Why US digital-only banks will keep growing in the next 5 years

• We forecast a continued rise in US digital-only bank account holders between now and 2024.
• This is largely thanks to a friendly regulatory environment, generous VC funding, and consumers’ lingering distrust toward incumbents.
• Insider Intelligence publishes hundreds of research reports, charts, and forecasts on the Banking industry with the Banking Briefing. You can learn more about subscribing here.

In our recent Digital-Only Bank Account Holders Forecast report, Insider Intelligence discussed how—despite risks like a pandemic-battered global economy and ongoing profitability struggles—we expect account holder numbers at digital-only banks to stay on an upward trajectory between 2020 and 2024 in the US, UK, and Canada. The US, in particular, will see the highest growth rate in account holders during the forecast period, at a compound annual growth rate of 19.8%.

Insider Intelligence

We think the following three factors will be the most instrumental in driving account holder numbers among US digital-only banks between now and 2024:

• Increasingly supportive regulators. Unlicensed digital-only banks currently must partner with a sponsor bank to lend money and accept deposits—but the tide may be turning to make it easier for them to obtain a license. The Trump administration has been loosening post-2008 crisis regulations since 2016, cutting red tape for banks of all sizes. And current Federal Deposit Insurance Corporation (FDIC) chairperson Jelena McWilliams has said that one of her priorities is to examine the regulatory burden on small banks (including neobanks) and speed up bank charter application reviews—and it shows: Varo became the first neobank to obtain FDIC insurance in February, followed by Square in March. Varo has since obtained a national bank charter. Even if administrations change in January 2021, we think that federal-level neobank support will persist, and as more neobanks gain charters and win consumer trust, it will drive up account holder numbers.
• Generous VC funding. The US is home to some of the world’s largest venture capital (VC) funds, which is reflected by the consistently higher levels of fintech funding in the country versus the UK and Europe, and also by North America’s high number of fintech unicorns, many of which hail from the US. Although US digital-only banks, like their UK counterparts, struggle with profitability, this steady stream of funding enables them to maintain a consistent pace of new product rollouts, which in turn strongly positions them to attract new customers. While the US hasn’t been immune to a temporary decline in VC funding amid the pandemic—veteran neobank Moven, for example, wound down its direct-to-consumer business as funds dried up in March—we expect levels to rebound before the end of the forecast period, boosting user growth for neobanks in particular.
• Lingering distrust of incumbents. Although consumers still perceive incumbent banks as better able to protect their money than newer banks—especially during a crisis—incumbents may face backlash once conditions stabilize. Anger toward incumbents’ role in the 2008 financial crisis opened up the market to some of the first neobanks, and once the pandemic subsides and customers have time to reflect on how providers handled the crisis, consumer sentiment toward incumbents could decline once more. As a result, we think neobanks could benefit from being underdogs in the post-pandemic landscape, which could augment account holder numbers.

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