The Rise of the Note-Takers

The first few years of the 2010s birthed a gold rush of development of messaging apps. WhatsApp had been around for a year-ish, Kik launched to immense success in 2010, and Facebook Messenger (then only within the Facebook app) had long been top dog.

Within a couple of years, photography and photo sharing apps were the new developer trend. By 2012, thousands of photography apps had come and gone or were at least on their way out.

By way of the explosion of the mobile games industry, a quick trend in meditation services, and a series of niche utility apps, we fast forward to today.

In the last 18 months, the indie app development world has taken a liking to the note-taking space.

Now in all fairness, this view likely isn’t representative of trends across a more global audience. Within our tech-oriented corner of the digital world, though, the trend is clear.

It has never been more hot to be building a note-taking app. Bonus points if it includes [[bidirectional links]].

What’s most interesting about the space right now, though, is the lack of a clear, widely loved leader. It’s a very fragmented space. Of course, there are dominant players in the form of OneNote and Evernote, but more on them later.

In a sector so full of new entrants and growing competition, why is there still no clear leader? Then the harder question: what will it take for the new notes king to claim the throne?

Note takers, assemble

The rise of the software as a service (SaaS) model over the last 15ish years has been one of the most influential evolutions in the growth of the innovation economy.

At the root of this evolution are the inherent low barriers to entry associated with software development. It costs quite literally nothing to begin developing a digital product (leaving aside, for now, the costs associated with deployment and scaling). Where beginning developing a product has historically entailed high R&D costs, material costs, machinery costs, etc, software is cheap to produce and even cheaper to scale. The marginal cost for each new user of a product, in most cases, is near zero.

Note-taking apps are a perfect example of this.

For developers first building side projects, notes apps serve as a low-cost, simple (all is relative…) technical product to work on. Beyond exploring new technical approaches and interface designs, they’ve also allowed their creators to experiment with new ways to design the input, consumption, and structure of knowledge.

It’s this freedom to explore new formats to store and access your own knowledge that has largely fueled the notes startup trend.

This increased development on the tech side has been amplified by several prominent new influential figures / ‘thought leaders’ (ew) in the productivity and personal knowledge management space. Many of them have been building on top of the rise of new notes apps and developing entire frameworks for their mental models and note-taking process.

Tiago Forte is arguably the most prominent recent figure in this space, with the rapid success of his Building a Second Brain online course, and his range of online content. Tiago’s approach focuses on established tools, but with a rigorous, structured system for his knowledge management.

Meanwhile, Nat Eliason has been a prolific online writer for a while now but has recently seen immense success with his Effortless Output with Roam course, which acts as a deep-reaching intro course to Roam Research, a relatively technical notes platform with some promising and exciting features.

Their efforts, combined with creators such as Conor White-Sullivan — who I recently (jokingly) compared to Creed from The Office — and his growing Roam-loving fanbase, or David Perell and his Write of Passage course have recently brought the art of effective note-taking into the foreground, building communities along with it.

The space is growing quickly, and note-taking is somehow becoming cool. Still, though, there’s no dominant leader that’s widely loved. Evernote leads the pack for now in the personal knowledge management space, but is often criticized (even by myself) for feeling increasingly out-of-date and lacking many of the exciting features of new entrants.

The business of notes apps

The notes app business model is a tricky one to sell.

Most existing companies are based on a freemium model. For personal use, most users can get away with the free functionalities alone, but power users can opt for a ~$5-8/mo package for more technical features and quality of life improvements. Meanwhile, teams and companies have their own enterprise plan, which expands note size capacity, team size, etc. The go-to note app pricing plan roughly mirrors the mainstream SaaS model.

The increasing competition we talked about before, though, does little to help in the way of profitability. Most industries’ profit potential is damaged by the threat of new entrants and the low barriers to entry they face, but the SaaS model only exacerbates this.

We’ve seen the low entry barriers already, and their inherent presence in SaaS products. But it’s their combination with low exit barriers which make notes apps a difficult space to compete in.

Owing to the low long-term investment in technology required to build a strong initial notes MVP, the exit barriers in note apps are almost non-existent.

