Tech-savvy millennials have driven – and continue to drive — a seismic shift towards an uptake in digital banking. According to the latest data available, there are 71 million millennials in the United States, with 68% using their smartphone in tandem with their wallet to handle transactions – according to 2019 Technology Predictions report from GP. Bullhound.
The transition towards digital banking will continue to be facilitated by payment services like PayPal and Venmo, which have seen a combined 24% increase in transaction volume from $6.1 billion to $7.6 billion from 2017 to 2018.
This should continue to grow as most millennials conduct at least some of their banking-related activities via digital channels, such as checking account balances, transferring funds, and performing account maintenance.
From a macro perspective, the combination of regulatory relief and reductions in corporate tax rates alongside rising interest rates could help US banks reach pre-crisis return on equity levels. This has resulted in banks and other enterprises flexing their investment muscles, with investments contributing to $40 billion in M&A activity in the first half of 2018 across 140 transactions .
Despite high funding activity surrounding financial technology start-ups, many traditional players are developing their own digital banking solutions to compete with the newer players in the field. Commission-free trading and investing platforms spurred JP Morgan to create a digital investing service that provides free or discounted trades and no-fee access to the bank’s stock research.
Venmo’s rise led to the development of Zelle, a competing digital money transfer system developed through the combined efforts of seven of the largest banks in the US. Meanwhile, Goldman Sachs responded to the proliferation of digital savings accounts with Marcus, which provides middle class customers with access to products that once existed solely for high net worth clientele.
There are some areas in the banking ecosystem that remain uncapitalised by larger players, which leaves start-ups to grow at rapid rates until traditional players realise the opportunity.
Brex, which recently reached unicorn status in under two years, is changing the face of credit cards by issuing them to small start-ups and charging based on company revenues or credit history.
ID Finance is pioneering the FinTech market by providing digital access to banking services in areas where traditional methods are inaccessible.
Both Brex and ID Finance have developed a proprietary scoring model to determine the risk of their users, providing a technological edge compared to larger banks. However, despite growing interest and investment in digital banking, there are associated risks and uncertainties in these solutions.
Due to low unit economics, as the average balances across digital accounts are quite small compared to their acquisition costs, most digital accounts are unprofitable. Banks combat this by expanding their offerings to increase cross-selling opportunities.
However, this may be especially difficult as the market becomes increasingly saturated as banks target the same tech-savvy demographic. Furthermore, most customers prefer dealing with humans on matters like setting up financial goals or getting investment advice, while about half of US banking customers aged 18 to 44 said they banked digitally but prefer to resolve some matters in-person .
Thus, digital banks need to recreate the branch network virtually to the greatest extent possible, aiming to offer digital-only customers the comfort that larger institutions can. However, despite these difficulties, the future looks bright for digital banks.
As greater investment, more considerate regulation and increasing innovation pushes the industry forward, we will continue to monitor the market with the hope that more choice and lower costs will encourage and incentive a fully digital consumer financial system capable of global reach.