Original Article Title: Replaying the Neobank Mistake in Crypto Or Rebuilding It Right?

Original Article Author: @0xcoconutt

Original Article Translation: SpecialistXBT, BlockBeats

Editor's Note: This article serves as a wake-up call to the current hot trend of "crypto banks." The author bluntly points out that the vast majority of "traditional internet banks" have failed to be profitable because they overly rely on meager interchange fees and lack core lending business, ending up as costly "deposit warehouses." And now, most crypto neobanks seem to be blindly following the same path, offering high incentives in exchange for unprofitable deposits.

Did you know? Less than 5% of Neobanks have been profitable.

The selling points of internet banks are enticing: all-digital banking services, lower fees, and a better user experience. However, the economic model of these digital banks has been proven to have fundamental flaws.

This article will delve into why many traditional internet banks struggle to be profitable and why crypto internet banks are now trailing in their footsteps.

Image Source : @ashwathbk (https://x.com/ashwathbk/status/1975899128745054710)

Business Model Over-Reliance on Interchange Fees

The majority of internet banks' revenue relies on "interchange fees," small cuts that banks earn each time a user swipes their debit card.

This model is only efficient at scale, assuming the profit margin can be maintained and the total consumer spending is high enough. However, in practice, this economic model often results in slim and extremely fragile profits.

Take the U.S. internet bank Chime, for example. It does not have its own banking license and can only rely on partner banks to hold deposits and issue cards—very similar to how crypto internet banks operate. Its business model is heavily focused on card transactions. In 2024, around 80% of its total revenue came from interchange fees.

However, regulatory agencies in many regions have already capped interchange fee rates:

European Union: 0.2% per transaction

United States (Durbin Amendment): Approximately $0.21 + 0.05% per swipe

Chime leverages small partner banks, which can charge up to approximately $0.44 per swipe

However, this "regulatory arbitrage" is facing increasing pressure, and for internet banks, relying solely on interchange fees results in thin profits that are difficult to sustain a viable business model.

Additionally, interchange fee revenue is highly sensitive to consumer spending cycles. During economic downturns, if people reduce card use, internet banks' revenue decreases accordingly.

Idle Capital: No lending, no interest income

The core revenue of banking comes from lending interest, not payments.

Traditional banks convert deposits into loans, earning interest through mortgage loans, credit lines, and commercial financing.

However, internet banks, even those with banking charters, have mostly failed to establish this core function.

60-65% of traditional banks' revenue comes from net interest income, with loan-to-deposit ratios reaching 55-65%, and sometimes even higher globally. Yet, most internet banks are far behind in this primary income source, with Starling Bank being the only exception as it acquired a mortgage portfolio.

Cryptocurrency-native internet banks operating in a self-custody model lack the ability to generate interest income from deposits. They cannot use users' funds to generate returns. At best, they merely "redirect" deposits to DeFi protocols like Aave or Lido, extracting a small portion of the yield as a commission. However, this integration does not provide underwriting risk, nor does it offer real control over the funds, bringing unique risks such as protocol exploits, stablecoin de-pegging, etc.

Whether in traditional fintech or a cryptocurrency-based model, the same paradox is playing out: deposits pile up, but cannot be monetized.

Essentially, many internet banks (including cryptocurrency-native ones) are just expensive "deposit warehouses."

High Customer Acquisition Costs and Maintenance Costs

Traditional banks historically achieved organic growth through branch networks, while internet banks must compete for every customer in the crowded digital market through marketing and referrals. This has resulted in exorbitant customer acquisition costs, severely squeezing their profit margins.

Due to the higher barrier to entry and required user education cost, the customer acquisition cost of crypto-native internet banks will only be higher. Not to mention, most of them also use high APYs and token incentives to attract user deposits. This constitutes a "deferred liability" that the company needs to repay, significantly increasing the customer acquisition cost.

The cost-to-income ratio of crypto-native internet banks is even worse than that of traditional internet banks:

Payment based on stablecoins has compressed the profit margin of foreign exchange and exchange fees, plunging into a "race to the bottom" in an increasingly competitive environment.

Regulatory obligations (even when adopting a self-custody model) also require KYC, fund transfer controls, and bank card compliance. If fraudulent card transactions are discovered, chargebacks and fines will be borne by the crypto-native internet bank. They may even face the risk of being suspended by centralized card issuing institutions.

Most users are low-balance retail customers (deposits <$1,000), while the costs of customer support, anti-fraud measures, and infrastructure are fixed.

Rebuilding the Business Model: Winning with Embedded DeFi

Given its self-custodial nature, the business foundation of crypto-native internet banks is completely different, so they cannot win by emulating Chime or Monzo. I do not believe that crypto-native internet banks have any advantage over traditional internet banks, but I think that crypto technology can help internet banks improve profitability through "Embedded DeFi."

Using Transactions as the Primary Revenue Source

Transaction revenue has become a mature path for driving high-profit revenue for traditional internet banks and crypto wallets.

Revolut Wealth Division (including crypto business, 2024): Revenue of £5.06 billion (16.3% of total revenue), a 298% year-on-year growth, mainly driven by customer cryptocurrency speculative behavior rather than traditional banking business.

Phantom Wallet (projected for 2025): Profit of $79 million from in-wallet token transactions.

Embedded transactional features have become an industry standard. Applications need to provide a wide range of asset classes, trading pairs, MEV (Maximum Extractable Value) protection, fast execution, and other functions to stand out and ensure users have the best trading experience.

Structured Revenue and On-Chain Financial Products

Internet banks do not have to lend directly but can package complex DeFi products into financial products that are easy for retail customers to understand and invest in.

Issuing a stablecoin independently, earning yield on the underlying US Treasuries by incentivizing users to swap into that stablecoin

Well-designed Yield Treasury and retail-focused savings protocol

On-chain ETF / Real World Assets (RWA)

Insurance

I have yet to see many Western neobanks replicate the success of Alipay's "Ant Fortune" suite of products.

Screenshot of Alipay Wealth Management Product Interface

Crypto-native neobanks have an edge in offering a broad range of wealth management products, simplifying DeFi, and making high-yield financial products more accessible to a wider audience.

Embedded DeFi helps greatly enrich the wealth management product line of Internet banks.

Building DeFi "Railroads," Not Reinventing Banks

Internet banks have always had thin margins. Crypto-native neobanks, despite having DeFi-native tools, face even tougher challenges: lower fees from stablecoin payments, higher compliance costs, more difficult user onboarding, and fierce competition once traditional Internet banks also "embrace crypto."

As Revolut and Nubank start offering stablecoins, cryptocurrency trading, and on-chain yield on top of their existing infrastructure, "crypto-first" Internet banks will find it hard to compete for user mindshare.

The real key to success lies not in reinventing yet another Internet bank but in providing "railroads": developing yield routers, stablecoin forex layers, DeFi wrappers, or curation protocols that can plug into existing bank distribution channels. It's challenging to compete with Internet banks that have already amassed a large user base, but we should strive to leverage crypto technology to complement and enhance their revenue potential.

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