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Why Gen Z holds the key for neobanks

Digital banking continues to challenge traditional financial services, but the competition for customers is getting fierce. So who will come out on top?

The growth of neobanks looks set to continue steadily in the coming years, with some predictions estimating that the industry’s global market size will grow at an average of 47% per year, from $35bn to over $700bn by 2028.

The future of digital-only, branchless banking looks assured. But, of course, with such strong growth potential, competition for market share will be intense. And while the early market entrants do have some advantage as incumbents, new competitors are disrupting the space. The financial services hunters have become the hunted, and we are set to see a significant struggle for the future of the space in the next decade.

Winning the hearts and minds of Gen Z

As more and more new neobanks and other digital financial services launch in the market, each with its own take on what the future of banking should look like, the question the industry faces is where the war for supremacy will be won and lost. And that is not an easy question to answer as consumer awareness and expectations for digital financial services will grow in the coming years. Certainly one key battleground for neobanks will be Gen Z, already one of the most powerful consumer spending demographics and on a path to dominate eCommerce in the near future.

Traditionally, neobanks have targeted younger, digitally savvy consumers that don’t have a strong brand loyalty to traditional banks. And they have succeeded in winning Millennials. Customers aged 25-34 are the principal customer demographic of the early neobanks and according to some reports as few as 2% of their customers are under 18 years old. This is a problem, not least because younger consumers are much more digitally aware than previous generations and they are also taking an interest in financial services at a much younger age because of the access this gives them. So waiting for them to become older isn’t a winning strategy; instead new competitors are designing neobank accounts specifically tailored to younger consumers.

Will cash still play a role?

Tailoring neobanking experiences for Gen Z and particularly those under the age of 18 is a trend we expect to play an important role in separating the industry’s winners and losers as its market cap grows in the coming years. One debate that is yet to be settled is how cash fits into this equation.

Some will argue that cash is no longer relevant; if kids cannot spend their finances on Fortnite or a new equivalent then they aren’t interested in it. That statement may be true and yet it isn’t true about cash.

In fact, many digital only services, such as online gaming, music platforms, and other streaming services do accept cash payments in the form of eCash. The consumer chooses cash to buy a specialised prepaid card that can then be used in online checkouts as digital currency. And many parents prefer this payment method as it enables them to control their child’s spending much more effectively than providing access to a debit or credit card especially for applications such as games with limitless in-app spending.

And when it comes to neobanking, there are reasons to believe that cash will continue to play a role for Gen Z as well. Despite the continuing trend of everything going digital, most young people are still introduced to the value of currency through cash. And for many of them, receiving payments either from family members or via working in the gig economy happens in cash. So while spending digitally will be a focus, being able to deposit into a neobank with no brick and mortar branches must have a physical element.

But it isn’t only familiarity with cash, or reliance on it, that is the major reason Gen Z customers need to be able to make cash deposits. They think differently to other banking customers in that they both have much less brand loyalty and are therefore very happy to switch banks if they don’t get the service they are looking for, and want a full range of services instead of being told what is best for them.

Choice is key

One thing we know about Gen Z is their desire for tailored experiences, and the value they place on choice. Neobanks must understand that young people are demanding ultimate flexibility from their financial services, and that includes being amenable to making cash deposits.

By enabling customers to place cash into their accounts via an eCash solution, where the transaction is completed at a local pay point, neobanks replicate the services of a physical branch without the overheads.

As the neobanking market becomes more competitive, appealing to the widest range of customers will become more and more important, particularly in case of the bank’s youngest consumers. And while in many ways that means a digital-first approach that does include digitised cash – not underestimating the role of cash will be critical.

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The article has been first published here on 17 March 2022.

 

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