VC firms have poured $2.5 billion into fintechs like Chime and Varo this year. It's the latest threat to disrupt Main Street banks.

Chime

Chime Co-founders Chris Britt and Ryan King

• Investment into digital-only banks or "challenger banks" from venture capital firms this year is at $2.5 billion, already surpassing 2018's record total of $2.3 billion.
• The increased interest in digital-only banks comes at a time when VCs curbed dealmaking efforts in fintech overall during the second quarter of 2019.
• A big selling point for challenger banks has been their large customer base compared to other fintechs.
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Venture capitalists are falling in love with the idea of taking down some of Wall Street's biggest players.

Digital-only banks, also known as challenger or neo banks, are quickly becoming the latest big bet amongst VCs, who see the threat they pose to traditional banks as a good investment opportunity.

Year-to-date funding for challenger banks has already surpassed 2018's record of $2.3 billion, according to a new report on fintech investing from CB Insights. Through July, digital banks have raised approximately $2.5 billion across 55 deals.

CB Insights

Challenger banks funding

Interest in digital banks from VCs comes at a time when the number of fintech deals in the second quarter (367) dropped to the lowest its been since the fourth quarter of 2016 (329). The slip represents a 23% decrease in the number of deals done in the second quarter of 2018 (476).

From the US (Chime, Varo) to Europe (Monzo, N26) and Latin America (NuBank), disrupting where Main Street holds its money is an appealing concept across the globe. Big banks have taken notice of these young, agile companies aiming to steal some of their market share.

According to a survey published in February from Fraedom, a credit card specialist, 80% of bankers believe digital banks would have an increased impact on their business in 2019, with 30% labeling them the biggest disruptive threat.

Read more: Challenger bank Varo, which has raised $179 million from Warburg Pincus and TPG, just took a big step that might separate it from competitors like Chime and Monzo

Some have attempted to address these young competitors head on with digital-only offerings of their own. The most notable amongst them was Finn, JPMorgan's failed banking app for millennials. One of the main reasons for Finn's lack of success was due to the uncertainty around its launch internally, highlighting the difficulties large financial organizations can sometimes face when attempting to create fresh, innovative products.

Part of the allure that challenger banks hold is their ever expanding customer base. In a time when customer acquisitions for startups are high, digital banks have managed to grow some of the largest audiences among fintechs.

According to the report, of the 25 fintechs that have amassed more than a million customers, excluding those in India and China, seven are challenger banks. Brazilian NuBank (12 million) and a UK-based Revolut (six million) led the way for the group, which in total accounted for over 30 million accounts.

CB Insights

Challenger bank customer accounts

The report also highlighted the trend among challenger banks to expand beyond their country of origin. Specifically, it highlighted NuBank, which nabbed a $400 million Series F round in July and is valued at $10 billion. The mobile-only bank, which counts Goldman Sachs and Sequoia Capital as investors, recently opened its second headquarters in Mexico and reportedly has plans to move into Argentina and Colombia.

See more: UK digital-only bank Monzo is launching in the US - but getting American customers to sign on may be a challenge

The US is also lining up to as another battleground for challenger banks. In addition to homegrown Chime and Varo, UK-based Monzo and German-based N26 have both gone live in the States in the past few months.