Looking at this chart from Michael Porter in 1979, the lessons ring true even in a software context. The low barriers to entry in the notes app space combined with exceedingly low barriers to exit signals a market opportunity for relatively muted, but stable returns. Sure enough, new entrants can easily enter the space with little headwinds, safe in the knowledge that should things go wrong, they have very little to lose. Their lack of need for profitability, or even top-line revenue, in many cases, leads to a race to the bottom for non-differentiated or non-niche competitors.

On top of this, several free options are increasingly gaining traction as personal knowledge management services, beyond standard note-taking apps, aimed at both the personal and professional markets. OneNote is a prime example of this, integrating block and line-level linking to allow more networked, rather than siloed thought. OneNote’s bundling with the Office suite and pre-installation on many Windows machines makes it an easy go-to for almost all business use cases.

For competitors unfortunately not packaged with the largest productivity suite in the world, the underlying challenge within growing a note-taking app is almost entirely one of switching cost handling.

Switching costs 

Low switching costs lead to increased churn risk, high switching costs lead to low adoption, and this is a fine line to walk in the notes space. Making the initial jump to a digital notes service as the hub of your knowledge management is a large undertaking.

Notes are an inherently personalized medium. No two people’s notes will look alike, and in some form of subjective esoterism, even highly contextualized notes can’t replicate the entire breadth and depth of their meaning and utility across different readers. Everyone has a distinct mental framework for note-taking, conscious, or not. This framework is largely influenced by the features and limitations of the platform on which they’re taken.

For pen and paper, the limitations are obvious: platform barriers in copying/transcribing, speed, imagery, version control, etc. On the other hand, though, the free-form nature of the analog medium offers full flexibility in style and ease of writing.

For digital platforms, these features and limitations are different, but very much present. The categorization, hierarchy, and depth of the notes I personally take are entirely crafted around Evernote’s features and limitations.

In countering these limitations, many note-taking apps have begun to turn towards Markdown, the lightweight text markup language that’s become near-standard across rich tech editors across the web and software. Markdown offers a homogeneity across platforms and services that hadn’t been found elsewhere. It serves as a basic framework for styling, hierarchizing, and formatting text content. It’s seen increasing usage in new note apps for its ease of global integration, and widespread understanding/usage. This shift, though, towards a more open standard acts as some sort of inverse tragedy of the commons — what’s good for the ecosystem is not good for the company long-term, and yet many do it anyway.

By adhering to a standardized format, many new entrants in the note app market are reducing their ability to fend off the threat of subsequent, even newer entrants. While adhering to a standard format reduces entry barriers for the company, it, in turn, reduces switching costs for the user, lowering the perceived effort required to move to a competing product. When I can copy and paste almost all my notes to a new program (or, more practically, use an online service), I feel very little tied to the platform I’m currently using.

The flexibility and portability Markdown provides is a great benefit to the user, but a serious threat to the platform.

Markdown, though, is a means to an end, not the end itself. It’s easy to integrate as your text editor’s backbone, sure, but Markdown itself offers little in the way of facilitating the smooth transmission of ideas from brain to notes. It’s in reducing as much friction as possible in this transmission that the note app leaders of tomorrow will shine.

Blueprint for a leader

There are a few ways to look at who will become the next personal knowledge management leader. The next king will likely have to tick one or a mix of these boxes:

  • Develop a conceptually new knowledge model
  • Differentiate and specialize their offering
  • Raise perceived switching costs

It’s in this first point that Roam Research has so far excelled. Rather than just serve as a better way of noting down information, it serves as an entirely new (better?) way of thinking about it and exploring it. In Roam’s view, just as brains don’t think in categorized thought, notes shouldn’t either. In using wiki-style bidirectional [[links]], it reduces mental friction in many areas (no more thinking about which notebook things go in, what tags to add…), but currently remains a bit technical for the average consumer (ie. me), right now, adding mental friction in other places instead.

I maintain that the next dominant personal knowledge management leader will heavily exploit AI to further reduce the friction involved in transcribing and contextualizing ideas.

Using Evernote, I add new notes every day from my PC, my MacBook, my phone, and now even a Google Home. Through each of these, I encounter some different form of friction. On the PC/Mac/Phone, I have to consciously format and structure my thoughts in such a way that will be optimal for later discovery in the app. Sure, this method forces me to think through my notes and really break them down, but to be honest, it’s a pain in the ass. It requires me to format my thoughts in a way that’s best for the platform, not for me.

