Generation Z is the new battleground for challenger banks

A new breed of banking startups wants to lock in customers while they’re in high school and college.

As the ecosystem of millennial-focused challenger banks gets crowded, a growing number of startups are focusing on Gen Z customers, or those who were born in the mid-1990s and onwards. The objective is to become the customer’s primary financial provider as early as possible.

The market is big: Gen Z has $44 billion in buying power, and it’s a population group that will soon outnumber millennials. Companies vying for market share claim incumbents aren’t catering to their needs. They’re offering banking products to suit unique use cases, like platforms that allow parents to transfer allowance payments to a child’s debit card and financial activity social media feeds. The hope is that by acquiring customers early in their financial lives, they can build a long-term relationship. Banking platforms that focus on these customers include French startup Kard; Current, a U.S.-based challenger bank aimed at teens; and Greenlight, a U.S.-based company that offers debit cards for kids.

An advantage these platforms have over traditional institutions is an understanding of how Gen Z customers want their banking services delivered, argues Scott Gordon, CEO of Kard. “They were born with smartphones and have had internet access since birth,” he said, noting that Gen Z customers’ financial habits are shaped by the growth of mobile commerce. “Taking a taxi means taking an Uber, watching a movie means Netflix — these business models have become the new normal for them [in commerce] and it will become the new norm for them in the banking industry.”

Kard, which will soon offer debit cards for teens and the ability to link parents’ accounts, has built a social media-friendly user interface, along with personal finance capabilities like savings envelopes, savings roundups and charitable giving features. The goal of the social feed is to cater to customers who want to share their shopping activities with friends, akin to Venmo’s activity log.

Kard social feed

“The social feed came from discussions with thousands of teenagers and young adults; one feedback message we got was whenever they buy something, they want to take a picture of it and share it with their friends,” Gordon said.

Companies catering to Gen Z customers see the group as fertile ground because larger institutions don’t see it as a profitable enough segment. New York-based Current offers banking products for parents and children, allowing parents to send digital allowance payments tied to tasks.

“Gen Z is currently under-marketed by traditional banks,” said Adam Hadi, vice president of marketing at Current. “They can’t upsell those customers into credit options, and it makes it hard for a traditional bank with with high fixed costs to make money off teenagers.”

Current, which has 400,000 users, said it differentiates through an easy mobile user experience with an emphasis on minimizing the lag time for customer service inquiries.

While challenger banks for Gen Z customers are reaching an underserved group, the sustainability of the business model is still yet to be proven. “The revenue model is difficult to justify if you are an investor chasing quick returns,” said Adam Davies, head of delivery at consultancy 11:FS. “Just looking at the economics, if you are charging consumers say $5 to $10 per month for this service, that essentially makes providing pocket money very expensive.”

Meanwhile, a significant number of Gen Z customers open bank accounts through a parent or another family member. According to a 2017 Raddon research study of Gen Z customers, 34% had at least one joint account with a parent. The same study, however, found that 44% of Gen Z would conduct their financial business with a technology company, the highest percentage when compared to other age categories.

If Gen Z-focused challenger banks can acquire a critical mass of customers who don’t become big bank customers, incumbents will start paying attention, said Jillian Williams, investment principal at Anthemis Group, in a recent interview with Bank Innovation. “Until recently, the target customer has been on the higher end of the [millennial] spectrum that tops out at age 30, but there’s still the opportunity around a younger demographic,” she said. “Challenger banks obviously have fewer customers, [but] startups have engagement.”

For Current’s part, the future of its business model involves opening up offerings to a broader group of customers. In February, the company rolled out checking accounts open to anyone, with a free basic account and a premium account for $4.99 per month with added features including early direct deposits and gas holds that are instantly credited to customer accounts.

“We want to have something for our teenagers to graduate into,” said Hadi. “When we first launched the teen [bank account] product, it became pretty clear that these are actually things that everybody wants, including quick access to money, very transparent fees and a convenient, easy-to-use app.”