Whats the business case for challenger banks banking on diversity?
John Ciocca didnt set out to start a challenger bank. He only wanted to help his brother Christian, who has Down syndrome, after their family moved from Florida to New York. He had trouble making friends, Ciocca remembers. I wanted to combine my passions for him and for technology to build something for him to connect and meet new friends.  In 2017, he launched youBelong, a social media community for people with disabilities. As the platform grew, Ciocca increasingly learned how people with disabilities struggled to open bank accounts and to apply for disability benefits. We realised that theres a massive opportunity for us to build something that allows them to have an easier way to bank, he continues. The revelation resulted in the launch of Purple in 2019, a neobank focusing on supporting people with disabilities. The name comes from the fact that its Christian Cioccas favourite colour. At the time we called it youBelong Cash and saw it as an extension of the brand, his brother recalls. It wasnt until last summer that we realised that this could be really big and that we should probably spin it out as a separate company.  The neobank is still in limited beta with only 25 card holders so far, but its CEO is confident that it will be able to tap into the 3,000 members of youBelong as the company evolves. For Ciocca, thats just the beginning. Our mission is to enable people with disabilities to achieve financial independence, he says. We want to set out to build affordable financial products that allow people with disabilities to spend, save and invest for a better life.  Purple is part of a wave of specialised digital banks that have launched over the past few years. In a similar way to traditional challenger banks like Nubank, Chime and KakaoBank, the new niche challenger banks offer accounts and low or no banking fees for some services. However, they stand apart thanks to their sole focus on supporting select minorities. Daylight was launched in 2020 to break down financial barriers for those in the LGBTQ+ community; Pride Bank launched in Brazil in 2019 with the same mission. First Boulevard, Greenwood and Paybby have been created to support black and Latinx communities in the States in the aftermath of the Black Lives Matter protests that followed the violent murder of George Floyd. A growing number of banks  such as Marhba and Niyah  provide Muslim communities with financial services rooted in Sharia law that guarantee that account holders money wont be invested in industries including arms, tobacco, alcohol, betting, porn or pork. The leaders behind these banks are responding to a perceived failure of traditional lenders and other challenger banks to recognise the individual needs in these groups because they are not part of them, which niche neobank founders are. Whats so powerful about them is that theyre able to leverage communities of people who are going through the same thing as them, Ciocca says. Banking on diversity  Its not as if more established challenger banks dont support minorities. Chime has supported the LGBTQ+ community by publicly championing the hiring of trans people and by providing financial advice for same-sex couples. The US-based digital lender has also openly backed the Black Lives Matter movement by donating hundreds of thousands of dollars to the Equal Justice Initiative, an organisation fighting racial and economic injustice. In the UK, Revolut launched Jamii, a marketplace and discount card for British black-owned businesses, in 2016. The $5.5bn neobank has also supported the LGBTQ+ community by issuing rainbow flag-branded banking cards, with the proceeds going to equality-focused charities in Europe. Some digital banks such as Monzo have also made a conscious effort to broadcast their support of these organisations by publishing diversity reports. Starling Bank for example is currently working on its first ever diversity survey. We hope to support everyone and we hope to be as inclusive as possible, says Alexandra Frean, Starlings chief corporate affairs officer. Frean notes that the fintech  just like all other challenger banks  is branchless and fully digital. So you can do your banking and open your account without leaving your home, she says, calling attention to an ongoing social media campaign launched in the spring of 2021 to support people with disabilities. Moreover, the UK neobank has a specialist team to help vulnerable customers and train staff to support customers struggling with all kinds of issues. To better boost that support, Starlings customer service agents are recruited from very diverse backgrounds. It just makes you a better company, says Frean. However, niche neobanks argue that these efforts are not enough and that they run the risk of being viewed as  if not disingenuous  then as value signalling with no real impact. Whats different when you talk to the founders at Daylight or First Boulevard or anybody else is that they think about how you can connect people within that community and talk about what it means to be black, to be queer, to be a part of society that is often neglected, says Bradley Leimer, co-founder of Unconventional Ventures and co-author of Beyond Good  How Technology is Leading a Purpose-driven Business Revolution. This is true in the case of Purple. In the States, people with disabilities cannot have more than $2,000 in their bank accounts if they receive disability benefits, according to Ciocca. For people like his brother, that means that they have to choose between staying home or trying to get a job and achieve a sense of independence. Do our family allow him to be out in the community and feel included and to be as normal as possible? he says. Or do we essentially just keep him in the house?  