The Bottom LineThe Bottom Line

One of These Fintechs Is Not Like the Others

An estimated 30 million people have opened an account with a "neobank." But how do these platforms work, and why is this one different?

Phone showing Dora app login screen

Dora…like any other neobank's app on the outside, but on the inside…very different. (Photo by Oscar Perry Abello)

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With its slick, user-friendly, bilingual app interface, Dora could easily be mistaken for any of the leading competitors in the suddenly crowded field of digital-only banking startups.

The Dora app automatically detects whether your phone is set to English or Spanish. It takes less than three minutes to sign up for a fee-free Dora checking account. Each account comes with a debit card, access to 30,000 surcharge-free ATMs, and “early pay,” the popular feature among many of these startups, allowing direct deposit funds to be made available earlier than conventional banks.

Sometimes called “neobanks” or “challenger banks,” you may have noticed a recent proliferation in digital-only banking startups. An estimated 30 million people now have a neobank account, and that number is projected to nearly double by 2025, according to eMarketer.

These digital banking startups are largely seeking to take advantage of growing anti-bank sentiment, stemming from the rise of overdraft fees and other predatory practices that slowly bleed away account holders’ hard-earned dollars. CNBC reported that banks took more than $30 billion in overdraft fees from clients in pandemic-stricken 2020 alone — padding record bank profits, although some large banks have moved away from overdraft fees in recent months.

Though anti-bank sentiment fuels all these neobanks, not all of these startups are built the same. Most are backed by venture capitalists and other early investors who expect to get a big payday somewhere down the line. Dora, on the other hand, is a cooperative, and its startup investors are a collective of credit unions who don’t expect any eventual big payday.

“This is a fintech that is homegrown within the credit union movement, which is truly distinctive,” says Ann Solomon, vice president of strategic initiatives at Inclusiv, a national network of credit unions that focus on community development. “It doesn’t have the same venture-capital profit-seeking motives that some of the other fintechs do.”

Inclusiv itself also made a startup investment in Dora, and holds a seat on its board. The name Dora comes from Dora Maxwell, a long-time credit union leader who helped charter hundreds of credit unions in the Northeast and the Midwest.

The term “neobank” can be a bit of a misnomer, depending on the specific institution at hand.

Some neobanks are digital-only banks and credit unions, like Ally Bank, Vero Bank or Alliant Credit Union. These institutions have actual banking charters, which are required to hold deposits, issue debit cards and do all the things mainstream banks do, the only difference being that digital-only banks don’t have physical branches.

But many leading neobanks like Chime or Current aren’t technically or legally banks at all. They’re financial technology, or “fintech,” companies offering an app or a user interface built on top of actual banks or credit unions that they’ve partnered with to hold deposits, provide debit cards and facilitate transactions on their behalf.

Because mainstream banks can be relatively slow to adopt new technology or consumer desires, these fintech companies think they can offer a better user experience to their customers while partnering with a real bank to actually hold customers’ money. You can usually find the real bank partner in the fine print at the bottom of the fintech company’s ads or its homepage.

Fintech companies can be valuable in terms of expanding access to basic banking services and paying bills, “but they’re not financial institutions — they are renting, paying for, or working with a financial institution that has a charter,” says David Rothstein, who leads the Bank On Initiative, which works with cities and financial institutions to promote financial inclusion across the county.

A big concern for Rothstein is that fintech companies are generally still in the startup phase, and it’s not clear to his group what happens if a banking fintech startup fails — or gets acquired. “A lot of those companies are designed to be bought out by a financial institution or somebody else,” Rothstein says.

By contrast, there are clear and established protocols for when banks or credit unions merge — or fail. Regulators can liquidate failed institutions and move accounts seamlessly into another institution, usually with no interruption to banking services for account holders.

No such established pathway exists for a neobank that isn’t a chartered financial institution. If a purely fintech startup fails, users may end up finding their deposits held at a bank they’ve never heard of, probably far away in a place like South Dakota or Utah or Washington State.

“We want people to have a safe product that’s regulated, that provides them that stable foundation, and I think these digital-only banking apps are a bit distant still, outside of the mainstream financial system,” Rothstein says. “They’re not bringing people into the mainstream, and that’s the continued challenge to this.”

