Niche banks offer financial products and services that are targeted toward a particular niche or audience, whether they are Native Americans, the LGBTQ+ community, or entrepreneurs. The objective of niche banking, also referred to as affinity banking or vertical banking, is to better meet the needs of a specific group of customers.
You might choose to open accounts with a niche bank if you’re looking for a banking experience that reflects your lifestyle. These banks typically operate on a smaller scale than larger commercial banks and can offer highly personalized services.
Understanding how niche banks work can help you to decide if using one is right for you. Here, you can learn:
• What is a niche bank?
• How does a niche bank work?
• What do niche banks offer?
• What are the pros and cons of a niche bank?
What Is a Niche Bank?
A niche bank is a bank that focuses on a certain market or audience, such as people in a certain profession or with a shared background. It offers products and services that are designed to meet the specific needs of that audience. Niche banks are alternatives to traditional banks. They clearly understand who they want to help and they tailor their banking approach to serving their target market.
Niche banks may have branches or they may be online-only. They can be insured by the Federal Deposit Insurance Corporation (FDIC) in the same way that other banks are. Again, the main difference between a niche bank and any other bank is where it concentrates its efforts and how it focuses its services. For instance:
• Murphy Bank, which has branches in Fresno and San Luis Obispo, CA, is an FDIC-insured institution that primarily services farmers, small business owners, and mobile home owners. It can help them to obtain loans for the purchase of equipment or property.
• Laurel Road focuses on customers who are healthcare and business professionals managing a sizable amount of student loan debt.
How Do Niche Banks Work?
Niche banks work much the same as other banks, in terms of how transactions are processed and the kinds of products and services they offer. Where they diverge from other banks lies in the audience they are established to serve.
As mentioned, Murphy Bank operates primarily as a lender to help farmers, small business owners, and mobile home owners in the Fresno and San Luis Obispo areas. The bank also offers certificate of deposit accounts.
Other niche banks, meanwhile, can serve an entirely different population. For example, niche banks may offer services to customers based on their:
• Geographic location
• Military affiliation
• Racial, ethnic, or gender identity
• Religious affiliation
• Sexual orientation
• Occupation
• Disability status
• Immigrant status
Here’s one perspective on the value of niche banks: An estimated 5.4 million households or 7.1 million Americans are unbanked, meaning they have no bank account, according to the Federal Trade Commission (FTC). Twenty-nine percent of the unbanked said they didn’t have enough money to open an account, while 16% said they didn’t trust banks enough to open an account. Niche banking can help fill gaps that may exist in traditional banking by catering to a smaller group of people. In this way, they may contribute to shrinking the ranks of the unbanked.
Get up to $300 when you bank with SoFi.
Open a SoFi Checking and Savings Account with direct deposit and get up to a $300 cash bonus. Plus, get up to 4.60% APY on your cash!
How Do Niche Banks Meet the Needs of Customers?
Niche banks can meet the needs of their customers in a number of ways. That can include offering specialized products or honing their services to fit a particular needs. Here are some of the ways in which niche banks help the people who use them.
Financial Wellness Tools for Those With Financial Struggles
Financial wellness or wellbeing has several components. Two to consider: freedom of choice in how you manage money and a sense of security that you’re making good decisions with your finances. Niche banks can recognize that financial wellness looks different for everyone. They likely know that what may not be a struggle for one segment of the population is for another.
Niche banking institutions can offer specific tools to help their customers overcome obstacles to achieving wellness. For example, that might include a mobile banking app for people with disabilities that’s specifically designed to help them manage Supplemental Security Income (SSI) or disability income benefits.
Recommended: Is Mobile Banking Safe?
Tax Management Tools for Those With Financial Struggles
Niche banks can also offer tools to help make income tracking and tax filing easier for certain customers. For instance, freelancers, gig workers, and entrepreneurs can get a boost from the niche bank Lili. When income is irregular because you’re working as an independent contractor or you’re a sole proprietor, having built-in banking tools like expense tracking can make doing taxes less stressful.
Lending for Native American Tribal Members
Certain niche banks exclusively serve Native American populations with the goal of helping them to finance their personal or business goals. That can be very beneficial for someone who may not know how to apply for a home loan or how to get a business bank account so they can apply for a business loan. These banks can review the borrower’s financial situation and needs to help them find the right personal or business loan option.
Banking for Immigrants
Immigrants often face numerous financial hurdles, including opening a bank account. Undocumented individuals who have an Individual Taxpayer Identification Number (ITIN) can open a bank account in the U.S. However, a lack of familiarity with banking regulations or a language barrier could be barriers to access. Niche banks can offer solutions to those issues in the form of bilingual banking, Shariah-compliant bank accounts, and other services that reflect the unique financial needs of immigrants.
