Deep-Dive: Neon Money Club
When a dating app is really a credit card which is really an investment platform.
Introducing my first deep-dive. In these posts I will be digging into a company or topic and surfacing info and/or insight which can’t be found anywhere else (otherwise I would just link to it in the weekly update).
There won’t be any fixed schedule for these, they will (or won’t) occur based entirely on when I stumble onto something I feel worth digging into.
Earned-media / Marketing Stunt
Two-days before Valentines Day the Neon Money Club (NMC) launched ‘Score’ a new dating app restricted to people with good credit (675 and above). Once you’re in apparently it’s a basic Tinder clone with no real algorithmic matching just the familiar left-right swipe.
They are positioning this as a ‘pop-up experience’ which will only be available for 90 days and per the press release is intended to “elevate the discussion around financial health”. Ultimately they generated a bunch of earned media with 32 pieces linked on their press page and there will be hundreds more examples who are syndicating, stealing, linking, etc to this content.
Having read all 32 pieces I can report back on a few things:
Posting credit scores on dating profiles is allegedly a ‘thing’ with this TickTock getting over 1m views and kicking off a ‘trend’ or at least some other TickTockers doing the same thing and claiming to have invented the trend. No longer being on the apps1, I have no first-hand knowledge here - but also no reports of it as an actual thing from male/female friends.
Only a handful of the articles referenced that Neon Money Club has actual products like ‘Cream Card’ - and the ones who did were directly quoting the press release with no further analysis/details.
None of the articles (except LinkedIn) called out Score as a marketing stunt, mentioned that having a list of prospects with credit scores could be useful or went any deeper into the company.
Target Customers & Problem
Their marketing material and interviews (especially this one in AfroTech) pretty clearly shows their target demographic; Genz and Millennials aged from early 20s through to early 40s who are very ‘cool’2 but have low levels of financial literacy/engagement - with a particular emphasis on Black and Hispanic populations.
By targeting an underserved market it also means they don’t have to directly compete and aren’t trying to convert customers from an existing (sticky) product. Solving why they are undeserved can be a challenge - but having a mailing list of people with credit scores over 675 means being able to skip this.
The Cream Card
The basics of the card are pretty straightforward, it’s an ‘Amex’ card with an earn rate of 1.5 points/dollar (competitive) and an annual fee of $128 (not very competitive). You get the basic Amex offers and can take the points as ‘cashback’ (statement credit) or redeem them for cash on the NMC investing platform.
They use the Amex network but they are not issued by Amex and NMC isn’t a bank so can’t issue cards, instead they are using Evolve Bank as a Bank-as-a-Service to be both the issuer and provide the integrations with Amex. As an Amex card the interchange (#145) averages around 2.68% (source), but as the issuer Evolve is probably keeping some, funding the cashback and giving some to NMC.
Amex offers are effectively an advertising network operated by Amex where they charge companies for the privilege of offering discounts to Amex customers. Given that Amex is managing the offers I think it’s also a fair assumption that Amex is getting most (if not all) of the revenue associated with this.
Overall then despite it’s massive prominence I suspect they make little or no money on the card - instead the whole purpose of the card is to operate as an on-ramp to the investing platform.
Investing Platform
Having signed up for the card customers are automatically onboarded to the investment platform (presumably single KYC/AML covering both) and given a fractional share of VOO which seems to be worth $30 (ADV). This means that customers aren’t starting with a blank screen. They have something to look at and interact with which helps them to understand the platform.
There is also a referral/engagement programme (contest rules), however this is pretty meagre. It runs as a monthly raffle with a single winner. Members get 3 entries for their first share purchase, 1 entry for every dollar invested and 1 entry for every referral. If anything this disincentivises referrals - why bother when customers can invest $1 instead.
The real hook is that when customers convert their points to cash on the investing platform NMC will double the points value - effectively a 3% ‘cashback-to-invest’.
Once on the platform they offer ‘Neon U.’ which “will meet the members where they are by translating financial actions with three simple pillars that provide a financial foundation for our people in their language”. In other words they have some onboarding videos/etc explain investing and teaching customers to use the platform. This is crucial because their whole model relies on reaching people who are not financially engaged and being able to onboard them at scale without human intervention.
The central product seems to be Neon+ ‘Playlists’ which are “automated investment solutions… customized and recommended based on an individual investor’s identified interests and characteristics, including: market sector(s) or industries of interest to a potential investor, their age and risk tolerance, among others”
This is a robo-advisor product where the customer fills in some kind of basic quiz and then is recommended a particular portfolio. The differentiation here seems to be how those portfolios are constructed, in an interview the CEO described one of them:
‘S.W.A.G’ — “Start with Assets You Got”, it holds stocks for companies like Nike, Supreme, Gap, and Ralph Lauren, among others…. We wanted to say, ‘Look, if you buy Nike, which we all do, you should own Nike’
On the one hand this is a re-phrasing of some classic Peter Lynch advice “buy what you know”.3 On the other hand though a portfolio constructed of a dozen apparel companies is going to be highly correlated (no diversity) and historically has lagged the SP500 substantially.
The fee for the portfolios is tiered but tops out at $6/month for balances above $6,001 - for low balances that’s sitting around 1.2% a year which is pretty steep in a market now dominated by zero-fee models (pioneered by Robin Hood). But obviously as balances go up the $72/year rounds down to a negligible number.
They could also generate revenue from commissions - the disclosures on this are a bit contradictory and unfortunately ‘Member Fees’ is a broken link:
CRS (13 Sept ‘23): “you will pay [Neon Money, LLC (“NML”)] a transaction‐ based fee, generally referred to as a commission, every time you buy or sell an investment.”
