We are relentlessly moving forward with digital banking. There isn’t a person I know that isn’t using some sort of digital banking app. Even my parents that are well into their seventies appreciate that they don’t have to go to town to pay the bills anymore.
Having reviewed dozens of mobile payments apps, investing apps, digital banking apps from traditional banks, money transfer apps, and digital banking apps for businesses, I can make an educated guess, almost a prediction about the future of digital banking.
We’re all aware of how ungrateful it is to predict the future. After all, even as close as 1989, people were dead sure that we’ll have flying cars, hoverboards, and holograms in 2015.
I’m referencing “Back to the Future 2”, of course. Let’s just hope no one digs up this article in ten years.
Digital Banks Are The Present And The Future
You could argue that all banks are digital nowadays and that the only difference is that traditional banks still have physical locations. With the rise of technology and the internet, nearly every process is digitized and automated.
Although that may be true to some extent, when we talk about digital banks we mean neobanks really. The challenger banks, often brought to the market by fintech companies and not banks per se.
Some fintechs might go further and get a banking charter in the future to offer even more features. Banks such as Ally and Varo in the US, or Revolut and Monzo in the EU and UK come to mind.
On the flip side, other companies won’t even bother with that because they are only working the frontend of the app while the backend is in hands of a traditional bank or a BaaS company.
There are currently between 250 and 400+ digital banks in the world, depending on who you ask and what your terminology is. Whatever number you choose, the increase is staggering in the last five years.
Even though their assets are tiny compared to traditional banks, they have made a dent in the market already and are slowly chiseling away the brick-and-mortar customers.
1. Major Brands Will Have Their Own Digital Banks
Opening a digital bank today is incredibly easy. That’s why there are so many of them on the markets worldwide and why we’re going to see an even bigger explosion in the near future.
You don’t need a banking license to open a digital bank or offer a banking or money management app like Cash App.
You don’t even have to have experience in how to open a bank or run one. All you need is existing customers or an existing platform. More on that later. Let’s first see how “anyone” can open their digital bank.
The backbone of many neobanks on the market today is BaaS. BaaS either means Backend as a Service, which would also apply in this case, or more often Banking as a Service.
As in, existing banks or fintech companies are offering their expertise and their software as well as banking licenses so that a third party can open their very own banking brand.
Chime, MoneyLion, OnJuno, Cash App, Current, and many others that have cropped up in recent years are all riding on the curtails of banks such as Lincoln Savings Bank, The Bancorp Bank, Metropolitan Commercial Bank, Sutton Bank, etc.
The Bancorp Bank is especially prolific in offering backend banking and card issuing services. It has partnered with almost a dozen fintech companies to help them launch their product. The list of fintech companies is long and includes:
- Varo Money
- SoFi
- Oxygen
- Chime
- Current
- Tab Card
- Netspend
- Venmo
- Uber
- BlueVine
- XTM
However, all these fintechs are small potatoes in comparison to Apple, Facebook, Google, and Samsung. All of these giant companies are in the financial game for some time now.
If we look across the world to China, for example, we’ll see that four mega conglomerates that own lucrative ecosystems (WeChat, Baidu, Taobao, and Xiaomi) have de facto cornered the digital banking market.
To quote my other article on Digital Banks in China: “These conglomerates have incorporated digital banks into their existing ecosystems and, more importantly, their existing customer base which made the expansion of digital banks seamless”.
Any major brand that has an existing audience that is throwing money at them WILL have some sort of digital banking feature incorporated.
We can already see this with NFTs. As soon as they became buzzwords, ALL the brands jumped on the bandwagon, for better or for worse. Of course, NFTs are, in my opinion, useless and no wonder the bubble burst already.
Digital banks aren’t useless, they aren’t a bubble, and as soon as a couple of brands outside of the fintech space launch their own digital banking product, we’re off to the races. Think Tesla, Nike, and Coca-Cola.
If any of these come out with their version of a digital banking app, hold on to your seats. The cat will be out of the bag.
2. There Will Be More Super Apps
App fatigue is real. If it weren’t for my research, I wouldn’t download any more apps on my phone. It’s not because of lack of space (although, that can be one major reason for some), but because I have had enough of apps.
I seriously contemplate every time I’m faced with a choice to download a new app or not. The app has to be much more than a simple website wrapped in app packaging. And don’t get me started on the whole sign-up process.
And, I’m not alone. On average, apps get uninstalled in 5.8 days after they have been last used. That means that your app has to be really useful in order to be used regularly and subsequently, not get uninstalled.
And how do you make a digital banking app useful apart from holding peoples’ money in it? You jam pack it with features and make it a one-stop shop. Another way is to appeal to Gen Z and add a social media flavor to them. More on that below.
So, what features am I talking about? Won’t the influx of features be just fluff or will it be beneficial for the end-user?
The answer for digital banks is that you add ALL the banking features known to man. Investing (crypto, stocks, commodities…), lending (mortgages, auto loans, personal loans, specialized loans…), debit and credit cards, personal and business accounts, savings, pensions, cashback, coupons, and beyond.
I hear you saying that some major traditional banks are already offering all of that. While that’s true, they have an image problem. They’re not regarded as cool and aren’t something cool kids use.
