Why Aren’t More People Using Digital Banks In The US?

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In a lot of ways, the United States is at the forefront of tech. Home to leading tech companies including Apple Inc (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN) and Tesla Inc (NASDAQ:TSLA), it would be a safe assumption that US residents would be high adopters of the latest tech. But this is not the case, at least when it comes to digital banks.

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A recent survey on digital banking adoption from Finder showed that only 6% of adults in the US hold a digital bank account. Six percent. This puts it dead last in the list of countries looked at in the survey.

To put it in context, the United Kingdom had almost double the adoption rate with 14.99% of adults holding a digital bank account, while 13.21% of Australian adults have one. The average adoption rate of the 31 countries included in the survey was 16.73% – almost 3 times the amount in the US.

So, what’s the deal? Why, in the country that gave us Silicon Valley, is hardly anyone using a digital bank account?

Big Banks Aren't Innovating

Banks and banking in the US have not been at the forefront of innovation like other industries. Most products and services offered by US banks have essentially remained the same for years.

The lack of an innovative culture and limitations of the banking regulatory environment in the US have meant banks are not innovating in the same way banks in other markets are.

Speaking to The Financial Brand, the former head of fintech strategy and innovation at Santander Bradley Leimer said there are a number of reasons US banks are “innovation laggards”.

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“I think legacy technology, regulation, compliance, and risk aversion have to top the list of reasons why we’re not seeing more movement,” he said.

Trust And Finding A Niche

Despite the lack of new products and services from big US banks, they benefit from high levels of trust which means consumers are happy to stick with them. A recent survey found 73% of people in the US trusted financial institutions to have their best interests in mind.

This trust in the banking status quo does not help new neobanks trying to get market share. The biggest US neobank Chime only counts 13.1 million account-holders, while Current only has 4 million. This pales in comparison to Chase Bank which serves almost half of American households.

Some neobanks are not going for broad market appeal, though. Many neobanks that have launched in the US are trying to serve a specific market segment. This includes Daylight which is targeting the LGBT+ community and First Boulevard which is developing banking products and services for Black Americans.

These banks are focused on niche communities which may have been overlooked or underserved by current US banks. This is quite different to neobanks in other countries which are going for broad market appeal, leading to wider adoption.

Checks And Other Outdated Tech

There are other issues facing neobanks in America. The use of and reliance on outdated tech can make innovation tricky. One example are checks.

Neobanks in most other markets do not need to offer check services to their customers. However, checks are still relied on heavily in the US. The best neobanks can do is digitise the experience by letting people send checks using the app or deposit a check on their phone. This isn’t a game-changing solution and isn’t enough to make Americans switch to a neobank.

Another example is contactless payments. For a number of years, the US lagged behind most of the world with its uptake of contactless payments. While markets like Australia charged ahead, with 4 out of 5 payments made there being contactless, American businesses and consumers showed little interest.

While contactless payment usage has been on the up, driven partly by the pandemic, it’s still low. This means a contactless-enabled card from a neobank is alone not enough to entice new signups.

Neobanks Closing Their Doors

To add to neobanking struggles in the US, a few high-profile neobanks have had to shut their doors in the past few years. This will do little to instil trust in new banks among the American population.

The country’s first neobank, Simple, announced it was closing in January 2021. Users were transitioned to the US BBVA app. Another US neobank Moven announced its closure in March 2020. UK digital bank Monzo also pulled plans to apply for a US banking licence but still opted to remain in the country.

What Will Drive Digital Banking Adoption?

So, there are a number of challenges facing digital banks and digital bank adoption in the US. What might actually lead to more neobank uptake?

The first is the opportunity to serve unbanked and underbanked people. Surprisingly, there are over 30 million people who are unbanked or underbanked in the US. This means they do not have access to banking products and services that meet their needs, whether due to cost, access or something else.

Neobanks are a great solution for unbanked populations, as shown by the huge uptake in markets such as Brazil and Indonesia. They can offer products which are cheaper, easily accessible and simple to sign up for.

The continued growth of niche banks such as Daylight will also help the adoption rate, albeit slowly, if the banks are actually useful to the communities they are designed for.

Lastly, time. It takes a while for various things to catch up in order to help neobanks flourish, including regulatory reform and product development. Even countries with the highest adoption rates didn’t get there overnight.

About the author

Elizabeth Barry is Finder's global fintech senior editor. She has written about finance for over six years and has been featured in a range of publications and media including Seven News, the ABC, Mamamia, Dynamic Business and Financy. Elizabeth has a Bachelor of Communications and a Master of Creative Writing from the University of Technology Sydney. In 2017, she received the Highly Commended award for Best New Journalist at the IT Journalism Awards. Elizabeth's passion is writing about innovations in financial services (which has surprised her more than anyone else).

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