Digital Banks, IPOs & Consumer Trust

The Fintech sector – specifically Digital Banks – is set to roar back to life in 2024.

A set of IPOs from renowned players such as Chime, Klarna, and Monzo are both expected and possible in 2024, depending on the source. Add Stripe to the mix, and 2024 is potentially a Fintech bonanza.

Furthermore, the ‘Fintech funding drought‘ is expected to end in the second half of the year, with VCs ready to pump capital back into the sector.

But what do consumers have to say about the matter? Do they trust the Digital Banks to become their primary accounts or is this all just a fad?

Trust in Digital Banks

The young upstarts are hungry to write their ticket into the future.

Digital Banks, IPOs & Consumer Trust

Digital Banking – Hypergrowth

The global Retail Banking is expected to grow at a CAGR of 5.6% between now and 2030 to a total market size of nearly $3 Trillion.

Simultaneously, the US Neobank Market is expected to grow at a CAGR of 53.6%, both in business and personal banking.

If we take the above set of data points to be true, it can only mean a slew of deals are on the horizon in 2024 and beyond:

  • Digital Banks IPO’ing and jockeying for market share among one another;
  • Incumbents looking for ways to acquire Digital Banks to ultimately eliminate as much competition as possible;
  • Digital Banks going for all the marbles and trying unseating the giants of the sector via one of many possible strategic moves.

For context on the analogy, Revolut comes to mind. Since their inception, their CEO Nikolay Storonsky has had one thing on his mind – become one of the Top 3 Digital Banks of the future.

Revolut’s US Banking CEO recently had this to say:

As customer behavior changes, there will be room for three or four large fully digital banks to be the bank for the next generation. That’s what we aspire to be.

Financial Brand

As Digital Banking sets to go into hypergrowth in the next 5 years, who will be top 3 or 4 in the global market to emerge as the Digital Banks of the future?

What Digital Banks will IPO in 2024?

Several of the leading Digital Banks – globally – have planted the IPO seeds for 2024.

Some examples expected on the near horizon include Klarna (BNPL), Chime (Payments), Monzo (Banking), and a slew of smaller players. Revolut is always the proverbial ‘what if’ player in the market.

Others are already public, and are likely going to be on the hunt for ways to grow both their balance sheets and customer numbers. Nubank, Affirm, Wise, and SoFi come to mind.

All eyes are on the lucrative US market, but continental Europe is being led by companies like German-based N26, and an array of smaller, regional players.

While Credit is the major revenue driver in the US, the European neobanks are experimenting with new business models that very well may prove strong enough to win in the end.

Square, Stripe, Paypal continue to play in various corners of the market. Both Square and Paypal are coming off vicious selloffs since their 2021 peak and have a lot to prove.

If a rush of capital comes back into the market in 2024 behind the challengers and disruptors, what will happen to the mainstream market?

To answer that question, we need to look at measures of sentiment and trust among consumers in the market currently.

Consumer Trust in Digital Banks

As much as innovation and being a “digital-only” bank draws attention from the market, consumers and their money principally care about trust.

Can they trust the entities to whom they deposit their money with?

As of right now, the majority would still say no, but the numbers are growing.

Trust in Digital Banks

Consumer trust in traditional firms remains higher than consumer trust in their digital competitors, such as fintechs and digital banks, the survey found. The percentage of adults who said they trust digital banks and fintechs was 43% and 37%, respectively, according to Morning Consult.

Banking Dive

A cursory analysis of these results shows it’s not so much about “distrust” as it is about a lack of awareness.

Whether or not they have the greatest technology or user experience, incumbent banking brands have the benefit of trust and stability in their respective markets. Most of them have been around for 100+ years, weathering storms, wars and everything in between.

The next-generation Digital Banks, on the other hand, have been around for ~10 years or less on average. In the instant-gratification world of ‘disruption’ that we live in, this seems like a lot. But in the world of money it is a drop in the bucket.

Only about 10% of consumers are actively looking to switch financial services providers. Switching banking providers is not like switching hairdressers.

This naturally leads to many of the leading players to target Gen Z, something that top Digital Banks like Chime have taken to heart. They are unique as a Digital Bank in that they don’t offer any debt-based products.

The next generation is looking to avoid the debt traps of their predecessors, yet struggle to earn high levels of income; thus they typically have little to no debt or savings compared to older generations.

79% of GenZ still have credit cards, however, and 25% have 3 or more credit cards. Credit (debt) is still an inevitability, yet the mechanics of it will change going into the future.

Equally, Millennials and GenX are looking progressively at ways Digital Banks can help them save money and gain a better experience than the Incumbents.

Revolut, for example, is seeing success with the ‘over 40 crowd’ of Gen Xers:

“More and more customers have less and less use for branches and they’re more and more comfortable with doing everything on that computer in their pocket, the mobile phone,” says Jajodia.

Financial Brand

We have seen a lot of top Digital Banks push into brokerage, trading, and wealth management to target the Millennials. GenX is more focused on convenience and saving money without sacrificing the customer experience.

Many Digital Banks have entered the market as ‘skinny’ players, offering one solution and doing it really well. Others like Revolut have taken the smorgasbord approach and rolled out super apps with multiple banking ‘apps’ in one.

Progressively, it is looking like the super apps are coming more in the demand zone.

The trend we see is the need for more personalization and customization across generational cohorts. This is one area where technology can make a big difference.

Can AI Augment Trust in Banking?

We would be remiss to not mention the impact of AI on the sector in 2024.

One of the major advantages of the digital-banking upstarts is their ability to test and ship new technology solutions to their customers. While Incumbents will take years, the next generation of companies can test and roll out new applications in month.

Embedding AI in digital banking can help personalize experiences and reduce friction, at least in theory. But can it help increase trust?

That will depend on how it is applied.

The dimensions of trust in banking are very specific. For primary accounts, consumers will use the products multiple times per day (typically), but very infrequently have problems that need to be addressed by support.

When a user does have a problem, however, they expect them to be addressed swiftly and decisively. After all, this is life savings and peoples’ livelihoods we are talking about.

AI is not meant to simply cut costs and streamline support functions, but to augment the core banking experience and direct users to the best sources of support in times of crisis.

Banking on Trust

There are a hundred different ways that banking can head in the future. Between blockchain, AI, and digital banking as a whole, there is no question that the entire industry will be radically reshaped over the next 5 years.

Betting on one trend or another in the broader context will be challenging, as ultimately it will come down to who consumers trust with their money.

Multi, multi-billion dollar Incumbent banking brands have everything to lose and little to gain in the upcoming wave compared to the new ‘Fintechs.’ The young upstarts, on the other hand, are hungry to write their ticket into the future.

Technology itself will not be enough. Trust will win in the end.

If a large amount of capital is deployed into the market in 2024 via IPOs and Fintech funding, the players at the top of the heap vying for market share will need to keep this in mind in order to win the long game.

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