil’s new banking rules.

This year, many countries and organizations issued tech-favorable regulations. This includes the EU’s revised payment services directive (PSD2), the UK’s Open Banking, the Hong Kong Monetary Authority’s virtual bank license, the US OCC’s Fintech Charter, and Brazil’s new banking rules. Only a handful have obtained regulatory charters: The list of startups that have a bank charter include UK-based Monzo, Starling Bank, Tandem Bank, Atom Bank, CivilisedBank, Germany-based N26, and US-based Varo which has a limited charter. All others operate under special regulatory licenses and/or partner with financial institutions and some, like Revolut, are in the process of obtaining a charter.

The list of startups that have a bank charter include UK-based Monzo, Starling Bank, Tandem Bank, Atom Bank, CivilisedBank, Germany-based N26, and US-based Varo which has a limited charter. All others operate under special regulatory licenses and/or partner with financial institutions and some, like Revolut, are in the process of obtaining a charter. Startups targeting retail and commercial banking are well funded: Collectively, these 61 startups have raised $3B across 173 deals since 2013. There are four unicorns among the group — Nubank ($4B), Revolut ($1.7B), Atom Bank ($1.3B), and Brex ($1.1B).

Collectively, these 61 startups have raised $3B across 173 deals since 2013. There are four unicorns among the group — Nubank ($4B), Revolut ($1.7B), Atom Bank ($1.3B), and Brex ($1.1B). Investors are ramping up investment: In the first 10 months of 2018, this cohort has seen investors participate in 53 investments worth $1.72B, representing 57% of the $3B raised in the last 5 years.

In the first 10 months of 2018, this cohort has seen investors participate in 53 investments worth $1.72B, representing 57% of the $3B raised in the last 5 years. Potential untapped investment opportunities: Enterprise expenses is an underrepresented category among startups in commercial banking. Companies in the market today are largely focused on expense management for small businesses, but may look to use funding to expand as they scale.

Sector breakdown & growth drivers

B2C-Debit

This broad category includes startups that entered the market with a retail banking product aimed at digitizing checking & savings accounts and a product for daily use. The core product is a digital-first app that tracks spending from a linked card issued by either MasterCard or Visa. Additional services range from checking accounts, savings accounts, direct and cash deposits, peer-to-peer transfers, and pre-paid or top-off cards that can be accessed digitally.

Within this broader category are startups targeting micro-demographics. This includes targeting the underbanked/unbanked, millennials, students, kids, freelancers, and early adopters of blockchain.

Underbanked/Unbanked

Many of the startups disrupting banking are reaching customers who are either underserved by existing bank accounts or do not qualify to open an account (unbanked). This cohort of startups is broadly focused on creating a frictionless customer onboarding experience, reducing fees on accounts and services, and eliminating penalty charges.

By leveraging technology and a branch-free business model, startups can compete with incumbent banks on price and can establish distribution quickly.

Europe has seen the first cohort of startups or “challenger banks” (Revolut, Monzo, Starling, and N26) break out, collectively attracting $1.5B in funding and over 5.5M customers since 2014 (which is detailed in a separate brief on challenger banks).

The standout in this group is Revolut, which is nearing 3M customer accounts and processing $1.8B of monthly spend across 28 countries in Europe as of September 2018.

Unlike the other startup challengers that applied for bank charters out of the gate, Revolut challenged the conventional go-to market strategy by applying for an easier-to-acquire e-money license and targeting currency exchange rather than current accounts.

In April of this year, Revolut raised a $250M Series C from DST Global, Index Ventures, Ribbit Capital, and Rocket Internet at a $1.7B valuation, making it the first unicorn challenger bank. Revolut has been aggressively iterating on its products and blurring fintech business lines. It added crypto wallets & SMB accounts, applied for a bank charter, and is rumored to be launching commission-free trading.

Other EU startup challengers making headway this year include Monzo. Last month, Monzo was rumored to be raising funding at a $1.5B valuation and crossed 1M accounts in September 2018.

Growth was largely propelled by approval of a bank charter which allowed the company to convert their costly pre-paid cardholders to fully-licensed accounts.

Outside of the EU, digital-first banks in emerging markets have been gaining traction in particular among the unbanked populations in emerging markets.

In Brazil, Neon crossed 600K reported customers in May after the Brazilian Central Bank liquidated the startup’s credit provider, Banco Neon. Neon quickly secured a new partner, BancoVotorantim, to resume card services. Neon raised a $22M Series A to continue to expand in Latin America from Omidyar Network and Propel Venture Partners, among others, in Q2’18.

Millennials

This niche specifically targets the cash-strapped, digital savvy millennials with marketing, brand positioning, and prioritizing the product roadmap.

