As relative newcomers in the banking industry, digital-only banks — also known as neo banks or challenger banks — continue to gain significant market share. What’s driving the success of these internet-only brands?
Digital-only banks began to emerge in 2017 to challenge traditional banking institutions. By bypassing legacy core technology and eliminating branch overhead, this business model set out to disrupt the banking industry with attractive features like better interest rates, lower or no fees, and financial health features.
Consumers began to take notice. According to surveys by eMarketer and the FDIC, of the approximate 124.2 million households with bank accounts, 29.8 million consumers in the U.S. held digital-only bank accounts in 2021. By 2025, this number is projected to almost double in growth to 53.7 million.
But what are these banks doing that is so unique? Why are consumers choosing to bank with them?
Marketing Expertise
First, they are skilled at targeting their audiences. They identify a demographic that would benefit from their services and focus directly on these consumers. For example, the U.K. digital-only bank Pockit targets underbanked consumers (e.g., users with low credit scores) who have difficulty opening accounts with traditional banks. This model targets a specific marginalized demographic and gives these consumers a feeling of inclusion.
Another thing these banks do particularly well is offer values-based banking to certain niches. For example, Daylight, a digital-only bank for the LGBTQ+ community, targets philanthropic values by allowing consumers to donate $10 to a charity of their choice during the signup process.
User Experience
Digital-only banks also offer tech-savvy consumers intuitive apps and easy-to-navigate websites that leverage the most in-demand capabilities available in today’s fintech ecosystem. When onboarding, a digital account opening experience allows them to open and fund online accounts easily, in minutes.
Many digital-only banks also feature technology to help users improve financial health and hone budgeting skills. Digital-only banks doing this well include Greenlight, which helps young consumers gain financial health, and Dave, which helps consumers who have challenges with credit history bolster their credit report.
Competitive Rates and Fees
Free of legacy core stacks and branches, digital-only banks can offer better interest rates and low or no fees to consumers. Unlike big institutions Bank of America and JP Morgan, who report that overdraft fees make up 7 to 8% of their profit annually, digital-only banks have a different business model. Their revenue stream is based on credit cards or interchange fees, which are the small amounts that the card providers charge merchants when consumers use their card. This amount is then shared with the digital-only bank. The no-fee proposition appeals to consumers since they can keep more money in their wallets.
As more consumers turn to digital-only banks, do you have a strategy? Creating a digital-only brand is a viable option, and something you may want to consider in this swiftly changing marketplace.