Neobanks democratizing investing: How Millennials and Gen-Z are redefining financial futures

A brief history

Neobanks (also known as challenger banks, online-only banks, or app-based banks), are financial institutions without a physical presence that conduct all of their business online, primarily via smartphone applications. They include names like Nubank, SoFi, Revolut, N26, and Monzo, among many others.

Born in the wake of the 2008 crisis, when a general mistrust of the banking sector prevailed, a wave of new regulations came into force with the intention of splitting the investment and retail banking arms of those institutions, as well as levelling the playing field to allow newcomers to challenge the established incumbents.

Among these regulations were the EU’s original Payment Services Directive, which increased transparency and encouraged easier access for new firms. This was followed by PSD2, which went even further in promoting competition by allowing fintech third parties access to previously guarded financial data.

In the UK, the Competition and Markets Authority forced UK banks to provide access to their own APIs in 2018. These new regulations effectively turned incumbents into service providers, thus opening up the landscape for fintech firms.

Millennial and Gen-Z users

Millennials and Gen-Zers are among the largest users of neobanks, with 60% of Millennials and 72% of Gen Z using a neobank as their primary banking service. Both groups highly value the online-only approach, as well as the ease with which new accounts can be created all from within an app.

While the Millennial generation were among the earliest adopters of this new breed of banks, and were partly responsible for spreading the word to their friends and families, Gen-Z have come of age with neobanks as a reality and in many cases as their first point of contact with the financial system.

Gen-Z, particularly, value customer service/friendliness and convenience as priorities for them over a bricks and mortar location, with each of the above criteria scoring 54%, and 51%, respectively in a 2023 study.

These are native smartphone users with much higher standards than their parents’ generation regarding online platforms and services. In another study, 73% of Gen-Z respondents stated that customer experience plays a critical role for them when choosing a brand.

One of the greatest successes of these new fintech financial institutions has been the development of highly user-friendly interfaces, instant peer-to-peer transfers, bonuses for referrals, and a range of innovative money management features that were previously unavailable with traditional banks. Even as incumbents have moved to follow suit and take their own offerings to the app stores, they have, nevertheless, remained several steps behind in terms of features and usability.

Security challenges

It should be noted, however, that the “move fast and break things” ethos of the tech sector can be said to be incompatible with the security demands and due diligence required when dealing with users’ savings, rather than just their social media content.

Many neobanks started life out as “e-money” institutions rather than fully fledged banks and so did not receive the same oversight. The same features that are advantages when it comes to ease of access, can be viewed as weaknesses when it comes to security. Many neobanks have suffered their own reputational hits in recent years through occurrences of phishing, social engineering, account takeover, and authorised push payment fraud.

Appealing to a new generation of traders

Another reason for the popularity of neobanks is their adoption of new asset classes such as crypto, as well as their efforts to serve the general climate of investing that has surrounded both Millennials and Gen-Z. While their parents may have been comfortable enough with a more passive approach to investing, perhaps chastened by the great financial crisis of 2008, these younger cohorts have grown up in an environment where active investment is encouraged.

This is borne out by the research, which shows that Gen-Z are 45% more likely to start investing by age 21 than Millennials were at the same age, and two to four times more likely than Gen X and Baby Boomers were.

Social media, YouTube, and the broader internet has offered this generation access to a great deal of information that has rapidly brought them up to speed and democratized the very notion of being an investor for them. Indeed, Revolut’s trading app recently hit the ‘Top 3’ spot on Apple’s app store for EU-based free finance apps, further testifying for the growing appetite among this demographic for hands-on trading.

Enter Gen-T

Following Revolut’s approval for a banking license (with certain restrictions) by the UK’s Prudential Regulation Agency (PRA) in July, in November the company announced that it has obtained an FCA license, making Revolut Trading UK an authorized investment firm. The company has offered the trading of shares on its platform since back in 2019 as an “Appointed Representative with a UK Principal.”

Now, its move to become a fully licensed investment firm in its own right reveals a great deal about the Revolut’s future aspirations, as well as its appraisal of the upside in being able to offer trading services to this younger generation of users in its own inimitable way.

Revolut’s move is supported by the research into Millennial and Gen-Z trading habits. According to research by Charles Schwab, the Millennial and Gen-Z cohorts are exhibiting much more “trader-like” behaviors than their older counterparts.

These groups are twice as likely to adjust their portfolios on a monthly basis than older generations, and are also much more willing to spread their investments around, with both generations more optimistic on emerging markets, futures, and fractional shares than Gen-X or Boomers. This newfound excitement for the practice of active trading is provisionally being dubbed by some as the emergence of a “Generation-T.”

Final thoughts

Neobanks have not only re-invigorated an entire financial sector that suffered tremendous reputational damage during the 2008 crisis (as well as falling behind the innovation curve in the decade that ensued), they have also re-engaged users across the generational divides, but also re-imagined what a bank can be to its customers in the modern world.

Though not as overtly “personal” as traditional bricks and mortar institutions, this new generation of global banks has nevertheless found a unique way to connect to new generations of users via their most valued and trusted device, which is always with them and within reach from morning to night.

As traditional banks attempt to reclaim this lost ground, by attempting to bring their own innovations to market informed by their own unique expertise and advantages, it becomes all the more important that they are eclectic in their choice of technology partners. This will allow them to transform their vision for the future into winning products and services that are informed by the cutting edge in this rapidly evolving market.

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• BankingTech
• Challenger Banks