This includes San-Francisco based Chime which in Sept’18 reportedly crossed 1.7M accounts and is on pace to cross 2M by year end. Chime is a mobile banking app that provides a checking account-like service through a partnership with Bancorp, debit cards through Visa, and optional round-up savings accounts.

The company has been rolling out services focused on reducing bank fees like preventing customers from overdrawing their accounts and incurring a non-sufficient fund fee (NSF).

Students

Students have a similar problem accessing affordable bank accounts that are portable. Companies in this category are focused on helping students access checking and savings accounts, manage scholarship and college savings, and learn how to budget.

This includes Loot, which offers a mobile app and is focused on spending insights and real-time budgeting.

Kids

This cohort of startups are augmenting retail banking by ushering in the next generation of consumers: children. Startups in this cohort are looking to leverage pre-paid debit cards and an app-based parental control center to teach kids how to spend and save money responsibly.

With parental consent, kids can set up their own accounts and make purchases using their own personalized debit cards. Parents can allocate recurring funds to their kids’ accounts and get the added control of overseeing what their children purchase.

The most well-funded startup is Georgia-based Greenlight Financial, an alternative debit card issuer that allows parents to manage spending limits and allocate funds for their children through a mobile app. In December 2017, Amazon’s Alexa Fund participated in its $16M Series A. Amazon has doubled down on improving kids’ access to the platform and this investment compliments that initiative.

Most recently, Australia-based Spriggy, a digital allowance and pre-paid Visa card for kids aged 6-17, raised funding in Q3’18 from Alium Capital and Grok Ventures.

This year also saw Current raise a $2.8M Series A-III from fintech-focused investor QED and Expat. Current is largely focused on Gen Z or the ‘iGen’ and uses goal-based savings to incentivize positive saving behavior.

Freelancers

This category of startups is focused on providing flexible checking and savings accounts for freelancers, contractors, gig workers, and digital nomads. Startups in this category provide retail services like setting up bank accounts that can accept multiple deposits from various employers, and cards that can be easily accessed globally.

Freelance-focused startups on the B2C and B2B side (covered below) are positioned to scale as the gig economy grows over the next few years. For example, Monese is tapping into this trend early by providing banking services for immigrants and expats across Europe using the e-money license.

Blockchain

This is a nascent category that includes companies leveraging the blockchain to decentralize money storage and replace a traditional bank account. This category will evolve as the underlying technology matures, new applications of blockchain and cryptocurrencies are developed, and regulatory guardrails are established.

Among companies developing banking alternatives is Babb, a decentralized platform leveraging blockchain and biometrics technology to provide peer-to-peer banking services to the global microeconomy. Babb has raised nearly $2M in crowdfunding and $18M via a token sale. The company is applying for a bank charter and hopes to launch a card in Q4’18.

B2B-Debit

On the commercial side of checking & savings, startups are focusing on serving small- and medium-sized businesses (SMBs) and enterprises (SMEs), tech startups, and self-employed entrepreneurs.

Startups in this quadrant are building products including mobile apps that track spending and offer services ranging from business checking accounts, travel and expense management, reporting, corporate debit cards, and corporate pre-paid cards.

SMB/SMEs

SMBs and SMEs have been a hotbed for fintech activity in 2018. SMBs and SMEs are typically underserved by banks because they generate less revenue for banks and are riskier to underwrite.

Startups are helping SMBs/SMEs obtain business checking accounts, debit cards, and provide mobile apps to centralize business expenses. Further, they can integrate with other software platforms to automate bookkeeping, invoice management, and payment preparation.

Norway-based Aprila Bank is a digital bank targeting invoice financing for SMBs & entrepreneurs. In April’18, Aprila Bank integrated with Tripletex’s accounting systems to offer liquidity and working capital to Tripletex’s 30K SMBs.

Expense Management

Startups in this category are focused on automating procurement and finance functions.

Divvy is a B2B payments and expense platform for SMBs that issues virtual and physical corporate cards to track business expenses. Divvy automates the entire expense report process, helps companies eliminate fraud and wasteful spending, and optimizes online subscriptions.

Divvy is quickly gaining the attention of VC investors — the company closed 2 rounds of funding in the last 4 months, including a $35M Series B led by Insight Venture Partners in July’18.

Tech Startups

Similar to the SMB/SME startups, companies here are focused on helping tech startups, which also lack financial credentials necessary to obtain a bank account. This category differs from SMBs in the wider range of businesses these startups can encompass, with unpredictable cash inflows, outflows, private backing, and growth potential which may require more flexible and scalable solutions.

Traditional banks hesitate to underwrite business accounts for tech startups because startups are high-risk businesses with untested founding teams (regardless of previous work experience). Having limited affordable options often forces founding teams to use personal accounts which can get complicated quickly given the volatility inherent with tech startups.

