Venture debt, events, APIs: Small-business neobanks get creative

Neobanks once stood out for serving small-business owners with digital tools they couldn’t find at most traditional banks. But the need to distinguish themselves in other ways has arisen because such features, including invoicing and cash-flow analysis, are common among small-business neobanks, even if fewer traditional banks offer the same.

“If you want to start a neobank, you can’t be everything to everyone,” said Ian Benton, senior analyst in digital banking at Javelin Strategy & Research. “Businesses are looking for something specifically built for their needs that allows them to connect to other professionals in their community.”

The small-business neobank landscape has expanded enough to no longer be a niche in itself, but house its own segments of entrepreneurs. Some neobanks tilt toward an affinity, such as Guava, which bills itself as a banking hub for Black small-business owners. Others focus on an occupation, such as Vergo (for architects, builders, contractors and designers) and Baselane (a financial platform for independent landlords that includes banking). Others are less specific: they state a specialty in freelancers (Lance, Lili), for instance, or “creators” (Karat, Nerve, Oxygen).

But branding isn’t enough to appeal to an audience. A prime way to differentiate a business-oriented neobank is to help customers find online communities and networking opportunities with each other and investors. Another is to introduce products that are specific to that type of business, such as venture debt for startup founders or assistance with merchandise design and fulfillment for creators.

Mercury, a challenger bank in San Francisco aimed at startups that launched in 2019, is doing a combination of these tactics. It has 80,000 businesses as customers.

On the product side, it introduced venture debt earlier this year, a type of financing for companies that have already raised venture capital. 

“It’s a very startup-focused lending product,” one that would be useless to, say, a restaurant owner, said Immad Akhund, co-founder and CEO of Mercury. The recently launched credit card does not require a credit check. Mercury manages its own underwriting and risk assessment using factors such as how much money the customer has in a Mercury account and whether they have received venture capital funding.

Meanwhile, the company launched Mercury Raise in September 2020 to connect founders to other founders, investors and mentors. This program includes a mix of virtual and in-person events that help founders jump-start their seed rounds by meeting investors in Mercury’s network, receiving guidance on pitching and raising money for their Series As, finding capital for ecommerce businesses and more. The Raise programs have worked with 687 startups in 32 countries so far; Mercury requires its businesses to be incorporated in the U.S., but the founders do not need to live in the U.S. One success story is Slope, a company that helps businesses offer buy now/pay later loans. It raised $24 million in its Series A round in April after participating in a Mercury Raise program.

Akhund has identified another benefit to drilling into a niche: knowing your customers and more easily catching fraud. “There are lots of signals available because we focus on this niche,” he said. For example, Mercury will look at evidence of funding from a reputable source, such as Y Combinator or Sequoia Capital, LinkedIn profiles of founders or board members that show experience at other tech companies, and transactions that match typical startup behaviors and flow from typical sources of revenue, as some indicators of legitimacy.

Choice Financial Group in Fargo, North Dakota, and Evolve Bank & Trust in Memphis, Tennessee, provide the underlying banking services.

John Waupsh, co-founder and CEO of Nerve, is differentiating his neobank with an embedded finance model.

Nerve, in Austin, Texas, launched in September 2021 as a neobank for musicians. It has since expanded to creators, which could include actors, writers, podcasters, influencers, instructors or coaches — or some combination thereof with multiple businesses and income streams.

“A lot of musicians are also broader creators,” said Waupsh. “They may be in a band, do graphic design and offer piano lessons.”

Although people can sign up for Nerve directly by downloading the app, that’s not the primary way the company intends to generate accounts. Nerve launched open application programming interfaces several months ago. The idea is for companies that serve creators, such as an ecommerce site that sells merchandise or an artist distributor that handles licensing and distributing music to streaming services, can embed these APIs in their websites and apps. The APIs will let creators who use such services open free deposit accounts, send and receive instant payments, and choose to share their Nerve transaction and balance information with the website or app hosts. Companies can use this data to build specialized loans, deliver insights and more.

Some APIs are free to use, while others, such as Payouts, which lets companies pay creators, carry fees. About 15 companies are currently using Nerve’s APIs, and there are thousands of customers with Nerve counts. Waupsh says the companies who will be rolling out Nerve’s embedded banking and payments services in 2023 will reach millions of creators.

Account holders can share their accounts with others but enact controls over who can transact or have read-only access. “This is very creator-specific,” said Waupsh. “The vast majority of creators have multiple businesses and oftentimes those are partnerships or collaborations.” For example, a business manager may have control over the account, but enable their musician client to monitor the funds as they come and go.

Piermont Bank in New York City provides the underlying banking services.

Benton sees plenty of room for neobanks to fill gaps in the small-business market, especially with industries or affinity groups that have particular payments and financial management needs. 

“There is a lot of greenfield territory that hasn’t been addressed yet,” he said. “A number of traditional community banks and credit unions are trying to specialize to attract those markets, but there is an opportunity for neobanks to go after those as well.”

Akhund of Mercury feels similarly.

“Everyone has their little piece of the pie,” he said.