The unprecedented COVID-19 pandemic has brought about many global changes that nobody could have foreseen. From extreme social distancing measures to the mandated wearing of face masks, the world looks much different than it did pre-pandemic. One of these changes, which is much more subtle than the two mentioned previously, is the adoption of digital banks. These banks, such as Varo, Chime, and Current, have won over a tremendous amount of U.S. customers during the pandemic as they have chosen to do away with the traditional banks they formerly used.
One of the main reasons these digital banks have gained so much traction recently is their quick processing of stimulus payments. This has set them far apart from traditional banks as customers need their payments as quick as possible. In some instances, these digital banks were able to just process the funds and send them through faster than traditional banks. In other cases, they predicted the amount their customers were expected to receive and pre-funded their deposit. These early deposits resulted in generous word-of-mouth referrals and helped the digital banks gain traction.
The ability of the digital banks to act quickly and diligently during these tough times resulted in negative responses towards bigger banks who were unable to facilitate the processing of funds as quickly. Delays that stemmed from the misrouting of millions of payments by the Internal Service Revenue, in addition to not already having direct deposits set up, caused customers to complain.
These digital banks are also known as neo-banks or challenger banks. They provide services mainly through downloadable applications and many offer perks such as no minimum required balance or no fees. According to the head of research at fintech consultancy 11:FS, Sarah Kocianski, “Getting stimulus money into the hands of customers faster than incumbent banks is a big publicity win for the neo-banks.” She also predicted that the transition to these digital banks that offer prompt payment will extend beyond the life of the stimulus packages.
Wesley Wright, CEO of Varo, stated that their customer base nearly doubled during the pandemic and the company now handles around 2 million accounts. Current’s customer based also doubled in 2020, growing to 2 million users in November, up from 1 million in June. Both of the company’s revenues have also grown tremendously with the growth in the number of users.
Despite their massive growth in users over the past year, the overall deposit market share that digital banks currently have is still expected to be in the low single digits. As we seem to be rounding the corner on the pandemic, do you expect these banks to continue to see widespread adoption, or a slowdown in growth?