Stablecoin Neobanks

We expect that the supply of stablecoins will grow from $300B today to $1T by the end of the decade, and far beyond that in the decades ahead. But what does this growth in stablecoins mean for where we should invest?

We’ve previously argued that despite being a transformative technology, stablecoins will primarily benefit incumbents. Nonetheless, we think that there will be large crypto-first businesses built or strengthened off the back of stablecoins. On-chain lending markets like Aave and Morpho are one example. Stablecoin-first neobanks are another.

As the stablecoin supply grows, hundreds of billions of dollars will flow into some type of stablecoin wallet. Much of that growth will come from emerging markets, where people seek protection from their local currency. The revenue opportunity for providing financial services to these stablecoin users could be in the billions of dollars.

Market Fragmentation

Stablecoins have many different customer segments. The market can be sliced by customer size (enterprises, SMBs, consumers, etc), geography, or industry. The product needs of SpaceX will be different from an African car importer, which will be different from the needs of a Bangladeshi consumer. For example, a consumer neobank may look more like a traditional mobile crypto wallet, whereas an enterprise solution may be a desktop app with complex tax reporting, payroll, and access management features. Because of these differences in customer needs, the stablecoin neobank market will be fragmented.

Customer Choice

Across all customer segments, we expect users to choose a neobank on three primary factors: product quality, product awareness, and product trust.

Product quality - like crypto wallets, stablecoin neobanks are relatively easy to build. But although the barrier to market entry is low, the barrier to excellence is high. Great products often contain a surprising amount of detail. There are countless crypto wallets, but only one Phantom. We expect similar dynamics to emerge in the neobank market, where products are plentiful, but over time, the highest quality rise to the top.

Product awareness - when users first onboard to a neobank, they’re going to pick from the options they’re aware of. Merely being in the market at the time when users are first onboarding to neobanks will be an advantage over later moves who must convince users to switch from one to another. Having stronger brand awareness means that you’re more likely to win the marginal user. The largest neobanks will likely keep on winning.

Product trust - we think being a trusted brand will be extremely important for neobanks, even more so than for legacy crypto wallets. This is for 2 reasons:

1. As more people onboard to crypto rails, the knowledge that the marginal user has about crypto will go down, meaning they must rely more on trust. The median crypto user in 2015 was more savvy than in 2020, and so on. Those trading memecoins on Solana today will know more than the everyday user in 5 years.
2. Today, most users use crypto wallets as speculative investment accounts. If they get hacked or lose money, it’s unfortunate but often doesn’t cause financial ruin. But neobanks are used as bank accounts, not investment accounts. Loss of funds would be devastating for most users, making them more risk-adverse.

The 2 most important considerations for a neobank are product quality and distribution. Trust will largely come downstream of those. While some customers will be cost conscious, we expect neobanks with product quality and trust to command price premiums.

Moats

Competitors are not necessarily competitive; there will be many neobanks, but few that are excellent. We think successful neobanks can create surprisingly large customer-centric moats, which, combined with their large markets, mean that they can become valuable businesses.

Neobank moats can come from:

• Brand - selling trusted products to risk-adverse and/or uninformed customers
• Product quality - building a delightful product that lowers interest in alternatives
• Switching costs - neobanks will be able to increase their switching costs as they mature.
  • The more features a neobank has, the more user re-education is needed when switching platforms
  • Address books are lost when switching from one to another
  • Physical cards require users to wait for a new physical card
  • Enterprise neobanks will have additional configured settings (e.g. multi-account access control), which would require re-setup if they switch providers.
  • The more assets they have in a neobank, the more annoying it is to move them to a new account.
• Network effects - more speculatively, it’s possible that the largest neobanks find network effects. Ideas include:
  • Login with wallets (e.g. login to a website with Phantom)
  • Wallet specific domain names
  • Discounted fees to sending / paying to addresses within the same neobank
  • In-wallet social features

Legacy neobanks like Nubank and Revolut will add crypto features, but we think there’s enough underbanked people and regions in the world that stablecoin-native neobanks have plenty of space to rise. Stablecoin neobanks may also have some regulatory arbitrage, be first to market in some regions, and have better crypto-nativity, which may be helpful in some contexts.

Monetization

Neobanks can monetize their user base in many ways. This gives them high ARPUs and robustness against business model disruption. Monetization paths include:

• Stablecoin float
• Yield sharing
• Card interchange
• Trading fees
• Transfer fees
• On/off ramp fees
• Subscription fees
• Enshrined defi protocol fees

Conclusion

Most stablecoin neobanks will struggle to build distribution or a delightful product. Those that can have the opportunity to become very valuable businesses.

If you’re a customer-obsessed founder building a stablecoin neobank, we’d love to chat. I’m nick@standardcrypto.vc.

¹  Visa