To solve this issue, Purple plans to leverage the Achieving a Better Life Experience (ABLE) Act, which the Obama administration introduced in 2014. It enabled banks like Purple to create so-called ABLE accounts, which help people with disabilities put money aside to improve their quality of lives. They can use it for buying wheelchairs, getting transportation and things like that  anything that they need to live a better life, Ciocca explains. And whats cool about it is that any money contributed to this account doesnt count towards that $2,000 limit. So now they can contribute up to the $100,000 limit that most states have.  Setting up these accounts can prove complex, which is why one of Purples first initiatives will be to untangle the intricacies of ABLE accounts. To do that, Purple must partner with a US state, which is Cioccas main focus at the moment. Since this is something that hasnt been done before were figuring out all of the complexities with them. Plus the states are bureaucratic and slow, which doesnt help, he says. Still, achieving this would empower the startup to grow tremendously. If we can pull that off we would hope to achieve probably 10,000 customers by the end of this year, the founder says. And then he believes the growth could really start to take off. There are tens of millions of people with disabilities. And if we can get a fraction of that to come bank with us because of the value we bring, we think it unlocks a lot of potential. Theres a massive opportunity for us, Ciocca says. Daylight CEO and co-founder Rob Curtis has provided additional examples of how these specialised fintechs can leverage insights into their own communities to create better services. Coming out to your parents makes you 40% less likely to have them pay for your university, he recently told Sifted. As a result, LGBTQ+ consumers have 50% more university debt than non-LGBTQ+ consumers.  Traditional banks therefore tend to see people from the LGBTQ+ community as high risk because they tend to have more debt than straight people, meaning that their mortgages are declined or they have to pay high interest rates, he claimed. Another example is that trans people often fail banks background checks because their social security numbers are attached to multiple names and multiple genders, which can raise red flags for banks. Additionally, Daylight has consciously not designed their cards with a rainbow flag or some other symbol of the LGBTQ+ community as its conscious that not everyone in the community is out yet and that they could face discrimination if they were. Understanding these sort of pain points, the argument goes, enable niche challenger banks to solve them. Money matters  The minority-focused banks will not only depend on their ability to create products, but also on their ability to raise capital. So far, theyve only enjoyed limited success at doing that. Greenwood raised $3m in October 2020. The round was backed by a number of angel investors. It then followed up the investment in March 2021 with a Series A round worth roughly $40m, backed by Truist Financial, JPMorgan Chase, Bank of America, Wells Fargo, Visa, Mastercard, PNC, Hispanic bank Banco Popular, SoftBank Group, Lightspeed Venture Partners and Quality Ventures as well as more angel investors. In February 2021, First Boulevard raised $5m from Barclays, Anthemis and a group of angel investors, Union Square Ventures partner John Buttrick, AutoZone CFO Jamere Jackson and Bad Boys II actress Gabrielle Union. By way of comparison, Chime raised a $485m round in September and Starling secured 272m in a Series D funding round in March. Purple has so far raised $60,000 through different startup competitions held at Cioccas university, but plans to formally raise a pre-seed round within the next few months. The goal would be to have that closed by the end of 21, Ciocca says. With that closed, we hope that we can start to hire and build out the team and get down to building [our business].  Even though hes confident in his and other entrepreneurs ability to drum up financial support from investors, not everyone shares Cioccas optimism despite the multi-million rounds mentioned above. Theres not been much progress at that with funding going to minorities, says Dulcie Omonubi, director of innovation consulting at Engine. Venture capital investment, she argues, tends to rely on relationships and if the investors understand the problem the startup is trying to solve. A typical sort of VC is a middle-aged straight white man and they might not always get the problem, and therefore think that theres no value in that solution, she argues. Depending on the success of niche neobanks, this could change. One unicorn in this space will open up for everybody else, Omonubi hopes. Its hardly a secret why that is. Ultimately, venture capitalists want to make money, she says, arguing that if a few of these challenger banks succeed in getting traction, they will start to invest in these startups. For Purple, securing funding for niche banks could end up benefitting everyone and could create a bright future for people within disenfranchised demographics. At the end of the day, all of us want to make a difference, Ciocca concludes. We all have the same goal of disrupting the big banks and we all have our own approach to doing so. I think thats what makes the smaller ones a little more special.  This story was originally published in the latest smart city-themed issue of Verdict Magazine; read for free here.