When Neobanks like Simple and Moven first appeared on the scene, they were heralded as "disruptors" with the potential to displace legacy banks. How's that working out?
Q2 and Cornerstone Advisors looked at fintech adoption in the US. Across seven leading US-based Neobanks, Americans have opened about 3.25 million accounts, and hold about $1.68 billion in those accounts--roughly 0.014% of all deposits held in US banks.
Disruption, my foot.
MegaDigital Banks
Not to be outdone--but seemingly ignorant of the lack of adoption--some big banks jumped on the digital bank bandwagon, including Chase's Finn and Wells Fargo's Greenhouse.
These efforts typically share one common trait: A focus on young Millennials. According to Peggy Mangot, the Wells Fargo executive in charge of the Greenhouse initiative:
“The app's target audience is younger consumers and students who are new to banking and learning about personal finance and budgeting.”
Looking For Disruption in All the Wrong Places
The Disruptophiles missed the boat on where the real change is happening.
The change in the market isn't with young Millennials opening Neobank accounts (or more accurately, debit-related payment accounts), but with:
- Older Millennials and Gen Xers, and
- Savings tools like Acorns and Stash.
The Real Demographics of Fintech Adoption
The Q2/Cornerstone study revealed that adoption of--and interest in--fintech is much higher among Older Millennials (those in their 30s) and Gen Xers than it is among Young Millennials (in their 20s). This was true in every category of fintech the study looked at.
The overall adoption percentages of Neobanks by generation are small--but the percentage of Older Millennials with a Neobank account is nearly double that of Young Millennials.
When you turn this into real numbers, it means that a roughly equal number (~1.3 million) of Millennials and Gen Xers have opened a Neobank account. But Older Millennials account for two-thirds of that generation's total.
This isn't likely to change soon, either. The percentage of Older Millennials who said they would consider a Neobank if they were looking for a new bank is twice the percentage of Young Millennials. And the percentage of Gen Xers isn't far behind the Older Millennials.
Savings Tools Are a Different Story
In contrast to Neobank adoption, US consumers have opened more than 7 million accounts with fintech savings tools like Acorns and Stash. Importantly, those consumers said those tools helped them save nearly $5.6 billion in 2018.
Among Older Millennials and Gen Xers--and even Baby Boomers--roughly twice as many are using savings tools like Acorns and Stash than have a Neobank account. And among Young Millennials, it's about three times as many.
Future consideration of these tools is much higher, as well. Among Older Millennials, 29% said they would consider using Acorns in the future, and among Gen Xers that percentage was 27%.
People Don't Want Accounts, They Want Help
The lesson here is that consumers want help managing--i.e., improving and optimizing--their financial lives. They don't want an "account" to replace their existing accounts simply because it comes from a digital-only provider.
The relative success of tools like Acorns and Stash provides a clue as to why so many banks haven't seen much success from their personal financial management (PFM) efforts: Tools that monitor or track one's financial life are different from tools that optimize or improve performance.
Improving Financial Health Will Become the New Basis of Competition
The past 70 years of banking have been characterized by two dominant phases of competition: 1) competing on location (who had the most branches in the best locations), and 2) competing on price (who has the best rates or fees).
Branches aren’t dead, but quantity and placement of branches has diminished in importance. Rates and fees are still important, but are hard to compete on, and aren’t transparent enough for consumers (proof point: how free is “free checking” when you add in all the overdraft charges, ATM fees, etc.?).
The lesson from Acorns and Stash's success is that banks will need to compete on who can best improve someone’s financial health (for a given cost)--and not on who has the best rates and fees. The winners will be the financial institutions who can deliver on improving financial health--and prove it.
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To download a (free) copy of the report Fintech Adoption in the United States: The Opportunity for Banks and Credit Unions, click here.
