Fintech SquareOne goes from kids’ pocket money to SMEs

According to the dictionary, ‘square one’ is an initial stage or starting point. It’s an apt description for Kiwi fintech SquareOne, which has changed its name to Emerge as it reveals its ambitious plan to move from teaching kids about money to offering services to SMEs and eventually becoming a neobank.

Neobanks or challenger banks are fintech companies that offer apps, software and other technologies to streamline mobile and online banking. They’ve disrupted the global banking sector in the same way Uber did to transport and Airbnb to the accommodation industry.

Co-founders Jamie Jermain and Jovan Pavlicevic, who have five children between them, started SquareOne in 2021. They saw a market gap for an app that provided parents with tools to help kids learn about money and savings.

After downloading the app, parents set the level of control they want and children are issued a Mastercard debit card and their first bank account. Emerge has an agreement with Mastercard allowing it to integrate across its platform in more than 200 countries, and Mastercard has also provided some non-dilutive funding.

“There’s a cheeky clue in the name. SquareOne was just the beginning for us, the first cab off the rank in terms of product,” says Pavlicevic. “The bigger vision has always been how do we get from a ‘pocket money’ app to something that can realistically provide an alternative option to what we have here in terms of the big Aussie banks.”

Emerge plans to go live with an SME proposition by the end of February or early March and then expand into personal accounts in the third quarter of this year. SquareOne will remain for now as the kids’ app brand. The co-founders are conscious that with 180,000 Kiwis signed up, there is a lot of love for the brand so they’re in no rush to get rid of it.

They’ve asked parents of kids using the app to indicate interest in other services from Emerge, and several hundred businesses are lined up to join – an encouraging early indicator of potential demand, says Pavlicevic. 

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The funders

Auckland venture capital firm Altered Capital led Emerge’s $5.8 million seed extension round last year, writing a $3 million cheque for a 19 percent stake. The two co-founders hold 21.57 percent while angel backers Enterprise Angels and Angel Investors Marlborough have 11 percent and 7 percent respectively.

Altered Capital set up in New Zealand at the end of 2021 and raised a $100 million fund the following year. It has made five out of a planned 10 investments so far from the fund.

Three of its founding partners were involved with the venture capital arm of investor MGFO, which is a 36 percent shareholder in UK-based Starling Bank. Altered Capital represents MGFO’s remaining stake in the neobank along with shares held by the firm’s founding partners and other high-net-worth investors.

Starling founder Anne Boden took the startup from a small digital challenger in 2014 to a major player in the UK’s financial scene with 3.6 million active users. As a licensed bank, it started out offering personal current accounts and bank accounts and later added Kite, a debit card for kids, among other features. Altered Capital partner Marcus Traill, who is based in London, sits on the Starling board.

McGregor Fea, one of the venture firm’s partners and a director of Emerge, says the firm always wanted to back a major fintech in New Zealand, particularly in the neobanking space.

“The same trends that were in existence when the seed cheque was written into Starling are in existence in New Zealand to this day, in that the incumbent banking experience is very poor for customers and that the incumbent banking returns are considerably larger than they should be were they to be appropriately challenged.”

But he says it’s not easy to start a fintech and succeed. 

“There is a very large graveyard of failed neobanking fintechs and there are only a few who are capable of working at the pace required to take on very powerful incumbents.”

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Altered Capital was introduced to Emerge’s co-founders in mid-2022 when the startup was  still too early to meet its investment mandate of proven product, unit economics and sales. But the VC continued to monitor its growth, and how well a move to start charging for its kids’ products was received by parents.

Eventually the VC firm decided to back Emerge’s wider banking strategy, co-investing with other early-stage investors, which Altered Capital has always seen as its role in the ecosystem, says Fea.

“[We’re] partnering up with these earlier-stage players and providing them with the funding they need so their winners do win. We really saw that as our secret sauce in the previous group [MGFO]; we had a very large balance sheet and it meant, regardless of the opinions or market conditions from the outside, we had the ability to continue to back winners, which is an important part of venture investing.”

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From fintech to bank

Emerge is a licensed financial services provider rather than a registered bank, although it intends to go down that path in a couple of years. It means it can accept and hold deposits on trust but not lend out money and charge interest.

It’s a long road to gain registered bank status, but Fea says Emerge has established world-class controls that are way ahead of its current product and what you’d expect from a banking board, rather than that of a fintech.