Speaking voice notes doesn’t have all those same issues, but compensates with others instead. It’s almost impossible to format and organize/interlink these notes by voice, and always requires focused time post-hoc to do all the back-end work required to integrate the notes smoothly into the knowledge system.

And that’s the root of the issue, the brain doesn’t think in systems.

Maybe this just sounds lazy or unreasonable, it’s entirely possible. It doesn’t change my outlook, though: the first company to incorporate AI/ML and contextual ‘understanding’ in such a way that actively augments the quality of my knowledge ‘system’, rather than diminishes the flexibility of it, will be an absolutely massive deal.

It will isolate threats from new entrants by massively raising entry barriers to be even remotely competitive. The low development and infrastructure costs I talked about previously quickly go out the window when it gets into AI/ML territory.

This goes hand in hand with the next points of differentiating and specializing the offer, and in turn (significantly) raising perceived switching costs.

There are already companies exploring this space.

Otter is developing a product for the workplace, with AI-powered and voice-focused meeting notes, similar story with reason8, with a focus on natural language processing. Kiroku takes the aforementioned more niche focus, offering a powerful AI-assisted notes service to dentists.

The most disruptive social and media platforms are the ones that bring not only a new community but an entirely new format. The same rings true for the note-taking world. The top disruptors of tomorrow won’t be the ones following the playbook of yesterday — ie. a minimal UI and good tagging systems. Rather, they’ll be the ones reinventing the entire meaning of note-taking.

It’s hard, then, to argue for a single rightful heir to the personal knowledge management product crown. Still, there are clear roads to the throne.

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Don’t Make me Choose

It’s September 1997. You’re an employee at Apple and things aren’t looking good.

You’re hearing news left and right that Apple is less than a couple months away from bankruptcy and there are no signs of a turnaround anytime soon.

Just recently, BusinessWeek put a shiny Apple logo on its front cover, unfortunately accompanied by the title “The Fall of an American Icon” — a scathing illustration of public sentiment toward the company. Wired just ran an article suggesting a sale to IBM or Motorola to save the remnants of Apple before it’s too late.

All in all, times have been better.

Just yesterday, though, you heard the news that Steve Jobs is coming back to run the company, in a last-ditch effort to turn the ship around. Analysts and journalists seem all but enthused, though.

Fast forward one year.

Somehow, Apple’s still around. Half your friends and colleagues have been laid off, but you’re still holding on. Times are leaner, too. 5 of the 6 official Apple retailers have been dropped. Just last year, there were 15 different Apple computer models. Today, there’s one. There used to be a long list of handheld and portable devices under development. Now, there’s one single laptop.

Until now, customers would walk into an Apple distributor and ask a salesperson for advice on which computer best fit their specific needs. They’d spend time weighing up the tech specs of each model and evaluating options. Sometimes, a difficult process.

“A friend of the family asked me which Apple computer she should buy. She couldn’t figure out the differences among them and I couldn’t give her clear guidance either.”

Steve Jobs in Good Strategy / Bad Strategy

Today, they walk in and get offered a grand total of 1 solution: the Power Mac G3. Take it or leave it.

As it turns out, they took it.

Looking back

In hindsight, a move to cut back operations, product lines, and staff to mission-critical only, trimming the bloat, focusing on a niche core offering seems like an obvious move. If it was so obvious, though, why did it take the return of the previously-ousted founder to do it?

The simple response is inertia, though that’s a focus for another day (no, really, I’ll write about that soon, it’s so interesting!).

What we’re exploring today is what went wrong in the first place. What happened that left Apple so spread across numerous product lines, deviated from their core focus?

It seems obvious that giving more choices to consumers is almost always a good thing — but it turns out that more choice isn’t the solution itself.

The age of abundance

Almost all product or service merchants, be that today or 10,000 years ago, began with a single product. Only as agricultural technology and techniques developed did these initial product lines widen in lockstep with the capacity to cultivate, grow, and sell a wider variety of produce and livestock. Still, the offerings were largely constrained for thousands of years by geographical limitations.

Fast forward to 3,000 BC to the emergence of the first formalized interregional trade routes in the middle east and Asia. It’s at this stage that optionality in commerce truly reached new heights.

