Top Banking Trends (September 2023)

The banking industry is still very much antiquated — the majority of the top 20 banks were founded over 100 years ago and 95% of bank accounts are still opened in-person at a physical branch.

Unlike Varo, a new online bank geared toward younger generations, older incumbents are tightly coupled to their physical footprint. Wells Fargo, for example, has 8,050 US branches, and large teams to support those branches and the associated operations. By trimming fat like this, Varo isn't bogged down with unnecessary costs and can therefore invest more into other parts of their business. In fact, Varo recently surpassed one million users, up from "tens of thousands" in early 2018.

Diving deeper, the rise of services like Affirm and Afterpay highlight a fear of the big banks, and of credit in general, among younger generations. These services let online brands offer customers a payment plan rather than one upfront payment, so while the customers may think they're avoiding credit, it's really just being shifted from credit cards to point-of-purchase credit like Afterpay (403% growth in US online popularity since featured in Glimpse last April). In fact, nearly 90% of purchases made using services like Afterpay are with debit cards and many of the sites using these services, like Forever 21 and Urban Outfitters, are targeting young consumers.

This young demographic that leans heavily on debit cards, because of the fear of credit, is similar to the one Varo is targeting. In fact, one of the bank's biggest selling points is that it doesn't have overdraft fees.

In developed countries, the banking business is heavily branch-based: prior to Covid, over 95% of bank accounts in the US were still opened in-person. Much of this is due to legacy economics: before widespread Internet access and ubiquitous smartphones, more transactions had to be started and settled physically. Developing countries can skip a step: as they get rich enough to need a more robust banking system, it can come into existence in a mobile-first way, skipping the branch phase entirely. Moniepoint is an African agent-based money transfer company that exemplifies this trend.

Moniepoint’s agents are independent contractors who use a point-of-sale device to record transactions. The device costs roughly $70 USD, and unlike many other payment models, each agent can set whatever transaction fees they want. For agents in urban areas, fees are generally low; they visit local bank branches frequently to settle up, and earn their profits on volume. Some agents, though, work in more remote areas; going to a bank can take hours, so they charge higher fees and settle accounts less frequently.

Since Moniepoint doesn’t know in advance what agents’ economics look like, a choose-your-own-fee model, means that their services are cheap enough to be competitive in dense areas, but worth agents’ time in more spread-out places. Moniepoint is not the only example of payments companies varying their prices—in gambling, and in adult sites like OnlyFans, payment transaction costs are much higher to account for the higher likelihood of chargebacks and fraud.

Agent-based banking has been a growing business globally, with the number of agents hitting over 5M in 2017, up ~10X from 5 years prior. In Brazil alone, there are over 400,000, and banks in India use agents to meet regulatory requirements for financial inclusion. In India, the government pushes for more people to have bank accounts, especially women and the rural poor. Consequently, banks sometimes use agents just to hit those quotas by paying a higher commission to agents who enroll people from underrepresented groups.

Military efforts are often said to be a strong source of world-changing inventions; from the internet to jet engines, digital photography, and even duct tape. But the finance industry is another one of these pioneers. The first successful Transatlantic cable line was built in large part to transmit exchange rates between London and New York (the value of the pound is still known as "the cable" in the foreign exchange business). Since mobile phone companies have grown fast, while regulated banks expand at a slower pace, there's a tech-enabled access layer that brings banking to more people.