The rise of neobanks was fueled by banks’ failure to disrupt their own consumer business models. Neobanks have filled gaps in the market by making banking affordable and accessible for large segments of the population that are historically unprofitable and unattractive for banks. These customers were typically less creditworthy and on the lower end of the income and wealth spectrums. With low creditworthiness, banks are unable to generate interest income from these customers, relying more punitive fees like overdrafts, to bolster their customer profitability. Customers are left feeling “not only do you not lend me money, but you punish me with fees”, resulting in distrust.
Banks’ overdraft fees are neobanks’ opportunities. Or better yet, the customers’ distrust of banks are neobanks’ opportunities.
Perhaps no community is more distrustful of American institutions than the Native American population. The countless atrocities against Native American peoples have, understandably, created a persistent feeling of distrust among Native Americans. Banks are viewed as one of those American institutions that have financed and funded many of the past atrocities and infringements on Native land and rights. Today, as a result, Native Americans have the lowest participation in the financial system of any group; they’re unbanked at a rate of 16% according to the FDIC.
This week, our former Director of Insights, Amber Buker, announced the launch of Totem, a neobank for Native Americans. We are excited to back Amber and her co-founder, Richard Chance, as investors in Totem’s seed round.
As former colleagues, it is an exceptionally easy decision to back Amber. Her ability to bring structure to our chaos and articulate insights from the hundreds of interactions within our community have enabled and catalyzed our membership growth to 70 banks.
Amber’s own experience as an enrolled member of the Choctaw Nation has taught us more about the financial problems and opportunities afflicting the broader Native population. Her presence within the Native and banking communities makes her the perfect founder to solve this problem and deliver culturally relevant financial products, education, and access to tribal benefits to Native Americans nationwide.
Why we love Totem, the neobank
It is a firm stance at Alloy Labs that Neobanks are Bad Businesses™. This comes from jaded former neobank founders who know exactly how hard it is to build neobanks into profitable enterprises. Interchange-only, debit card swipe businesses depend on you acquiring customers efficiently, activating them at a high percentage, capturing a large number of card swipes, and avoiding churn and fraud. A lot has to go right while you get to a large number of customers. Since most neobanks target the unfulfilled market segments, their customers are on average lower income, riskier, and more mobile than your typical bank customer. Compared to the average bank, neobanks start from a tougher place that only becomes more challenging as they scale.
These businesses aren’t impossible to build. They are incredibly hard to build. In fact, we don’t even have reliable evidence that it’s possible to build a big, sustainable business off interchange alone.
Why then, are we excited about a neobank whose addressable market is a small minority of the US population? Without divulging any specifics about Totem’s product or strategy, here are the points that drive our optimism:
Identity Neobanking. Fintech pundits frame neobanks as utility-based or affinity-based. In my opinion, there is an overlooked, third category which we deem identity-based. We believe that the strongest identities, with the most distinct set of financial needs, have opportunities to acquire and retain customers while delivering the distinct set of financial services required by those groups, not offered in the market.
There are few populations with as strong of an identity as the Native American population. The differences between the tribes create even more opportunities to celebrate identities and fulfill their unique financial needs.
Being Unbanked Impacts the Ecosystem. When a population is unbanked, it creates inefficiencies across the economy. Therefore, by solving consumer problems you are likely solving businesses’ problems as well.
Unit Economics Tailwinds. Native American and distinct tribal benefits will strengthen Totem’s consumer banking business unit on virtually every metric. Acquisition, activation, deposit balance, churn will all outperform neobank benchmarks. Those benefits will extend beyond Totem’s deposit and card products as Totem expands its financial service offering.
We envision Totem becoming a critical piece of infrastructure throughout the Native American economy, capturing robust, diversified revenue, that enables Amber and team to bring more opportunities for her people to accumulate wealth and lift their communities. We could not be more excited to back Amber and join her on this very important journey.