International maritime commerce and land-based trade routes redefined the landscape for choice in the marketplace across a number of verticals. The ongoing development and growth of international freight over the following millennia through the industrial revolution, combined with modern globalization and innovation in shipping logistics set the stage for the age of commercial abundance we consider standard today.

The dawn of the internet age supercharged that growth.

Suddenly, the incremental cost of commercializing an immense variety of SKUs dropped almost overnight. 

With the rise of the internet, new opportunities for choice in almost all commercial sectors boomed. The cost of developing, testing, and commercializing similar but new solutions plummeted.

This trend to increased optionality is a natural evolution of commerce and distribution thanks to technical and technological progress. The internet didn’t spawn this, but it augmented it.

If we characterize the last ~hundred~ years as an age of rapid growth in commercial and retail opportunity built on the innovation in international communication, logistics, and technical evolution, we can characterize the last ~5-10 years~ as a tipping point in that growth.

Increasingly, founders are building companies with a mission to make sense and sort the fruits of this age of abundance. These take the form of aggregators.

Others are building companies and strategies around a completely inverse vision of commerce. Rather than offer a wide array of products and variations, however niche they may remain, there will always be an alternative strategy in hyper-focus on a single line.

At the root of this view is a core philosophy: the perceived benefit of having a wide array of options to choose from is quickly illusory. We think we want more choices, but that’s not the whole story.

Beyond abundance

Everybody has heard the famous quote by Theodore Levitt that claims “People don’t want to buy a quarter-inch drill. They want a quarter-inch hole.”

Typically this quote is viewed through the lens of features vs. benefits. The quote can be applied to the framework of abundance, though. Through this lens, abundance, however plentiful, remains a means to an end, not the end itself.

Choice, then, is not the end goal it’s made out to be.

Choice is the means by which the consumer seeks to extract maximal value from a transaction, in the belief that their own decision making is the most rational means by which to ensure it.

To quote Scott Galloway:

Choice is a tax on your time and attention. Consumers don’t want more choice, but more confidence in the choices presented.

Consumers want more confidence in the choices presented. We make choices in the goal of picking the most favorable, rational outcome available, all else equal. The act of choosing in itself, of making a decision, is one committed only by necessity.

Aggregators are working their way towards negating this necessity of choice to a maximum extent.

In a first use case, let’s look at travel booking aggregator

Booking aggregators are nothing new. itself was founded in 1996, with a mission to reduce friction in discovering the range of offers available, and picking the apparent ‘best’. Kayak, while very similar, was founded with a slightly different principal vision. or Expedia were originally laser-focused on hotel reservations. With a destination in mind, the sites served to aggregate and compare offers from a number of hotel options at once. In booking a hotel stay, price is an important factor. Price alone, though, is not the (almost) singular factor in the decision-making process. Location, quality of the room, facilities, services, etc. are all important factors that can vary highly from hotel to hotel, all at similar price points.

This is where Kayak, with a leading focus on air travel, differs. In plane travel, the quality of services and amenities are almost identical at each incremental price point, regardless of which carrier you decide to go with. Price points can vary greatly over minor factors, but at each price, the offers are relatively identical.

Kayak, unlike its hotel-focused counterparts, aids in reducing the decision-making process entirely. When booking a hotel, there will often be a handful of attractive options at similar prices, but ultimately, location and amenities act as the deciding factor. This has been the case since the birth of travel agencies.

In flights, though, once you’ve filtered your search to the requirements you expect, there’s rarely more than 1 single option which makes the shortlist: the cheapest. Kayak and it’s numerous competitors serve to take away the need for choice entirely. They recognize that choice is simply the means to an end, and the faster the choice is made, the better.

Companies are best positioned to capture large value when, beyond offering more choice, they give us confidence in the choices presented to us.

Trust me, I know best

Meanwhile, other companies have been able to reduce this choice process by integrating vertical solutions directly.

AmazonBasics is a (ahem) prime example of this.

In product verticals where differentiation is entirely secondary to price, AmazonBasics has largely taken away the decision-making process within the aggregator feed entirely.

