Hatch Secures $20 Million to Reimagine Business Banking for Small Enterprises

Following the acquisition of his previous venture, Framed Data, by Square, Thomson Nguyen initiated a search for new opportunities. During his tenure as an entrepreneur-in-residence at Kleiner Perkins, Nguyen engaged with numerous small business owners and discovered a widespread issue: substantial fees associated with maintaining business checking accounts.

The Burden of Banking Fees

“A significant number of small businesses operate on tight margins and high cash flow, lacking a readily available $4,000,” Nguyen explained to TechCrunch. “Our research indicated that micro-SMBs, on average, incur approximately $450 annually in overdraft charges.”

Introducing Hatch and its Funding

Nguyen’s latest startup, Hatch, has recently unveiled its initial product suite and announced the successful completion of a $20 million funding round. Investors participating in this round include Kleiner Perkins, Foundation Capital, SVB, and the founders of Plaid.

Hatch’s Account Features and Benefits

Hatch Business Checking accounts are offered at a monthly cost of $10. They eliminate both non-sufficient funds (NSF) and overdraft fees, and provide customers with cashback rewards. Eligible account holders can also enroll in Hatch Cover, offering overdraft protection up to $100, or apply for lines of credit.

Targeting the Micro-SMB Market

While some Hatch customers employ hundreds of individuals, the startup’s primary focus lies on businesses with 20 or fewer employees. A substantial portion of these are single-person operations, often establishing a business account for the very first time.

Drawing on Past Experience and Personal Roots

Hatch’s foundation is rooted in Nguyen’s professional trajectory and personal history. The 2016 acquisition of Framed Data, a predictive analytics firm, by Square preceded his role as head of data science at Square Capital. He later transitioned to Kleiner Perkins in 2018, concentrating on fintech and machine learning applications.

Nguyen’s upbringing as the child of immigrants instilled in him a deep understanding of the challenges faced by small businesses. He stated, “My objective at Kleiner was to identify further problems to address within the small business sector. Square’s commitment to economic empowerment for small businesses strongly aligned with my family’s narrative.”

Addressing Fee Disparities

The Hatch leadership team, comprised of professionals with backgrounds in fintech and major financial institutions like Square, Stripe, Morgan Stanley, and JP Morgan, discovered that recent immigrants and individuals without established credit histories disproportionately bear the brunt of bank fees.

The startup initially secured a $5 million seed round in January 2019 from Kleiner Perkins, Abstract Ventures, and Gokul Rajaram, a former Square executive. This was followed by a $14 million Series A round in February 2020, led by Foundation Capital, SVB, and Plaid founders William Hockey and Zach Perret.

Growth Amidst Challenging Times

The rollout of Hatch Business Checking commenced in January, and the platform currently serves 4,000 users. The company’s launch coincided with the economic disruption caused by the COVID-19 pandemic and the implementation of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Resilience and Innovation in the Face of Adversity

“Initially, I expressed some concern, but conversations with our small business customers revealed a remarkable level of resilience and innovation,” Nguyen noted. “Even during a global pandemic, these entrepreneurs demonstrated a determination to adapt and learn.”

Adapting to New Realities

Examples include restaurants swiftly adopting delivery services through platforms like Postmates and Uber Eats, and accountants and lawyers transitioning their practices online.

Serving a Diverse Range of Businesses

Hatch caters to businesses across various industries, including those led by first-time entrepreneurs.

The Rise of the Sole Proprietor

“We’ve observed a growing trend of individuals with side hustles transitioning into full-fledged small businesses, particularly following layoffs during COVID,” Nguyen explained. “Many of these entrepreneurs identify themselves simply as individuals running a business, rather than formal entities like ‘Thomson Tacos LLC.’”

Leveraging Machine Learning for Efficiency

Hatch utilizes machine learning to streamline the online sign-up process for Hatch Business Checking, ensuring compliance with know your customer (KYC) and know your business (KYB) regulations. This includes verifying business incorporation documents, social security or employer ID numbers, and conducting Office of Foreign Asset Control (OFAC) checks. Applications can be approved in under five minutes.

Upon approval, customers receive a Mastercard virtual number and can link existing bank accounts. Machine learning is also employed for real-time fraud and risk monitoring.

Overdraft Coverage for Peace of Mind

Nguyen explained the rationale behind Hatch’s overdraft coverage program: “We recognized it as a valuable tool for businesses to overcome temporary financial hurdles, complete transactions, and replenish their accounts at a later time.”

Offering Accessible Lines of Credit

Businesses with Hatch Business Checking accounts can apply for a Hatch Business Line of Credit, with loan amounts ranging from $200 to $5,000 and an APR between 18% and 24%. Hatch avoids hard credit checks, positioning these credit lines as an alternative to payday lenders and check cashers often utilized by individuals with limited or no credit history.

Data-Driven Lending Decisions

Hatch assesses loan applicants using data from their Business Checking accounts, including activity from connected point-of-sale systems. This allows for real-time data analysis and forecasting of potential revenue, enabling credit line approvals in as little as two hours.

Focusing on Business Potential

“Hard credit checks can be particularly challenging for recent immigrants or those with past financial difficulties. Bankruptcy can remain on a credit report for seven years,” Nguyen stated. “We prioritize a business’s operational status and growth trajectory. We’ve approved credit lines for individuals who declared bankruptcy several years ago but are now running thriving businesses.”

A Commitment to Responsible Lending

However, Nguyen emphasized Hatch’s adherence to the Small Business Owner’s Bill of Rights and its commitment to avoiding the encouragement of unnecessary debt.

Aligning Incentives with Customer Success

“Our success is directly tied to the success of our customers,” Nguyen said. “Unlike a lending-focused model, our revenue stream, derived from $10 monthly fees and debit interchange, incentivizes us to support the long-term viability of businesses. We prioritize fostering financial independence.”

Utilizing Machine Learning for Risk Management

Hatch currently funds overdrafts and credit lines using its own balance sheet. “By leveraging machine learning data to understand our risk profile, our primary focus is on analyzing business growth patterns and developing corresponding products,” Nguyen explained.

Industry Validation

In a statement, Kleiner Perkins partner Ilya Fushman commented, “Small businesses contribute nearly half of all economic activity in the U.S., yet often face obstacles within the banking system. Hatch is democratizing access to essential financial resources, empowering small businesses to start and grow. Thomson and his team possess the technology and expertise to facilitate their success.”

Foundation Capital’s Perspective

Foundation Capital partner Charles Moldow stated, “We believe the next wave of financial innovation lies in the convergence of lending and mobile banking. Hatch is at the forefront of this movement for small businesses. The team’s ability to rapidly establish a comprehensive, mobile-first banking solution for SMBs demonstrates their capabilities.”

Future Growth and Expansion

Since its Series A funding, Hatch has expanded its team from eight to 48 employees, embracing remote work during the pandemic. The company plans to broaden its Business Checking offerings and develop additional products for the estimated 40 million small businesses in the United States.

“Our future product development will center around ensuring small businesses can launch and scale effectively and efficiently,” Nguyen concluded. “This may involve financial products like our business accounts, or potentially software solutions to facilitate business creation. The possibilities are vast.”