Gen Z is growing up and becoming an increasingly interesting area for new neo banks and venture capital investors. but monetising these digitally native consumers might prove challenging.
Image source: Photo by Max Fischer from Pexels
Digital banks that were developed with millennials in mind have now turned their attention to the next generation, but their road to success is set to be bumpy.
“It’s an interesting opportunity for investment but also a tricky one,” said Marcel Van Oost, an early stage fintech investor.
“The best brand will eventually win in this digital banking era, so the ones that are really building a brand that clients believe in, not just another digital bank like Revolut or Starling. These were the first ones that launched a bank [that was] fully digital. But the ones that will eventually win are the best brands out there.”
Targeting teenagers is not a new phenomenon. Back in 2012 GoHenry and Osper in the UK were set up to do exactly this. But in the last few years, it has become more popular as fintech entrepreneurs have started looking for niche areas they can disrupt.
According to fintech research group WhiteSight, there were nearly 60 neo banks catering to kids and teens around the world in 2020. This includes existing digital banks expanding their services, like Danish neobank Lunar, which launched accounts for teenagers from 15 to 17 years old last year; as well as those that are only targeting teenagers like Pixpay and Kard in France.
The number is set to grow. For example, in Germany, a new digital bank for 15 to 24-year-olds is launching this month called Pockid.
On top of this, traditional banks have also realised they have missed an opportunity by neglecting teenagers for decades, according to Caroline Menager, co-founder and CMO of Pixpay, who says that some banks have started building offers for this segment to make sure they don’t lose their existing customers’ children.
Pixpay launched in 2019 and within three months raised €8 million from investors.
“We figured out that teens were totally abandoned by traditional banks. On the other hand, we could see that children were willing to buy online, had digital habits, but couldn’t fulfil it.”
And so the business is targeting teenagers aged 10 to 18 and is aiming to teach them who to be good with money when they become adults. By the end of 2020 Pixpay had 50,000 customers and Menager said they are aiming for 150,000 by the end of this year.
Even digital banks that have been targeting salary-earning millennials have struggled with profitability. Offering services only to teenagers who don’t have large incomes will make this more challenging. That’s why the subscription model is so important, according to Pixpay’s Menager.
“We are convinced that what we propose to families has value not just as a payment card but also because it teaches how to be good with money, making your child happy and safe.”
Pixpay charges €2.99 a month, which includes everything, from a payment card to cash withdrawal. Asked if they will expand the services to adults, Menager said the group is currently aiming to keep the focus on teens and create the most technologically advanced product for this segment.
“When you consider that this market is really underequipped, with 90% of transactions by teens made with cash, there is a huge market in France and in Europe,” she added.
Pixpay is not the only one to rely on subscription payments. According to junior consultant Benjamin Kral at Amsterdam-based fintech specialist Fincog, neobanks that focus on teenagers and children don’t have a lot of options for revenue creation.
“It usually revolves around subscription,” he said. “Other revenue models do not make much sense. It’s not a big transaction volume for interchange fees and there is no room for much interest income.
Then it depends if a neobank can acquire a certain number of customers to achieve profitability or not, and that will depend on a lot of variables.”
A bank like Revolut, which launched junior accounts for 7 to 17-year-olds last year, has more varied sources of revenue, which Kral says can be an advantage. However, if a neobank that is focused only on teenagers can acquire several million customers and offer a premium product, that can also work “because you’re a niche player and famous for this specific product”.
But there is one crucial decision that can make or break banks launching services for the younger generations. Will they target the teenagers or the parents?
While Kador by Boursorama Banque is targeting the parents and Kard the teenagers themselves, Pixpay has decided to address both.
Menager believes that if the parents are not on board it will make it more difficult as they are the ones who put money in the account. But if the product is not desirable to the children, it also doesn’t work, she says.
According to Van Oost, a lot of investment will be necessary before people see a return in any case.
If the business is trying to attract the parents, then as clients turn 18 and leave the account their parents opened for them and have access to, there will be a constant need to acquire new customers.
But if the children are the first point of contact, then the banks that only offer services until a certain age will need to grow with their client base and expand their offering in time. In Van Oost’s view, although this can take time and money, these are the players that could succeed in the end.
“It’s an opportunity for them to build a relationship with [Gen Z]. But the moment they have their first salary they need to bring more services to clients and grow with them.
You then build a relationship, and they have no reason to sign up with another bank,” he explained.
“If you do it like this, it will take a long time for you to see some return on investment. These generations don’t spend a lot of money. It will take a long time before you can monetise on a young generation like this.”
While monetisation may be more aloof for banks focused on the next generation of ultra-digitally savvy users, the millions of existing users of neo banks such as Revolut, who are quickly growing around the world may just provide long term sustainability to the sector.