The Amazon Basics label, rightly or wrongly, represents a badge of quality, of certainty. For products with little room to differentiate, or for whom the delta between high quality and bare minimum is narrow, an AmazonBasics product is an attractive sell. Why bother wasting time hunting for something that Amazon, a trusted company, offers itself? Unless you’re a stapler aficionado, or have a more specific use-case, the AmazonBasics stapler instantly requires the least cognitive effort, is likely among the cheapest, and radiates a certainty of getting an at least pretty good product.

There are over 8,000 different staplers available on Productive progress, technological innovation, and economies of scale mean that hundreds of these staplers offer better features than the AmazonBasics one. Some come with finger guards (???), some with champagne gold casings, others with sizing tools. But for the majority of consumers, the standard stapler is enough, no more, no less.

In the same vein, Steve Jobs wasn’t blind to the fact that many consumers loved the specific use-cases offered by their specific computer model. What he recognized, though, is that for many, many more, the standard Power Mac G3 was plenty for almost all use cases.

You don’t have to buy a Power Mac, but when you do, you buy the built-in peace of mind that you made the right decision.

Packaged Confidence

More and more brands are following the Apple playbook of either reducing or limiting the growth of their offer to a small, core set.

Nowhere is this more noticeable than DTC lifestyle brands.

Ironically, the entire DTC model, on the surface, appears perfectly structured to offer a wide catalog of products, with marginal additional costs — therefore expanding your total addressable market with little downside in terms of variable costs.

The largest DTC companies we know today, though, saw that model, and ignored it completely.

In a radical departure from traditional commerce, where horizontal expansion and product diversification at low costs seem a no-brainer in capturing additional value from new markets, the DTC model has so far thrived on a more restrained focus on individual core offerings. Just as Apple steered away from offering variations of a single product, the model has stayed true in top DTC brands today.

Allbirds, the sustainable shoe company lauded by VCs all over the US, launched with a single product, the Wool Runner. They’ve slowly expanded their offering since, but each new product is notably different in form and focus to the prior.

Casper, even today, limits its core product line of mattresses to just 3 SKUs.

Quip, the top dental care DTC brand started with an initial offer of only a toothbrush and has little deviated even into years of success. They offer a handful of other products, but each is a complementary addition to the other, none cannibalizing any other product — a combination perfectly crafted for cross-selling and upsells.

But a product line of one (or very few) products is a difficult one to sustain, leaving you little diversified in the event of consumer trends that work against you. To offset this risk in the DTC space, and owing to the nature of a distributorless sales model, a heavy investment in brand-building is required.

By leveraging a large focus on company values, core vision, and main mission, brands position themselves effectively against competitors otherwise engaged in a race to the bottom.

In reducing your core offering to a small line of products, there lies an inherent implication that “we spent a lot of time making the boring decisions so that you don’t have to”. When you purchase a Casper mattress, you can go to bed in full certainty that you opted for a high-quality solution from a human-oriented brand. You know you can engage with the creators easily on Twitter, you know your mattress was invented not in an opportunistic profit-capturing expansion, but in a mission to create a great sleeping experience.

Rather than testing a bunch of similar-feeling mattresses at Mattress Firm and wasting a day making a choice you really don’t know, nor care all that much about, Casper offers just 3 options, each for a slightly different type of consumer. They let you know the whole way through the purchase journey that they’re only happy if you’re happy — even offering a 100 nights trial period on each mattress.

Closing Thoughts

The age of abundance drove opportunities for product discovery and development previously impossible. This same abundance, though, has driven the side effect of increased anxiety across younger generations more than ever before.

Reducing choice appears limiting on first viewing, we hate ruling out options. Building out product lines for each different client use-case appears a tactical win in a strategy to grow your total addressable, and then addressed market, but as the saying goes, when you create for everybody, you create for nobody. Entropy and inertia eventually catch up and drive down profit potential across each line one by one.

Choice is only the means to an end, and Jobs understood that perfectly. Today, companies are refining and reducing the span of their niche, taking decision making off the table — taking a leaf out of that fabled Jobs playbook: here’s the offer, take it or leave it.

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Why did Neobanks become so boring?

What happened to the rebels of the financial revolution?

We’re starting this week with a quote from a piece by Ian Kar at Fintech Today:

In the first half of 2020, overhyped neobanks went from a contrarian opinion to a major industry talking point. 

What was just recently a contrarian opinion, is now stated as fact.