ADV (10 Jan ‘24): “Clients are responsible for the payment of all third-party fees (i.e., custodian fees, brokerage fees, mutual fund fees, transaction fees, etc.). Those fees are separate and distinct from the fees and expenses charged by [Neon Money IA LLC (“NMIA”)].”
Member Agreement (10 Jan ‘24): “You are responsible for trade charges, brokerage commissions, mark-ups and other fees imposed by the [DriveWealth, LLC]”
It appears that when they did the CRS they were planning on operating as a broker-dealer themselves (and have the registration), however they subsequently switched to using DriveWealth as a broker-dealer partner. Reading the DriveWealth API specifications though it’s pretty clear that NMC would be setting the commissions - so I suspect the revenue from these goes straight back to NMC.
But on the other hand it’s pretty tough to compete by charging a commission when Robin Hood has no commission and even the legacy brokers have moved to that model.
There are a few other possible revenue sources (sorted from least to most interesting):
Interest Income: customers will often have an uninvested cash balance which NMC could be earning interest on - most likely by sitting it in an account at Evolve. Even with high rates you need a lot of balances for this to generate serious revenues.
Market Data: basically this is the fancy charts and near-live data. It’s available from DriveWealth (here) and the Member Agreement sets out a series of restrictions on it. This kind of functionality is core to an investing app so I assume it is being provided for free.
Payment for Order Flow (PFOF): this gets a lot of bad press but in my view is relatively benign. Market makers pay brokerages in exchange for routing orders to them - a stream of (uninformed retail investor) orders helps market makers to profit on the bid-ask spread. This is specifically allowed under the Member Agreement, with the revenues going to DriveWealth as the broker - although some/all might be kicked back to NMC.
Securities Lending: another bogeyman. If you want to short a stock (bet on it going down) then you first need to borrow it (and pay interest to the owner), then you sell it and you hope to rebuy the stock at a lower price so you can then return it to the lender and profit on the price drop. As the custodian of an account brokers may make the shares available for lending and then either pocket the interest or split it with the account holder. Under SEC rules any securities lending must be disclosed, however I couldn’t find anything in the disclosures so I’m assuming this isn’t happening.
Putting it all together
The Customer Acquisition Cost (CAC) probably rounds to $30 (e.g. the free fractional share) on the basis that they will be pushing hard on earned media and referrals.
The problem is Life time Value (LTV)…
The $128 annual fee is likely eaten up by Amex and Evolve, with no revenue for NMC from the Amex offers.
The card spend generates ~2.68% of interchange, let’s assume:
0.68% is retained by Evolve (for underwriting the risk)
1.5% is used to fund cashback/cashback-to-invest
0.5% is revenue for NMC (for doing the marketing)
In their target demo of GenZ and Millennials, the average credit card debt seems to run around $2-4k and is generally getting paid off, so let’s assume $1-2k/month of spending. Applying the interchange numbers that means:
$6.8-13.6 for Evolve
$15-30 for cashback/cashback-to-invest
$5-10 for NMC
However if the customer elects to take the cash-to-invest option then it actually pays out at 3%, the problem is that there’s only 2% available to fund it (1.5% + 0.5%) so NMC is funding the remaining 1% out of pocket. So the average customer spending $1-2k is getting $30-60 in their account which is costing NMC $10-20 out-of-pocket
On the investing platform NMC is only making $6 (maximum) on the robo-advisor ‘playlist’ service so they’re running at negative $4-14 per month per customer.
I don’t know the pricing model for DriveWealth but let’s assume $5/month/account which pushes the total to negative $9-19 per month per customer.
Assuming they aren’t charging commission then the only real remaining revenue is payment-for-order-flow (PFOF). Robin Hood (who generate more PFOF per account than anyone else) claimed to earn $0.0023 per share per trade (source).
For NMC that would mean the average customer trading 4,000-8,000 shares (across one or more trades) per month just to break even which doesn’t seem viable.
Conclusion & Outlook
This is an seed-stage start-up. They haven’t necessarily built very much and don’t seem to have an actual product in market or assets under management. The splashy creative and marketing stunts are intended to establish whether there is product-market-fit and build a mailing list for their eventual launch.
The unit economics at the moment clearly don’t work - but that’s not unusual. If they don’t find good PMF the unit economics don’t really matter, they will run out of runway and go bust.
If they do find good PMF then they will need to iterate on the unit economics until they find something viable - or run out of runway and go bust.
The obvious move is simply to ditch the double cashback-to-invest or at least restrict it to the first X months for new customers. That transforms it to a profitable product, for the average customer per month:
$15-30 cashback-to-invest for the customer
$5-10 revenue interchange for NMC
$6 robo-advisor fee for NMC
$5 platform fee for DriveWealth
Which nets out to $1-11 for NMC meaning 3-30 months to payback the CAC.
The problem is the competition:
Robinhood has great brand awareness with the target demo, no account fee and no commission with a proven ability to simplify investing and encourage trading - which generates massive PFOF revenues. Oh and they have a no-fee debit card with 1% cashback and round-ups + recurring investments.
Charles Schwab doesn’t serve the target demo, but it has no account fee and no commissions. And they have a no-fee Amex card (issued by Amex) which generates 1.5% cashback-to-invest.
In a crowded and highly competitive market I don’t think that branding and language will be enough to differentiate NMC and achieve success.
Hopefully my wife will overlook that her score edges mine out by 0.2%
Or however the kids describe it these days
Sometimes misattributed to Warren Buffet