That’s not something they’ll be able to fix easily or at all and no matter how good their product is, they will have major problems getting new generations on board.
There are apps and operating systems outside of the financial and banking world that are becoming super apps. Retail and e-commerce giants such as Amazon and Walmart come to mind.
Apple, PayPal, Block (formerly Square), Revolut, Ant Financial, Tencent, Intuit, Robinhood, and many others are on their way to becoming super apps and/or ecosystems.
There will, of course, be mergers because some are going to be more successful than others. We’ll also see what the next recession brings us when venture capital dries up for a year or two.
Fintechs are heavily dependent on raising capital because they aren’t even close to running sustainable businesses, let alone profitable ones. The rate of cash burning is staggering.
The ease with which fintechs can raise capital (at the moment) is also why other companies that aren’t even resembling financial technology companies are branding themselves as one. I’m talking about WeWork, of course.
3. Rise Of Social Media/Banking Apps
Another approach to digital banking is to make your app look like social media to users. This is the Venmo approach, obviously.
Venmo has become ubiquitous in the United States, especially with Gen Z that love to share EVERYTHING and don’t care much about their privacy.
It’s not their fault of course.
The older generations made and financed social media as well as smartphones. Gen Z were simply born into this world and don’t know anything different.
It’s easy to blame them for what they are, but they are merely a product of this system, for better or for worse. Tik Tok user data available to the CCP? Pfft, whatever. Facebook, Google, and others selling their data to advertisers? What else is new?
After all, Boomers (politicians and financiers) and Millennials (developers and marketers) let or made it happen.
So, yeah, digital banks and money management apps are increasingly going to incorporate more social media features to help stave off app fatigue and solidify their position on the phones’ home screens.
4. Traditional Banks Will Adapt Or Go The Way Of The Dinosaurs
It’s safe to say that the vast majority of traditional banks have a banking app. Some are more useful than others, of course. However, how are they going to attract customers once most of their physical branches close?
Word of mouth? Ads? Hardly. They will have to go above and beyond to attract new generations. Some of them are already bleeding customers and it’s not like this trend is going to slow down anytime soon.
Once people start trusting neobanks more and start using them for direct deposits of their paychecks, the writing will be on the wall for the old guard.
That’s another point. Paychecks. Regular paychecks. In today’s gig economy, they are sadly becoming a thing of the past for many people. That might be freeing and invigorating for some as they become their own bosses and work whenever and how much they want.
On the other side, not having a set and regular paycheck is the stuff of nightmares for most people.
For people in the gig economy, it’s far easier to get money from their customers on Shopify, Square, Cash App, PayPal, or other e-commerce POS or payment platforms and keep it there than it is to transfer the hard-earned money to a separate bank account. These platforms are their de facto checking accounts.
Notice the tagline
To conclude, traditional banks will have to step up their game in a major way. Incremental improvements won’t cut it anymore.
5. The Regulation Will Tighten
Regulators have been lenient with financial technology companies thus far. It’s a rather well-known fact that apps such as Cash App, Venmo, or even Zelle, won’t have your back in case you get scammed.
You could lose $10 or $10,000, it doesn’t matter to them as long as you “voluntarily” transferred the money to a scammer’s account. That might seem normal to some people thinking that they got scammed for a reason.
And, although I can see their point, traditional banks typically refund the victims’ lost money if they report what happened promptly.
Not always though. Case in point – Zelle.
Product of seven major banks, Zelle is a money transfer service that has been in hot water recently due to the increasing number of scams related to it.
People got their bank accounts drained in seconds when they transferred all or some of their money in a phishing scam. The bank in question? Bank of America. The app used to drain the account? Zelle.
BoA refused to refund the money saying the victims transferred the funds voluntarily. Zelle, on the other hand, doesn’t offer any fraud protection.
Seems that the only solution to get your money, in that case, is to contact your local news reporters and put the bank in the spotlight.
With the popularity of these financial apps and digital banks, and especially, money transfer apps, the regulation will have to tighten and existing laws will have to expand or new legislature passed in order to protect ALL the customers, no matter how gullible they are.
The companies in charge of apps will also have to tighten their security protocols no matter how much they might annoy regular users. Multiple authentications have to be turned on by default and not as an option left to the customer to figure out on their own.
Conclusion
The world is too dynamic for us to accurately predict the future. However, we can make informed guesses based on the current situation in the fintech and banking world.
The number of challenger banks will continue to grow staggeringly fast because of how easy it is to have a digital bank up and running. Thanks to banking as a service and traditional banks willing to lend their banking licenses.
Super apps will also become ever more common. You won’t have the need to install ten different apps. All your (financial) needs will be met by a single app.
Venmo-style apps will also see a rise in numbers. Who would have thought that Tik Tok would be the number one social media app? Snapchat certainly didn’t. If the Chinese company doesn’t get banned, they could add fintech features to capitalize on their Gen Z and Millennial audience.
Traditional banks that don’t start to focus on younger generations and the way they do money transfers and banking will lose out in the long term.
And lastly, financial regulation will have to tighten and have a firm grip on all the digital banks and apps cropping up. The governments have to keep up or else the users will suffer.