Just a couple of years ago, neobanks were spearheading the ‘financial revolution’, armed with a seemingly bottomless flow of venture capital.

Today, they’re largely out of the mainstream news cycle.

This week, we’re diving into the world of consumer fintech: Why did neobanks suddenly become so boring? What drove the hype cycle? Where did it go? 

From there, the harder question: with the initial boom out of the way, what’s the long game for these banks?

We have a bunch to cover, so best get started!

Cash Flows & Sleek Logos

Only about 2 years ago, every other week, news would break of a brand new neobank — seemingly out of nowhere — raising an 8 figure Series A, sending their CEO to speak at TechCrunch Disrupt to talk about their (very unique) company ‘values’, then hunkering down until it was Series B time.

Rinse, repeat.

Today, neobanks have reached almost meme status in tech and investing circles.

It quickly seemed like anyone and everyone could start a neobank. The space is extremely interesting. To get picky, almost none of the (US) neobanks are actual “banks” so to speak — they don’t store and insure client funds themselves, rather partnering with an FDIC licensed incumbent, serving as an intermediary.

The apparent relative ease to launch a neobank was an attractive sell for many new founders.

522,000 results!

While launching a mobile bank — especially in the US — involves an immense roll of red tape, regulation, and high bars to entry, it is far less complicated than launching a “traditional” financial institution.

Rapidly looking to ride the trend, card issuers — namely Visa and Mastercard — scrambled to be first pick to serve these new banks in offering debit cards. In the US neobank space today, Visa fights to hold its lead.

As such, it quickly became a relatively smooth process to issue debit card services once your online bank was established. To add to that, several other fintech infrastructure companies quickly popped up to supplement the growth of the space. 

These ranged from the complex field of compliance (eg. Alloy), interbank connections (eg. Plaid), and a bunch of under-the-hood services that were previously handled in-house by large banks, now being commoditized in the form of competing startups. 

All of this came together to form a space perfectly ripe for creating new challenger banks with attractive brand values, all aimed at “making your finances more transparent”, “dethroning the big banks”, etc.

To go with the shiny mission statement, you need a shiny product — and neobanks nailed the mark.

Hype Cycles & Making Banking Cool

I’m a brand strategy guy at heart, so seeing Starling Bank’s announcement of one of the first-ever vertical debit cards was a masterclass in brand differentiation. It had been tried before, but nothing had quite reached the mainstream.

Once Starling Bank made it ‘cool’, the vertical debit card and minimalistic design became the representation of mobile banks, quickly adopted by Venmo, N26, Revolut, and so many more.

This widespread aesthetic adoption, though, did little to help with the copycat, meme status beginning to plague banking startups.

Business strategy aside, you have to admit they look sleek…

In a space not exactly known for its innovative creativity, neobanks brought a fresh coat of (bold, matte) paint, both through the physical product, and user experience.

Brick and mortar banks have immense resources to outperform on features and depth, but this comes at the expense of simplicity. From design to product experience, neobanks solidified simplicity and minimalism as a top priority, with a heavy sprinkle of customer experience.

Armed with a beautiful product, a mission to make a boring field exciting and accessible, and a target market of mobile-first digital natives, the next step was to ramp up marketing spend. This was the not-so-secret sauce in bringing hype to the banking space.

Tejas Raut Dessai put it best:

The menu is simple — a checking account, a debit card, and a few other adjacent services. The modus operandi is somewhat simpler too, raise a ton of cash, hit the gas on marketing, grow deposits, and leverage the spread on income to fuel more marketing.

Neobanks quickly took a page out of the DTC playbook and ran up paid social spend, with a focus balanced between brand building and user acquisition.

My Instagram Stories ads are the perfect proof of this, as is the London Underground.

If you’re a neobank, the hype train is now smoothly in motion.

User count is skyrocketing, all seems well. In fact, ARPU is even slowly rising as your neobank is slowly moving along the adoption cycle from early-adopters to the mainstream.

But now the problems are beginning to creep in.

Hypergrowth is brilliant, required, even, in the months fresh off a funding round. The issue, though, is that hypergrowth is seldom sustainable — especially when it’s largely tied to ad spend.

That’s not to say that sustainable growth can’t be built on paid channels, rather that it’s a much more expensive and risky long-term play, relative to building out alternative, less expensive, and organic acquisition channels.

