Neo Financial bets on embedded finance, D2C combo amid tough consumer banking market

a man in skateboard shoes leans sideways and flashes a Neo mastercard at the camera. it is in focus in the foreground and he is out of focus in the background
After partnering with Intuit, Neo looks to land more embedded finance deals.

Neo Financial started in 2019 with a mission to re-imagine everyday banking products for consumers. As the startup evolved, it has found itself working more and more with businesses to provide financial solutions.

Recently, Neo announced both a new consumer product—a rewards and cashback debit card—as well as a business partnership with Intuit TurboTax to provide loan advances on tax filings. The deal with Inuit is an embedded finance product where the loan is provided by Neo, through its banking partners.

CEO Andrew Chau indicated embedded finance and direct-to-consumer products are equally important to Neo.

As Neo’s director of partnerships, Keegan Sharp, told BetaKit, Neo has been exploring more embedded finance partnerships of late. This has come amid reporting from The Logic that Neo has struggled to grow its consumer-facing business and retain customers.

If you ask Neo co-founder and CEO Andrew Chau, embedded finance has been a part of Neo’s strategy since the beginning. In 2021, it launched a branded Mastercard in partnership with Hudson’s Bay. However, in an interview with BetaKit, he explained the company is now more actively selling embedded finance to businesses. Embedded finance is the practice of placing financial services into existing products, or nonbanks providing banking-like services.

The Logic reported earlier this year that Neo users are reaching for its flagship credit card less often than anticipated, despite the company announcing last year that it has one million customers. As BetaKit reported last year (when Neo raised $185 million CAD at a more than $1 billion valuation), that one million customer number includes Hudson’s Bay credit card clients. The Logic recently reported that when Neo inked its partnership with Hudson’s Bay, the large retailer’s parent company, HBC, took an equity stake in the startup.

While Chau wouldn’t discuss the status of Neo’s customer retention in detail, he said the company has seen “tremendous growth” on the consumer side of its business. He argued that has led to a lot of interest from businesses that want embedded financial services.

“When we can add value to a partner like TurboTax or a partner like HBC, the growth automatically comes,” Chau argued. “When you have that symbiotic relationship with these partners, that’s where you get that natural uptake in growth, and that’s been our thesis from day one.”

Chau also emphasized that the startup is not moving away from consumer products, but rather sees embedded finance and direct-to-consumer (D2C) products as equally important.

Neo’s D2C products include its rewards-based credit and debit cards, mortgages, and an investment platform powered by fellow Harvest Ventures portfolio company OneVest. The FinTech company has also been exploring crypto.

Is embedded finance the future?

Embedded finance has been touted as the future of many FinTech companies.

As Andreessen Horowitz executives and many others have argued in recent years, every company either is or will be a FinTech company, of which embedded finance plays a large part. Montréal startup Hopper is a Canadian example. It started as a travel booking app and has shifted heavily into FinTech products to support the bookings.

In the United States alone, financial services embedded into e-commerce and other software platforms accounted for $2.6 trillion USD, or nearly five percent, of total financial transactions in 2021, according to a report from management consulting firm Bain & Company. These include companies that facilitate payments or offer “buy now, pay later” loans at checkout to online shoppers. The transaction value is expected to exceed $7 trillion by 2026, according to the same report.

As for the challenger bank market that Neo plays in, one report put the global size of the market for smaller banks that compete with the major players at around $18 million USD in 2018, with expected growth to around $4 trillion by 2026.

Being a challenger bank is just that: challenging. Any issues the companies may have with customer retention are likely reflective of the difficult nature of creating a competitor to large, established financial institutions. Many Canadian challenger banks have faced the difficulty of having to rely on banks for services, while simultaneously trying to attract dedicated customers away from them.

What embedded finance looks like for Neo

Chau is adamant that Neo is very much still focused on consumer banking, not pivoting to embedded finance, which he said has always been a part of its business.

This harkens back to Neo’s decision to build its own financial services tech stack, which, as Chau explained on the BetaKit Podcast in 2021 set the foundation for the company to build a variety of products through APIs.

More recently, Chau told BetaKit that “a very large focus” of Neo’s business is on embedded FinTech, but the goal is to have those partnerships lead to a Neo-branded product.

“TurboTax is a great example where, yes, it’s using our embedded FinTech tools, but they are getting a Neo loan product,” Chau said. Notably, though, Neo and challenger banks have to work with banks to provide products like loans, since obtaining a banking licence in Canada is an arduous process. Neo’s banking partners are ATB Financial, Concentra, and Mastercard.

Sharp explained that Neo has seen notable traction with its TurboTax partnership, and is starting to speak with more large enterprises about other embedded finance options. He said Neo is targeting large retailers and financial institutions that might want to modernize by offering new FinTech products, but would have trouble doing so in-house because of legacy backend systems that they can’t easily abandon. While Neo hasn’t publicly disclosed any additional embedded finance partnerships, Chau explained that there are a number of ways the startup can partner with other businesses. Neo is exploring ways to provide card programs, loans, savings, mortgages, and potentially insurance in the future. Chau said companies are able to access Neo’s suite of products through what he argued are easy-to-use APIs that the startup has built off its tech stack.

The CEO explained Neo is able to offer services that are Neo-branded, co-branded, or white-labelled with the client company’s branding.

According to The Logic, Neo has been in talks with a handful of large enterprises about partnerships, including a white-labelled rewards program with Tim Hortons. Notably, Tim Hortons competitor Starbucks has seen success in recent years utilizing embedded finance.

Even as Chau argues that Neo’s consumer products are fueling its embedded finance play, Neo’s flagship credit card product has reportedly been struggling to keep users active. Neo launched the card during COVID-19 and relied on rewards and partnerships from retailers that were floundering at the time.

For Chau, while embedded finance might help the company increase its user base, D2C is still very much a focus. The CEO argued Neo’s value proposition is stronger having both sides of the market.

Feature image courtesy Neo Financial.

Meagan Simpson

Meagan Simpson

Meagan is the Senior Editor for BetaKit. A tech writer that is super proud to showcase the Canadian tech scene. Background in almost every type of journalism from sports to politics. Podcast and Harry Potter nerd, photographer and crazy cat lady.

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