Not only does that ensure customer security and protection is paramount, it also creates a harmonious relationship with regulators – something the investors had experience with via Starling, says Fea.

“We know where the sensitivities lie and what best practice security and protocols look like and we have already implemented those. They will be established as an additional cost to the business, but the reality is the counterfactual is just non-existent for us. We are launching as a banking competitor and consumers and ourselves as board directors need to know that we are as confident as they are.” 

Self-described as a digital-first banking alternative, Emerge will have no branches and zero fees and account costs. 

Jermain says it has chosen to target SMEs now, rather than consumer banking, because it thinks it is the next most-underserved segment in New Zealand.

The SME and kids’ banking markets have similar pain points in terms of onboarding and account opening, and the aim is to remove some of that friction, he says.

“We’ve been through that as a business trying to set bank accounts up. Some banks have got it down to what would be considered, I suppose, a reasonable timeframe of a few days, some might take a few weeks, some months. We figured out an onboarding process which takes 10 minutes for a simple company structure.”

SME customers also complain about managing team members through their existing bank accounts and getting cards for staff. That can mean one company credit card is handed around the entire team for expenses, or staff have to use their personal cards and be reimbursed. Emerge’s product means businesses can spin up unlimited team cards and it will also offer single-use online cards with smaller limits that allow staff to purchase items with company funds without putting the entire account at risk.

It has also built integrations with accounting software platforms Xero and MYOB.

The startup says it will also build a partner marketplace where businesses would be able to get discounts from other providers, which Jermain thinks has more value to SME customers than being able to offer interest on their accounts. 

It’s likely to wait another six months before launching consumer products after beta testing them with SquareOne parents.

“We’ve seen such a massive explosion in the UK and Europe with very cool apps like Monzo, Revolut and Starling – the new players which have been massively successful. We want to make sure we get the consumer side right because there is a need for it and a lot of people want it so we’ll ensure that it is feature-rich enough to capture the market,” says Jermain.

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The competition

Pavlicevic says it’s not acting as middleware for the banks; the ambition is for Emerge to augment or replace bank accounts with its own service offering.

“It was always the aim to become a platform that enables a range of these different services – something for business, something for personal, something for your pocket money. The key is the underlying reg stack, the people, the tech stack, that becomes a shared platform for all these different products.”

Pavlicevic says the megabanks remain an important part of the infrastructure and Emerge works closely with many of them. But they struggle to innovate due to their size, he says.

Emerge was the first Asia Pacific issuer on Mastercard’s digital-first programme, which means a SquareOne card has all the embossing and sensitive personal details taken off when it arrives in the post.

“You can ask yourself why has no-one else done that before in New Zealand and you’ll definitely remember that the only reason that embossing is on your card is for the old zip zap machines. That’s reflective of the lack of general innovation in the space where you do have these legacy incumbents.”

Funding a fintech through to a registered bank will be costly. Starling, for example, has raised a total of 609 million pounds to date from investors. 

But Fea says more capital is required by central banks based on how risky a bank’s lending activities are. 

Typically customers would rather the banks didn’t take high-risk bets with their money and it is Emerge’s intention to be a low-risk, initially no-lending, banking proposition, he says.

“If you’ve got a business model and customer relationship which is experiential and based on the best-in-class tech experience rather than squeezing out a little bit of extra return from doing some risky lending, then the bank gets the benefit of not having to hold as much capital because they’re not taking risk with customer funds and the customer gets the benefit because the experience is better.”

Jermain says Emerge can go two ways for its next capital round.

“We can either raise enough to see us through to profitability and we have a plan to get to profitability or if we’re going to go for banking registration then, obviously, we’d look to do a bigger raise and enough to have the capital reserves to apply to complete the banking registration and enough money to fulfil the aspirations that we have.”

It has 32 staff in New Zealand and the Philippines and plans to double that this year, including building out a local call centre function and the development team. 

While they want to achieve a “big roadmap” in a short timeframe, Jermain says the co-founders are being “militant” around preserving company culture. 

“That’s one of the most important things and we’re very proud of the team that we’ve built and the culture that we’ve built. Growing too fast can be quite dangerous in that aspect, and if you don’t get the right people in and your culture starts to turn the other way, it’s something you can’t get back from very quickly.”