Costs Rise As Capital Chases Neo-Banks

Morning Markets: Will rising costs to find new customers make the neo-banking boom a smaller affair than expected?

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Over the past year we’ve kept tabs on companies like Chime, Acorns, Robinhood, and SoFi as a trend we call neo-banking grows.

The collection of companies we keep in mind didn’t necessarily start life as banking startups. Indeed, Acorns started off life as a savings app before adding a debit card. Robinhood began life as a company that let you trade stocks for free. Last year it tried to create high-yield savings accounts before messing it up. SoFi was famous early for its work in student loans, now it offers “online and mobile banking” per its website.

Chime has been a neo-bank since I can recall, but as you can tell from the list, there’s a lot of action in the market for your deposits and debit transactions.

Money is chasing the trend. Chime has raised a total of $309 million, including a $200 million round earlier this year. Robinhood has raised just under $540 million, including a $363 million round last year. SoFi has raised $2.5 billion, including $500 million this year. Acorns has raised $207 million, including $105 million last year.

All that money is going to product and teams and work and offices, of course. But I wonder if a large chunk isn’t also earmarked for customer acquisition (SoFi’s stadium deal fits here, I reckon) costs. And those, we just learned, are rising.

Here’s a chart from Mary Meeker’s recent Internet report (our notes here):

I think that that is pretty easy to read, but here’s what I’m seeing regardless: A rising customer acquisition cost (CAC) for the type of company we’ve been tracking.

This should not surprise. If you give a lot of competing companies a lot of money, they tend to spend it trying to grow faster than their rivals. Incumbency is the ultimate cool in Silicon Valley. And if someone will pay you to buy that status, hey, why not.

As we wrote back when Chime raised its latest round:

Chime CEO Chris Britt told Crunchbase News that Chime has gone through “explosive, triple-digit growth rates” since its May 2018 Series C. Last year, the startup had about 1 million accounts, and upon announcing this new round, Chime has 3 million bank accounts.

Growth is easy when your channels aren’t saturated. This can give a company a lower-than-reality view of its long-term CAC. But as you raise more, you can eat a higher CAC as you add features and tooling and the like that adds lifetime value to each customer.

But costs still go up. And as Meeker’s chart makes plain, we’re seeing the effects of that now.

Illustration: Li-Anne Dias.