India-based Open provides banking services to the region’s emerging startup scene and is focused on serving entrepreneurs. Open offers a digital banking platform, business card, and bank account that can make and receive payments. Open integrates with other business finance systems and popular SMB apps.

Freelancers

This cohort of startups are focused on providing SMBs/SMEs and self-employed freelancers with flexible checking and savings accounts for contractors and “gig” employees. Startups in this category provide services like establishing business checking accounts designed for non-traditional payroll processes, reporting tools for tax accounting, and issuing pre-paid expense cards that can be reloaded or canceled remotely.

This is critical for self-employed workers that are required to report earnings as a business in certain countries and to SMBs and SMEs that employ contractors. Startups are reducing friction around account opening, employee onboarding and offboarding, travel and expenses management, and accounting.

France-based Shine is the latest among this cohort to raise funding, closing a $9M Series A in September’18. The company provides self-employed or “self-entrepreneurs” with business checking accounts, debit cards, and a platform that combines online banking with contract and invoice management, streamlining administrative, and financial tasks.

Credit

This broad category includes startups providing alternative credit cards, tracking credit card spending, monitoring credit, and scoring alternative credit for retail consumers and businesses.

Underbanked/Unbanked

Historically, Latin American countries have had the second-largest credit gap in the world after MENA. To tackle this issue, Brazil’s central bank recently lowered banking reserve requirements on savings accounts from 40% to 25%. The move is a signal regulators want to bolster competition and provide greater access for fintech companies to bank services.

Brazil-based Nubank has raised substantial funding totaling $605M, including a $150M Series E that valued the company at approximately $2B, making it Brazil’s first fintech unicorn — it is now valued at $4B.

In January, Nubank was approved to operate as a bank, attracting a reported 16M Brazilians to apply to become Nubank customers. The company has been cashflow positive since 2017 and is gearing up to expand its banking services.

On the emerging side in the US is Petal, an alternative credit card issuer. Petal targets the Americans that are “credit invisible,” or those who do not meet the traditional criteria for a credit line with a bank. Obtaining credit is a Catch-22 for consumers with a short credit history or “thin-file” — they cannot build credit because by the default criteria, they do not qualify for a credit line.

Petal’s approach uses an in-house algorithm that leverages machine learning and supplemental data (like income, short-term debt, and outstanding loans) to alternatively underwrite a consumer’s credit risk. Petal is partnering with WebBank and Visa to issue the unsecured cards, and has raised $50M in venture funding.

Students

Students typically lack a credit history and have a tough time getting their first credit from a bank without having to secure the card or have a parent guarantor. Companies in this category are focused on helping students get access to credit cards and to build up their credit score.

This includes Deserve, which is using machine learning and alternative data to provide millennials and Gen Z students access to fair credit products and tools to achieve financial independence. Deserve raised a $17M Series C in August’18.

Home Owners

Mortgages are highly regulated and companies looking to provide mortgages require a charter. While there are a number of fintech companies working on mortgages, few are actually banks.

Atom Bank and CivilisedBank have both taken the time-intensive and costly route of pursuing and obtaining a bank charter.

Atom Bank landed on mortgage banking after a series of false starts. The company is well capitalized, having raised $514M in total funding including the company’s latest $206M minority round in March from incumbent bank BBVA.

SMB / SMEs

On the B2B side of credit, startups are also looking to undercut banks on interest and widen credit options for SMB and SMEs. Startups are less active in this category because of the regulatory barriers to enter and the high costs associated with lending.

Capital On Tap is a UK-based startup focused on short-term credit alternatives for SMEs. The company raised $38M in equity funding and $178M in debt to lend to SMEs in August 2018. Capital On Tap operates with an e-money license and partners with Mastercard to issue business credit cards.

Tech Startups

Tech startups also face a unique set of pain points when obtaining business credit cards. Similar to most alternative credit card providers, startups lack a credit history for the business because the business is just forming.

Brex is solving for this and another pain point unique to foreign founders — obtaining credit for a business established outside of their country of origin.

Immigrant founders essentially start with a blank credit history when they set up their business internationally because banks don’t share data and credit scoring is not universal.

Brex’s core products include a credit card & a digital expense management and reporting app. Brex partners with Visa and Sutton Bank to issue the cards and accounts, while doing KYC and underwriting in-house.

In October, just 2 years into the business, Brex became a unicorn following a $125M Series C investment lead by fintech-focused DST that valued the company at $1.1B.

This report was created with data from CB Insights’ emerging technology insights platform, which offers clarity into emerging tech and new business strategies through tools like:If you aren’t already a client, sign up for a free trial to learn more about our platform.