Dora could be the exception. It is a fintech platform currently built on top of USALLIANCE Federal Credit Union, the lead credit union behind the platform itself. Based in Rye, New York, the credit union started out as the IBM employees credit union in 1966.

USALLIANCE CEO Kris VanBeek says he and his colleagues first noticed a few years ago when some neobanks started advertising services, like “early pay,” which credit unions had been offering for years. It drove him a little crazy, he says, when some fintech companies started calling their users “members” — credit unions are very protective about being member-owned.

“Fintechs have taken a chapter from credit unions and just executed really well on it,” VanBeek says. “They’ve made it so you can go from a financial connection to an emotional connection really easily.”

USALLIANCE and other credit unions have mobile banking apps of their own, as well as products and services shaped by decades of being member-driven financial institutions. But the fintech companies seem to have figured something out they haven’t yet. Users seem to be drawn to a more pared-down, digital-first experience that does just one thing, not bogged down by the desire to upsell them on other products.

“They’re doing a really good job, and there’s no reason we can’t do a really good job,” VanBeek says.

USALLIANCE started building Dora in-house, but the plan was always to make it a collective effort with other credit unions. It would also need some additional investors just to compete with other fintech companies. Dora is going up against platforms like Chime, which just raised $485 million in its sixth round of startup capital fundraising, and it expects to go public later this year, according to CNBC.

There was some interest from some credit-union friendly companies in the financial or payroll space to provide some startup capital for Dora, but ultimately VanBeek says it was decided they would keep the ownership in the family, so to speak — only credit unions, which are all member-owned financial cooperatives.

“Keeping it nonprofit and pure co-op is a powerful statement in itself,” VanBeek says. “Cooperatives have a little-bit longer term view and are more interested in their members.”

Even with 130,000 members and $2.1 billion in assets, USALLIANCE is actually the smallest of the four credit union investors in Dora so far — it’s also a low-income designated credit union, meaning a majority of its members meet certain low-income thresholds based on data available from the U.S. Census Bureau. The others are Twin Cities-based Affinity Plus Federal Credit Union (also a low-income designated credit union), Digital Federal Credit Union in Massachusetts and Service Federal Credit Union in New Hampshire.

Inclusiv’s investment in Dora allows it to serve as a voice for its members, which currently consist of 425 mostly much smaller credit unions serving some of the lowest-income communities across the country. “Our members don’t have a voice with much of the fintech world, and here we can give them that voice,” says Peter Rubenstein, director of technology and innovation at Inclusiv.

Dora launched in September 2021, and had 3,700 accounts by the end of December. Assuming Dora starts to gain traction, VanBeek anticipates more credit unions will be interested in joining the platform. Some might invest, some might decide they will just sign on as banking partners. Dora has the capacity to work with multiple banking partners behind the scenes, as do other fintech platforms.

Thanks to its unique ownership structure, Dora already has something no other fintech platform has — it’s Bank On Certified.

The Bank On Initiative certifies bank account products that meet its national standards for low-cost checking accounts, including no overdraft fees and free online bill pay. One of the requirements for Bank On certification is that the accounts are provided by a chartered and regulated financial institution.

While digital-only banks like Ally Bank or Alliant Credit Union do offer Bank On-certified account products, other purely fintech platforms aren’t currently eligible. But Dora qualified because of its ownership structure.

“Dora is certified because it’s a product offered by four credit unions and it’s backed by those credit unions,” says Rothstein at the Bank On Initiative. “It’s as close as we’ve ever certified to that other [pure fintech platform] model.”

Dora already planned to focus its marketing on unbanked or underbanked households. The FDIC estimates there are more than 30 million unbanked or underbanked households across the country. Bank On Certification can help with that marketing plan. The Bank On Initiative works with a growing network of 90 state and local coalitions across the country to promote the bank accounts that meet its standards for financial inclusion.

“One of the things coalitions always ask us is how can they get their local credit unions and local banks involved, because they really want them to be doing this,” Rothstein says. Now, he says, those credit unions can join Dora.

Editor’s note: We’ve corrected the spelling of Peter Rubenstein’s name.

This article is part of The Bottom Line, a series exploring scalable solutions for problems related to affordability, inclusive economic growth and access to capital. Click here to subscribe to our Bottom Line newsletter.

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Oscar is Next City's senior economic justice correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha and Fast Company.

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Tags: credit unionsfintech

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