Many startups have taken shots at traditional banking, but few have succeeded in changing the way consumers handle their money. However, there is plenty of promise in this model, according to investor Tim Young.
"On a high level, banking is broken in the brick-and-mortar space," said Young, founding general partner at ENIAC Ventures, a New York and San Francisco-based venture capital firm that has provided seed investments in mobile companies that focus on the Internet of Things, wearables, drones, robots and smartphones.
Its initial foray into financial services is the lead in a new $2.5 million see round in Zero, a San Francisco-based mobile banking startup that that focuses on using mobile technology to offset the costs associated with credit card rewards.
From the consumer's perspective, a Zero account acts like a deposit account or a debit card. But behind the scenes it processes transactions on credit card rails, generating enough interchange revenue to provide cash-back rewards on all spending.
Since a true debit/credit card hybrid is not possible, Zero's product is technically a credit card issued by Visa issuers, but it allows consumers to spend only the funds they have linked to the Zero account.
"A lot of the popular cards out there have have interest fees and can lead people to spend beyond their comfort level to get the rewards," said Bryce Galen, CEO and founder of Zero. "Zero's model does not entice you to spend beyond what you can because you can see the deposits and withdrawals all in one place."
The lure for merchants is potential increased traffic via higher rewards, while consumers have better visibility into their finances. Zero makes money through a portion of the interchange fees, its mobile-only model provides a low overhead. Zero does offer an actual physical card as an option, and it offers incrementally higher cash back rates for those who spend more on a yearly basis.
"The user experience provides better oversight, and we steer consumers into things like autopay and electronic statements," Galen said. "It's a more streamlined way to manage finances where you don't have to manage a monthly bill or risk getting into debt over a long period of time."
ENIAC's Young said Zero's mobile model lightens the expense of customer acquisition—it can cost more than $200 to acquire a new card account—and that Zero's founding team, which has experience with the social gaming company Zynga and in wealth management, has a background that can make Zero's plan work.
"They have the credentials to grow the business virally and organically," Young said.
ENIAC also hopes Zero's growth will boost its foray deeper into mobile-driven financial services. Zero has more possible investments in the pipeline, but is "stealth" at this point beyond its flagship Zero account.
More often, financial services and payments are drifting into ENIAC's specialty of mobile and IoT innovation, Young said.
"It's taken a while for consumers and the user base for mobile platforms to get comfortable with this technology," Young said. "But we think consumers will want to perform all sorts of financial services in mobile."
Zero's model is in some ways similar to Simple and Moven, companies created by high-profile entrepreneurs and use digital payments as a gateway to broader financial services. These startups, while relying on banks for some back end support , also positioned themselves as alternatives to old school banking.
These alternatives grew out of the post-crisis sense that consumers — particularly younger people — wanted an option outside of banks, but the market for such services has not grown explosively. And it can be a tough market, according to Richard Crone, a payments consultant.
"Zero is trying to play into the 'pure virtual banking' model, hoping that it will appeal to millennials," said Crone. "But in reality several studies show that millennials still value the physical infrastructure, though they use it much less than other customer segments."