The story of how Dave took the long road to become a neobank

March 27, 2023 ndowd

Welcome to The Interchange! If you received this in your inbox, thank you for signing up and your vote of confidence. If you’re reading this as a post on our site, sign up here so you can receive it directly in the future. Every week, I’ll take a look at the hottest fintech news of the previous week. This will include everything from funding rounds to trends to an analysis of a particular space to hot takes on a particular company or phenomenon. There’s a lot of fintech news out there and it’s my job to stay on top of it — and make sense of it — so you can stay in the know. — Mary Ann

Q&A with Dave founder Jason Wilk

Right before the Silicon Valley Bank meltdown, I had a conversation with Jason Wilk, founder and CEO of neobank Dave, about that company’s business. I was intrigued because the bank — which counted Mark Cuban as one of its investors as a private company — took what some might say was a backward route to becoming a bank. Rather than start out offering checking and savings, it worked its way there. And the strategy seems to have paid off for the fintech company, which went public in January of 2022. It recently reported 45% higher GAAP revenue of $59.6 million for the fourth quarter of 2022, up 45% from the same period the year prior. Here are excerpts of my interview with Wilk, which have been edited for brevity and clarity.

TC: Are you benefiting from higher interest rates, and if so, how?

JW: This is a challenging place for growth companies, who may have access to more capital to eventually get it because the cost of capital is a lot more expensive due to the interest rates.

That’s one of the reasons why our stock has come down so much — given we are not yet profitable, although close to it. The benefit of higher interest rates for customers is that they can earn higher interest on savings and deposits, and we do benefit from that as well, as we can earn extra income from the higher rates. But I’d say overall that the highest interest rate environment is more negative than positive on the business.

You’ve mentioned a path to profitability. When do you see that happening?

Last year we were 8 to 10 quarters out. Now we’re 4 to 6 quarters away from when we expect the company to be profitable. We were before in 2018 and 2019, so we’ve been there before. We’ve added a sufficient amount of staff to build our future roadmap and have 1.9 million monthly transacting members on to Dave. We need to get 2.2 million to 2.4 million customers to get to profitability/break even. We don’t need to raise capital or any other liquidity.

Our anchor feature that disrupted overdraft fees is our Extra Cash product, which lets people borrow small amounts of money and now get up to a $500 cash advance [that limit was increased from $250 to $500 last summer) with up to 14 days to pay it back, with no late fees and no interest. Then in 2020 during the pandemic, the government was giving away a lot of free money via stimulus dollars and so there was less of a need for it and our marketing message was less resonant during that time.

So that’s why in 2021, we grew the business about 26%, and we’ve really ramped things back up as things are returning closer to normal.

You launched banking services not that long ago. How is that going?

Dave was focused on Extra Cash Product but then our most requested feature is that people wanted to bank with Dave. So at the end of 2021 we launched our own checking account, and as of the second and third quarter of 2022, that was going so well we decided to just become a full-on bank and give a checking account to every customer, and now every new and existing member is a banking member. And because of that broader expansion, and now that every customer has a card, we were able to grow the banking business 90% year over year.

So you did not start out as a full-blown neobank — you sort of evolved into one. That must have helped lower your CAC (customer acquisition costs).

Yes, that’s right. It was always the plan if you go back to our seed deck. We realized that CAC to acquire banking customers is very high.

And now it’s a very big strategic focus of the company. We think it gives us the ability to stay with our customers a lot longer and become their primary banking destination. Our strategy moving forward is, “Hey you can still get Extra Cash and send the money to your Chase account, but now we have this Dave debit card, which you can access the money even faster and also you can put your paycheck in here and stop paying things like minimum balance fees and customer support fees and all the other things that banks are trying to charge for it this point.”

We saw our cost of acquisition going down actually — 31% year over year in 2022 over 2021. We acquired about 550,000 new members in the fourth quarter alone.

How else do you continuously make yourself relevant to customers so they don’t outgrow your services?

One way is to let the customer decide on a payback date that’s fair to them and that aligns with their next paycheck date. It’s a guaranteed amount of money that you can tap into paycheck to paycheck, and it does not require any kind of mandatory fee. So instead of paying your bank $38, you can choose to tip Dave, anywhere from zero to 10% of the amount we give you. On average our tip is around $4. And it’s less risky for Dave, because we’re advancing money, not loaning it.

I started Dave because I was frustrated by all the overdraft fees being charged by the big banks. I felt it was unfair to charge reliable customers such a large fee against a negative balance knowing they will be brought back whole in a couple of days.

How does AI come into play with all of this?

We’ve gotten really good with our AI engine, which is able to very accurately detect somebody’s income and understand how risky it might be to give somebody the money before they get paid. And because of that AI engine, we’ve gotten default rates down to about 2%. And we’ve been able to increase the amount of money we give away so it’s just gotten a lot better over the years.

