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Neobanks face their own set of challenges. The number of US neobank account holders will continue to climb by 46.4% between 2022 and 2026, according to our 鈥淣别辞产补苍办蝉 Confront Uncertainty鈥� report. But as VC dries up, neobanks will struggle to keep up with the incentives, low fees, and innovative products customers have come to expect.

Smaller groups of customers with an appetite for more excitement may gravitate toward cryptocurrencies, neobank competitors, or nontraditional banking services. It looks like the right time for marketing messaging to emphasize a bank鈥檚 strong reputation and stability鈥攑articularly when targeting Gen Xers and baby boomers.

Challenger banks are also likely to feel pressure from Apple. These more specialized banks are nearing the end of their runways, like Daylight, which recently shut its doors, and Kinly, which was scooped up by competitor Greenwood. But Cornerstone Advisor analyst Ron Shevlin believes these banks should feel threatened by all players in the financial services sector. How can FIs compete?

Digital-only banks will likely never claim as many account openings as they did in 2020 and 2021 because of rising profitability struggles, declining fintech funding, and competition with other payment fintechs and Big Tech. The majority of digital-only account openings will come from Gen Zers, reaching 3.3 million between 2023 and 2027. Use this chart:.

That will likely boost retention and should help attract new users who may have favored challenger banks鈥� superior digital services. Strengthening loyalty will also make it easier for banks to cross-sell products like credit cards, banking services, and mortgages.

The remittance market is already flush with established competitors, including incumbents, fintechs like Wise, and neobanks like Revolut. That may mean PayPal pivots to focus on areas where it鈥檚 generating easy growth, like buy now, pay later (BNPL) and Braintree, while reinvesting money back into core areas.

Our take: Black FIs also face competition from new banking entrants like fintechs and neobanks. But the new challengers may not be all bad. Many affinity-based fintechs and neobanks build their operations around community and support the 鈥淏ank Black鈥� movement.

ATM location: If they鈥檙e a digital-only bank or have closed lots of physical locations, they should consider covering customers鈥� ATM fees, at least up to a certain threshold. Figuring out which accounts Gen Zers gravitate toward can help FIs determine if this benefit should be universal or solely target cash-reliant consumers.

狈别辞产补苍办蝉鈥� appeal to unbanked and underbanked customers is diluting GPR cards鈥� value. This group has long relied on GPR cards to make digital purchases. But ongoing growth in digital-only bank account ownership is making them less critical. To keep pace, GPR card providers will continue building out their suite of banking solutions. That includes services, like direct deposit and check capture.

But while some digital and challenger banks offer the latest and greatest technology as part of their digital banking experience, some incumbent and traditional banks see the investment as a sunk cost, or they build cheap but inefficient experiences on top of their existing tech stacks.

Debit card rewards programs are hard to come by, mainly only offered by smaller fintechs or neobanks. But customers highly value rewards. This should attract prospective debit cardholders, especially since the card is coming from a trusted issuer that consumers may already have a relationship with.

Since the demand for a great digital experience and competition from neobanks and Big Tech have changed banking, marketing has played a big part in making banks more customer-obsessed.

Though 92% of banking customer respondents said they have an account at a traditional bank, 46% of bank customers also have an account with a digital-only bank. Consumers also don鈥檛 necessarily believe their financial lives need to exist at banks.

Neobanks like Brex, Mercury, NorthOne, they've really benefited a lot from this. And I do think it is very interesting though because those neobanks, they don't actually have banking trotters themselves, so they're backed by usually smaller banks that provide the banking services for them. That is something to think about.

Yes, but: Neobanks have attracted even more followers on social media than chartered banks. Brazil-based Nubank鈥攚hich doesn鈥檛 appear in the ranking of banks on social media, because it isn鈥檛 a bank鈥攈as 2.7 million Instagram followers. Chime has three times as many followers as BofA and Chase, at 933,000.

Visa will also expand the offering to more use cases鈥攍ike gig, creator, and marketplace payouts鈥攁nd to more digital wallets, neobanks, and payment apps. Will it succeed? Visa+ solves many of the participating wallets鈥� pain points. Interoperability has been missing from the P2P space, causing friction for consumers. But Visa+鈥檚 convenience and simplicity can lead to greater use.

After its 2020 launch, the neobank acquired social network The Gathering Spot and began offering community collaboration spots such as workspaces, meeting rooms, event spaces, a restaurant, and a bar. It later acquired Valence, a networking platform to assist the Black community with professional development and job recruiting.

These generations claim financial institutions don鈥檛 understand them, and they鈥檙e willing to trust nonbank financial entities鈥攍ike neobanks, super apps, and Big Tech鈥攚ith their money. Here鈥檚 how you do it: Regional bank CMOs must adjust their marketing strategies to cater to digital outlets. Make it meaningful: Community connections are regional banks鈥� big selling point.

UK banks will need to approach 2023 with customer compassion,鈥攐r risk losing their base to more generously paying neobanks. This article originally appeared in Insider Intelligence鈥檚 Banking Innovation Briefing鈥攁 daily recap of top stories reshaping the banking industry. Subscribe to have more hard-hitting takeaways delivered to your inbox daily. Are you a client? Click here to subscribe.

Despite the losses, the neobank attributes its first months of profitability鈥擩anuary and February鈥攖o its substantial personal and business user base and new revenue streams like lending and paid subscriptions.

How does headless banking differ from BaaS and neobanks? Headless banking dispenses entirely with the conventional banking infrastructure. That鈥檚 not the same as Chime or MoneyLion, for example, which serve as an alternative to traditional banks. They concentrate on offering a user-facing experience and rely on partnerships with licensed banks like Bancorp or Pathward to hold deposits and issue cards.

The big takeaway: With competition intensifying within the banking industry, banks, neobanks, and fintechs are doing anything they can to impress new customers and grow their businesses. But with that comes added complexity and risk. Regulators are increasing their scrutiny of all types of financial institutions to ensure fairness and protect consumers from harm.

As younger generations use the P2P app for more of their banking needs, it鈥檚 still missing key financial services.

Gen Zers and digital bank customers are among the most doubtful, with only 30% of Gen Z and 28% of neobank customers saying they鈥檙e very confident in their bank. Baby boomers find a bank鈥檚 reputation to be more important than their counterparts, yet Gen Z is the most likely to switch banks.

Thousands of users saw $0 balances or couldn鈥檛 access accounts. With no clear explanation from BofA, the bank risks losing customers.