Neobanks have begun to fall out of the Silicon Valley spotlight as they now begin to build out more sustainable paths to growth — or profitability.

It’s the end of the beginning. Next step, prepare for the future.

The Long Game

The rise of the neobank in the US has been a relatively recent one, compared to the rest of the western world.

That doesn’t come as a huge surprise though. America has long lagged Europe in terms of consumer financial infrastructure and product innovation. Corporate finance knows no better land, but consumer tech has fallen by the wayside.

While the rest of the world quickly adopted chip and pin, contactless payments, and instantaneous bank transfers, the US kept mailing cheques, swiping magnetic strips, and waiting 3-4 days for transfers.

This failure (refusal?) to modernize is largely why, until recently, almost all top neobanks were Europe-based.

US entrants are finally changing that, though. Chime, Varo, and SoFi are among the most recognizable neobank leaders today in the US, and quickly caught VC attention in the Bay Area.

Fast forward a couple of years to today, the widespread hype in tech and VC circles for neobanking is much more subdued.

This doesn’t mean neobanking itself has slowed down, though.

Beyond offering checking accounts and debit card services, fintech companies and neobanks are making moves up, and across the value chain. 

Going Up

As we touched on earlier, until very recently, there have been no US-based neobanks that hold an actual banking license, with regards to FDIC coverage. This means that no neobank had been approved to have client deposits insured by the US government.

For this reason, as we saw before, neobanks, upon launching, partner with a sponsor banking institution, one that does hold an FDIC license, and operates via their services.

This all changed when US-based neobank Varo, recently announced approval by the US government to be the first mobile bank to be granted FDIC approval. This marks a watershed moment in the fintech space, allowing the company to decouple from their sponsor bank (Bancorp) and vertically integrate a significant part of their value chain.

In offering independence from a partner institution, Varo will be able to bring all customer data in-house, and regain control over the cut of profits the partner bank would have otherwise claimed.

Though license integration is nothing new for neobanks on the international scene (lead competitors such as N26, Monzo, or Revolut all already hold EU-wide banking licenses), the move up the value chain is exciting news for US-based neobanks.

This brings me to a prediction: within the next 2 years, we’ll have seen the first US neobank IPO.

Through this lens, a bank charter is an attractive line item in an S-1.

And Across

Integrating operations away from a partner bank to in-house, though, brings with it a need for significant resource allocation to regulatory compliance. This is the expensive downside of integration, representing costs to the tune of 6-10% of revenue.

For the many neobanks already hemorrhaging money, engaged in a vicious race to the bottom, working hard to avoid death by a thousand Instagram mid-rolls, the extra costs vertical integration brings makes little financial sense.

So, instead of looking up the value chain, as in the Varo example, many neobanks are exploring lateral moves.

We saw earlier how most of today’s neobanks began as online checking accounts. They then expanded to offering debit card services. Now, many players are looking further afield.

Source: Invyo

This takes both the form of geographical expansion and product expansion.

Many established companies are now looking to expand operations horizontally to lending, insurance, and robo-advisory roles.

Upgrade is a leading example of this, bundling a credit-focused service with a card service all at once. To the difference of ‘traditional’ neobanks, credit-focused mobile banks operate on a revenue model built primarily on transaction fees, and interest.

Meanwhile, companies such as SoFi are deepening the focus on robo-advisory products and expanding quickly.

Already offering debit card, checking account, and loan services, the company is now moving further into the investment space, both with brokerage access, and a hands-off automated financial advisory service which sets goals, auto-rebalances and diversifies investments.

Further afield

Many of the top established neobanks, now comfortable with stabilized CAC/LTV ratios, streamlined checking/debit card services, and sustained growth, are setting sails for foreign lands.

Revolut, already established in 30+ countries, announced the success of a $500M funding round to fuel a global hiring spree, aiming to grow from 1,800 employees to 5,000 by the end of 2020.

The story for competitor N26 is a similar one, already in 30+ markets, with eyes set abroad. 

Both companies are making rapid moves to dominate the US market share while the competition is so fragmented.

It’s this same fragmentation that today makes the space anything but boring.

