When a Bank With a Marketplace Becomes a Marketplace With a Bank

Neobanks struggle to earn money, especially neobanks in Britain. After discussing the situation with fintech founder Thish de Zoysa, I learned that his company has been developing a stronger neobank business model. It’s similar to the marketplace strategy that many neobanks use already. Interchange fees, the main revenue generator for neobanks, are very low in Britain. While a bank in the US may charge a 3 percent fee on a transaction, a British bank may only collect 0.2 percent of the transaction value. So neobanks need another source of revenue, and an internal marketplace is a popular one.

I’ve looked at neobanks and their marketplaces before. Neobanks typically enter into partnerships with other financial firms. The marketplace sends a neobank’s customers to life insurers, property and casualty insurers, financial advisors, wealth management firms, travel insurers, and other firms that manage money. These services are similar to the ones that traditional banks cross-sell to their checking and savings account holders, except traditional banks typically promote their own services rather than third-party offers. Today I learned that Their Perfect Gift, Thish’s startup, has a different marketplace strategy.

Thish promotes his startup as a gift card company rather than a neobank. So I asked him why he doesn’t call his company a neobank. His company provides international debit cards to businesses, just like a neobank that offers business accounts. But similar payments startups call themselves neobanks and very few call themselves gift card companies. When I told him that, he said I’d answered my own question. And he was right.

Then he told me that Their Perfect Gift plans to sell consumer products, not just provide gift cards. After thinking about it, it makes a lot of sense. An online store provides another source of revenue, potentially a much larger source of revenue, in addition to interchange fees. And the neobank provides a way to drive shoppers to the retail store. I brought up PayPal’s Honey acquisition here. Paypal paid $4 billion for a browser add-on because of the revenue it could generate by referring customers to retail stores.

And I also mentioned department stores that issue branded credit cards to their customers. The department store doesn’t have to make money on the credit division, and can even incur losses there, as long as it earns more money by providing credit to its customers. So a marketplace with an unprofitable neobank can still thrive. There’s another benefit of providing financial services to your customers. It can convince them to make bigger purchases. Thish’s gift card startup just started selling products directly, so it’s a bit early to see whether issuing gift cards greatly increases the size of the average purchase. But it sounds like early results are promising. There’s also another reason why I think this marketplace banking model could succeed.

If you’re familiar with Thish, he often makes LinkedIn posts about neobanks giving away money. These fintech startups often do not charge fees for services that cost money at other banks. Neobank customers can often spend money outside of their home country, access their wages a few days early, and keep small amounts of money in an account without paying additional fees. Neobanks may also pay high interest on savings accounts and sometimes even pay interest on checking accounts. And they often offer lucrative referral bonuses for opening new accounts as well. It’s difficult for a bootstrapped startup to compete with venture-backed firms that provide costly services for free, especially when they’re literally giving away money.

With gift cards from Their Perfect Gift, shoppers are also making purchases with free money. Except in this case, the businesses that buy the gift cards are the ones giving away money. And because customers aren’t spending their own money to shop online, they may spend more and care less about the sticker price of the products they buy. Businesses can deposit as much as GBP 1500 on a gift card if they provide documents that satisfy the know-your-customer requirements, and Thish plans to sell items worth as much as GBP 100 in his store.

Another reason why this retail marketplace model is so important is that Their Perfect Gift hasn’t raised much money from venture capital firms yet. It’s conducted a crowdsourced funding campaign and plans to raise money from investors in the near future, but hasn’t raised the kind of multi-million dollar funding rounds that other neobanks frequently boast about. So unlike other neobanks and fintech startups, Their Perfect Gift can’t afford to give millions of dollars away. It has to use a profitable business model now.

My conclusion is that operating a marketplace with its own neobank may be a better business model than opening a neobank with a marketplace. Some of the most successful financial services firms were originally the financial divisions of department stores and catalog retailers. And by going down that road, Thish can operate a retail store while still benefiting from the advantages of owning a neobank. Their Perfect Gift can still provide business debit accounts to its customers, even if it calls them business gift cards, and it can still collect interchange fees from customers who don’t shop at its store.