As bank CEOs describe their uncertainties impacting their 2023 planning as consumers will always demand more so they will take their business to the providers that deliver on those expectations. This report shares insights to consider in 2023 on Gen Z being the new customer, privacy controls becoming the necessity, neobanks will not survive as new revenue streams will emerge, and the growing pains of embedded finance.
I. Gen Z Breaks Into the Financial Services Mainstream
Gen Z is the new customer—and their business must be won today.
Gen Z is the new customer—and their business must be won today.
In 2023, there will be more adult Gen Zers than adolescents for the first time—about half the size of the millennial population. This digitally native generation relies heavily on digital for their finances, and that won’t change. Players across the banking sphere must act now to grab adult Gen Zers’ business, while also trying to win over younger consumers and lay the groundwork for upselling them in the future.
Providers will start reshaping the customer journey to match Gen Z’s preferences by:
- Building awareness where Gen Z is. Gen Zers use a more diverse set of social platforms than any other generation. They go to these platforms to build their financial literacy (think “finfluencers” and “FinTok”).
- Cutting through the noise during the consideration phase. Gen Z is effortless at researching online and seeking word-of-mouth recommendations. And they’re the most likely to consider nontraditional providers like Apple, per our Digital Banking Trust Benchmark 2022.
- Having humans on standby to close the deal. Digital natives they may be, but they also want human support. Gen Z eclipsed all cohorts but baby boomers in opening a checking account in person over the past year.
- Building loyalty by cracking the personalization-privacy-ethics question. Gen Z consumers stick with brands that offer personalized experiences while placing data privacy front and center. They also demand ethical brand values and action.
Forecast
Forecast
Banks will level up their social media strategy to garner Gen Z’s trust. Skepticism toward traditional financial institutions pushed Gen Zers toward social media for advice. But now they feel misled by influencers who were paid to promote cryptocurrency that failed. Major incumbent banks will take advantage: They’ll launch educational social media campaigns on budgeting and investing wisely during an economic downturn.
II. Privacy Controls Become “Need to Have”
Apple’s AppTrackingTransparency framework was just the beginning.
A groundswell of demand among consumers for control over how companies use and protect their data has triggered waves of regulation across the globe. In 2022, first movers like Apple, Meta, and Capital One caught the privacy wave by positioning themselves as leaders in safeguarding customer data.
First movers will put the spotlight on laggards’ privacy gaps.
Through high-budget campaigns highlighting privacy-related features like encryption (WhatsApp), or by rolling out innovative features like monitoring the dark web for customers’ data (Capital One), these companies have gotten into consumers’ good graces. They’ve also lit a fire under their competition that will burn throughout 2023.
Privacy-focused campaigns will become the next big theme for product design and marketing in 2023, creating opportunities and risks.
- Claims of privacy leadership will abound. Incumbent banks will follow Capital One’s lead and tout their own distinctive features that put customers in control of their data.
- But the message will be diluted. Breaking through the noise will become increasingly difficult as more providers join the chorus.
- Only the laggards will stand out, as robust privacy protections become a mainstream expectation. As the year draws to a close, privacy features will be notable only if they’re absent or overstated.
III. Neobanks Near the End of Their Runway
Not all will make it to liftoff.
In 2022, investors shifted focus from growth at all costs to profitability. Most of the world’s 291 neobanks have not been able to turn a profit—and investors are losing patience. With the funding route unlikely to abate, 2023 is shaping up to be a do-or-die year.
Here’s how it will play out for neobanks:
- Unprofitable neobanks won’t survive. This will affect not only businesses and shareholders but also the larger network of banking as a service (BaaS) partners that make neobanks run. For example, Evolve Bank & Trust came under heightened scrutiny around financial exposure, as it was a bank partner for the now-defunct FTX.
- New revenue streams will emerge. We’re watching three that could help providers achieve the holy grail of profitability: BaaS, credit cards and lending products, and subscription fees. Neobanks like Starling, Nubank, and Revolut have already made exciting progress in each area, respectively.
- Risk management controls will tighten. After years of growth at all costs, neobanks will revamp their underwriting policies. They’ll focus on bringing more profitable customers who will drive higher balances into the fold.
Forecast
- Mergers, acquisitions, and bankruptcies will rise. We predict there will be fewer than 235 neobanks worldwide by the end of 2023.
- A small handful of neobanks will emerge stronger. For example, Nubank is profitable, and Dave expects to hit profitability in 2024.
IV. Embedded Finance Faces Growing Pains
Expectations, meet reality.
Rapid growth has inflated hopes for embedded finance. In this “as a service” partnership model, platform providers and sponsor banks enable brands as small as yoga studios or as large as Apple to slot financial services into their customer experiences. But as the space crowds and economic conditions deteriorate, not all tie-ups will pull through.
Here’s our outlook:
Next year will be a mixed bag.
We expect rising loan defaults and falling swipe fee revenues to hurt the embedded finance industry, even as it benefits from more lucrative margins on lending and credit appetite during challenging economic times.
Regulators will circle as risky partnerships sting providers.. We expect that platforms will consolidate in 2023 as unprofitable partnerships end. And a handful of worst-case scenarios—such as bankruptcies—may leave consumers without access to their funds, triggering harsher regulation.
Revenues will surge in the long run. Brands and BaaS platforms will more than double their US revenues earned from embedded finance between 2021 and 2026, topping $51 billion, per a September 2022 Bain & Company report. The largest category is payments—think Uber’s checkout flow—and it will remain dominant through 2026, but others will eat into its share.
Forecast
- Big Fintech will build full-stack embedded finance. Watch for SoFi and Block to offer banking products directly to consumers and as a service.
- Low-code and no-code solutions will proliferate.
- Credit cards as a service will be the next major battlefield.