The neobank sector is perfectly ripe for consolidation. The established top-dogs in the space, primarily Revolut, N26, Monzo, and Monese have all seen YoY user growth rates upwards of 150% in the last 24 months.

Neobank2018 no. of Customers2019 no. of Customers% Increase

Currently, though, the majority of the top neobanks do little in the way of product or brand differentiation.

To call back to what we saw earlier, the neobank playbook has been to offer checking, then debit cards, then expand to brokerage services, with a sprinkling of robo-advisor features.

Over the coming years, the primary differentiator in the neobank space will be the ability to overcome regulatory hurdles and rapidly expand to new markets.

Through this lens, Varo zigged while the others zagged.

The move to focus on FDIC/banking charter approval relatively early on slowed down front-row product innovation, but now positions the company extremely strongly on the US market, relative to other home-grown opponents, and more pressingly, the incoming foreign threat by the British and German incumbents.

Within the coming years, I believe we’ll begin to see the first rounds of neobank M&A deals as EU-based neobanks set their sights on the New World.

The moves would serve the EU-based players well, largely circumventing the regulatory nightmares of acquiring banking charters in the US as a foreign entity, and integrating an existing client base, partially forgoing the need for a shiny Instagram ads bidding war to drive user growth.

Opposition Far and Near

While “normal” neobanks launch from the ground up, competition is slowly coming out of the woodwork in the form of the tech giants.

Google Pay and Apple Pay are nothing new.

For a few years now we’ve been able to digitize our existing debit and credit cards and use them via our phones.

Apple went one step further last year, launching its first physical finance product: the Apple Card. Sponsored by Goldman Sachs, Apple, similar to the neobank strategy we’ve talked about, looked to integrate the physical payments interaction.

Already used by more than 3M+ Americans, the majority of whom use it as their primary credit card, the strategy has been a strong opening for Apple’s financial ambitions.

But they’re soon going to have company.

In April this year, TechCrunch broke the news that Google has been exploring possibilities in launching a card of their own.

Google Pay was Google’s first entry into the finance space, already on track to hit over 100M users in 2020.

For both Apple and Google, though, the core ambition within their finance verticals is — at least for now — very different to that of full-fledged neobanks.

While “traditional” neobanks seek a path to dethroning the incumbent brick and mortar banking institutions, Google and Apple look at banking as a means to an — unrelated — end.


For Google, this takes the form of advertising data. The transaction data granted to Google through using a Google Card makes their existing colossal ad network even more powerful by “closing the loop”.

Advertising attribution is an impressively tricky field. If you’ve been shown 7 ads for the same brand/product on Google, but you end up buying the product physically in-store, Google has very little knowledge that the ads it served you worked.

The Google Card changes that.

In closing the loop, gaining visibility into the offline purchase journey is a goldmine of advertising data for Google (all while claiming their x% of transaction fees).


For Apple, this takes the form of ecosystem empowerment.

Apple’s fundamental product strategy has always been one focused on interconnected, inter-device, seamless experiences. 

If you own a MacBook as your daily driver, there’s a strong chance you also own an iPhone. If you own an iPhone, there’s a strong chance you own Apple EarPods, or better yet, AirPods.

Now, when you next look to upgrade your laptop or phone, each individual Apple device you own acts as a weight on your decision, pushing you towards not straying from their walled garden.

The Apple Card is no different — and it does an even better job of extending the ecosystem beyond “attractive” consumer tech, into moments of daily life that would otherwise have very little connection to Apple.

Apple Card fights off other phone brands. Google Card fights off other ad networks. Neobank cards fight off other neobanks.

Neither of the two is likely to make huge ripples in vertical integration in the finance space anytime soon. That said, the immense resources available to both companies and their enormous existing userbase does pose a significant threat — by platform power alone — to neobank entrants, local, and incoming.

In this view, neobanks, our rebels of the financial revolution, are fighting a battle they’re racing to finance, fighting on a landscape they’re racing to expand, and fighting a range of opponents growing faster than ever.

We watched as the first act of the neobank tale unfolded, a chapter ripe with VC cash, sleek logos, and extraordinary advertising budgets.

Today, competition is growing on all sides, free flows of venture capital are growing harder to come by, but the need for hypergrowth at all costs has never been more pressing.

The neobank story never became boring, it’s just gearing up for the second act.

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