Banking for Freelance Workers
The number of freelancers is growing. There are approximately 59 million freelance workers in the U.S. and they collectively contribute $1.3 trillion to the economy. Niche banks understand that freelancers may face certain challenges with things like billing customers and getting paid. So they can offer banking tools that can make managing those challenges easier. For example, you might be able to send invoices through your mobile banking app, track ones that have been paid, and see those deposits in your checking account.
Why Are Niche Banks Gaining Steam?
The rise of niche banking may be attributed to a few things. For one thing, people may be increasingly tired of paying high banking fees, such as monthly maintenance fees, overdraft fees, non-sufficient funds fees, and excess withdrawal fees. The expense of keeping your money at a traditional bank can really add up. That’s how banks make profit.
Niche banks that operate as online-only institutions can offer a fee-friendly alternative. Generally speaking, online banks tend to be less expensive for their customers because the bank isn’t passing on high overhead costs. Online banks may also offer better interest rates to savers.
Another reason for niche banks’ growth may simply be the desire for a more personalized banking experience. A major bank may not understand the types of financial challenges a customer faces on a daily basis. Niche banks pride themselves on being able to understand those challenges, whether it’s Greenwood, for the Black and Latino customers, or Ando, which is dedicated to sustainability for eco-conscious clients. Working with a niche bank can help you feel more connected to the institution itself and to your money.
Advantages of a Niche Bank
Niche banks have their pros and cons like any other type of bank. If you’re interested in what’s good about niche banking, here are some of the main advantages.
Niche Banks Know What You Need
Niche banking is all about figuring out what the members of a specific population need most from their bank. When you open an account with a niche bank you can be fairly certain that the bank has studied the most common challenges its customers face and understands what kind of solutions are needed.
They’re Technologically-Inclined
Once upon a time, you might have gone to a branch to do your banking. But thanks to online and mobile banking apps, you can probably manage your money from just about anywhere. Niche banks typically recognize that customers want tech tools that can make keeping track of their finances easier. They often deliver them in the form of user-friendly apps and features, making it fast and simple to pay bills, transfer funds between bank accounts, and more.
They’re Not One-Size-Fits-All
Niche banking aims to encompass a wide variety of customers, which means it can be easier to find the right banking option for you. You’re not necessarily limited to banking in your geographic location. Instead, you may open accounts online based on factors like gender identity, ethnic background, or disability status. And as more niche banks open, they will likely serve an even more audience segments.
Disadvantages of a Niche Bank
There’s a lot to like about niche banks but there are some potential drawbacks. If you’re considering a niche bank, here are a few things to keep in mind.
Products and Services May Be Limited
While some niche banks offer the same products and services you’d find at any other bank (say, checking accounts, savings accounts, credit cards, and loans), not all of them have a full spectrum of services. Murphy Bank, for instance, does not offer checking accounts or money market accounts. So in some instances, a niche bank may not be an all-in-one-banking solution.
Finding the Right Bank May Be Difficult
Having multiple niche banks to choose among can be a good thing, as it allows you to find the best banking option for you. That said, the process can be a challenge if you find that no single niche bank meets all of your needs. Perhaps you are both Black and an entrepreneur, and are considering niche banks that speak to each facet of your identity. It may be hard to know which financial institution will best suit your needs.
Recommended: Can I Have More Than One Bank Account?
The Takeaway
Niche banking offers a personalized perspective, serving the specific needs of certain consumers. For instance, some niche banks are designed to uplift the disabled; others are there to understand and serve the needs of Native Americans. For some account holders, switching to a niche bank will allow for a more personalized, satisfying experience. Account holders can enjoy services and an outlook that really meshes with their identity and aspirations.
If you’re looking for ways to bank smarter, see what SoFi offers. While we aren’t an affinity bank, we do understand what our customers want. Namely, high interest, no fees, and convenience. So when you open our high yield bank account with direct deposit, you’ll enjoy a competitive APY and no fees. Plus, eligible account holders can get paid up to two days early. Those are good reasons to open a SoFi bank account online.
FAQ
What is vertical banking?
Vertical banking is banking that targets a specific vertical or segment of the population. It’s the same thing as niche banking or affinity banking.
Are niche banks a fad or a long-term option?
Whether niche banks will stick around for the long haul is anyone’s guess. The increasing number of niche bank offerings suggests that banking customers are looking for alternatives beyond the traditional big banks, regional banks, and credit unions.
What is niche market strategy?
Niche market strategy is all about targeting a specific niche to sell products or services. Banks can apply a niche market strategy to narrow down the area of the population they’d like to serve.
Photo credit: iStock/Bearinmind
SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
SOBK0522027