We also use AI with customer support, over 50% of our support responses are with a chatbot. That also brings down costs. We have 320 employees and most banks have over 100,000 employees. Higher headcount often leads to higher prices for consumers.

Now, Dave is not the only digital bank reporting impressive numbers. Grasshopper Bank, a digital bank for businesses, earlier this month reported that its assets reached over $620 million, up 108% year over year and that its total revenues exceeded $17 million in 2022, representing 39% growth year over year.

Weekly News

Reports Romain Dillet: “Fintech startup Checkout.com is better known for its payment processing service, but the company is launching a new product…: its customers can now create payment cards for their own customers. The company has been testing Checkout.com Issuing for a while, and millions of cards have already been created with the new service. Checkout.com supports physical cards as well as virtual cards that can be used multiple times or can be set to be disabled after the first payment.” More here.

Reports Sarah Perez: “Amazon may be closing a number of its high-tech physical retail stores in recent days, but some of the technology it developed for those stores is finding a new home. The online retailer said that Panera will now become the first restaurant to deploy Amazon’s palm reading payment and loyalty system, known as Amazon One, in its own stores, allowing its customers to both pay as well as access the chain’s loyalty program.” More here.

Also from Sarah: “Restaurant delivery service DoorDash announced it will begin to support the ability for customers to pay with cash for their online orders. But there’s a catch — the feature is only being rolled out to DoorDash’s white-label delivery solution for restaurants, DoorDash Drive, which allows restaurant owners to offer delivery from their own website or app while tapping into DoorDash’s courier network. The company says that, during tests, Chinese restaurants and pizza shops have been early adopters of the feature.” More here.

Reports Christine Hall: “Payments and shopping service Klarna is the latest company to announce its integration with ChatGPT. The company said it is “one of the first brands to work with OpenAI to use its protocol to build an integrated Plugin for ChatGPT” and is rolling out a personalized shopping experience that provides product recommendations when Klarna users ask for shopping advice, inspiration and product links via Klarna’s search and compare tool.” More here.

From me: Roofstock on March 22 laid off about 27% of its staff, just five months after the property technology startup laid off 20% of its workforce. The online marketplace for investing in leased single-family rental homes one year ago raised $240 million at a $1.9 billion valuation. According to the email, co-founder and CEO Gary Beasley said the reduction in force (RIF) was “in response to the challenging macro environment” and the “negative impact” it is having on Roofstock’s business. More here.

The company’s website states that it has 400+ employees, or “Roofsters,” as they’re dubbed, but it is not known if that figure is current.

Hindenburg Research issued a report that tore into payments company Block (formally known as Square) after a two-year investigation, alleging that the company “facilitated fraudsters,” reported Bloomberg. Among the allegations, Bloomberg reported, the report charged that “Block’s wildly popular Cash App was likely facilitating scammers taking advantage of government-stimulus programs during the pandemic.” Issuance of the report’s findings led to Block saying it would explore legal action against Hindenburg. The allegations hit the company’s stock price, which slid by 15% on March 23, the day the report was released.

F-Prime Capital published a State of Fintech Report earlier this year (which we covered in-depth here). But one area we didn’t dive into was the LatAm fintech findings. F-Prime points out that there are five Latin American companies in the F-Prime Fintech Index: Nubank, PagSeguro, Mercado Libre, Stone and dLocal. Nubank and dLocal were among the 10 largest exits during 2020 and 2021, and both saw significant declines in their stocks. But, F-Prime pointed out via email, that “scaled LatAm fintech companies are still growing at high rates,” with Nubank growing LTM (last 12 months) revenue by 117% and Mercado Libre growing by 54%. Also, interestingly, it found that four out of the five Latin American companies in the Fintech Index have a payment business model.

Insider published a couple of articles about HR/fintech startup Deel this past week, taking a look at the company’s culture, its practice of hiring so many independent contractors (event its CEO is one!) and the question of whether employees were misclassified as independent contractors. You can read those articles here and here.

Other news:

MoneyLion announces evolution of its embedded finance technology with rebranding of “Even Financial” to “Engine by MoneyLion”

Crescent unveils up to $75 million in FDIC Protection and 3.75% APY for US businesses in wake of Silicon Valley Bank shutdown

SoFi checking and savings to offer access to up to $2 million in FDIC Insurance

How Wealthfront offers $3M of FDIC insurance

Mercury moves to close the gap created by SVB collapse

Capitalize to power rollovers for Robinhood Retirement account holders

Summers predicts “cleaning out” of fintech sector after SVB failure

CompScience inks MGA agreement with Swiss Re, Nationwide

Zumper doubles down on short-term rentals: launches a dedicated vacation site, a new subscription service for flexible stays, and hits an inventory milestone