Financial services and the digital age are more closely intertwined than ever

Digitization has blurred the lines between traditional and digital-first financial services. As the two stand at a crossroads, consumers don’t want to forego either, eyeing the best of both worlds. 37% of consumers want to maintain their relationships with their primary financial institutions which are traditional banks as well as reap the benefits of convenient tech-enabled services and user experiences from digital banks, according to a new report by Marqeta.

While digital banks are gaining popularity, traditional banks still have a significant role to play in the ecosystem, indicating that the future of banking will likely be a hybrid model with a mix of traditional and embedded financial services.

An exciting time for embedded financial services

People are becoming increasingly comfortable with the idea of embedded finance because of the convenience it can offer, whether it’s automatic payments for ride-sharing with Uber, or Buy Now, Pay Later (BNPL) virtual cards to pay for goods or services. As embedded financial services gain traction, consumers and businesses have more choices in getting services that may not necessarily be suited to banks. 

The combination between non-financial institutions and embedded finance services isn’t only limited to payments by creating more convenient checkout experiences, or lending by offering BNPL – it’s pushing beyond that and bringing integrated experiences in services like insurance and investments for both consumers and businesses. 

However, integrated payments takes the lead among other sectors and has become a big slice of the embedded finance pie. Payments experience is closely tied to the loss of revenue and impacts customers’ current and future buying decisions, building or breaking their affinity with the brand.

Additionally, checkout design is now a key point in online purchases and explains why merchants who integrate payments into their platforms or apps are driving smoother checkout experiences. Through integrated payments, customers can make purchases directly through a company's website or mobile app, without surfing to a separate external payment portal. 76% of consumers prefer this practice and make purchases through a retailer’s mobile app, up from 69% in 2022. 

Integrated payments also allow customers to pay with a range of payment options, including credit and debit cards and digital wallets, which can result in less cart abandonment. 

That said, a majority of consumers relinquish the buying process before completing a purchase when they are routed to third-party sites for payment or if they are required to download a new app or payment method, according to the report. 42% of consumers globally and 43% of US consumers cited a fragmented payment experience as the reason they discontinued or changed their mind to complete an online purchase. 

By streamlining operations for merchants and improving the experience for customers, integrated payments can act as a middle course for both consumers and merchants. 

Next comes the equally famous, P2P apps

Money isn’t so much changing hands anymore as it is moving from one payment app to the next. The global P2P payment market was valued at $1.19 trillion in 2022 and is expected to reach a value of $4.89 trillion by 2030. 

P2P payment apps have picked up steam in recent years due to consumers’ widespread adoption of smartphones and increasing inclination toward online commerce. 75% of consumers have used a peer-to-peer payment app in the last 12 months, almost the same (76%) as surveyed in 2022, the report shows. 

Younger Americans are largely driving the growth of these transactions, fueled partially by rewards or loyalty programs offered by payment app providers besides ease and convenience. Additionally, many P2P apps issue their own debit and credit cards to drive stickiness, allowing consumers to spend their received funds without having to transfer the money to their financial institutions. 

When it comes to various P2P apps, PayPal is the most popular service among consumers with 88% reported using the app in the past twelve months (a 3% increase over 2022’s results), followed by Cash App (39% compared to 32% in 2022). 

“The overall brand recognition of PayPal may be higher since it’s been around longer than other P2P apps, but our research shows that there’s significant traction for the P2P market overall among consumers,” said Rachel Huber, market intelligence lead at Marqeta.

Platforms like PayPal also allow users to buy cryptocurrency using their PayPal balance, or a PayPal-linked debit card or bank account. Providing users access to a wide range of services other than transactions also makes the case why PayPal is likely a clear winner among P2P apps. 

The balance of power in the card business is shifting

Among other habits cemented during the pandemic, consumers globally, and in the U.S. specifically, have increased their usage of digital wallets in the last couple of years. 

Increasing adoption of digital wallets also brings growing competition among card issuers, underscoring the importance of staying atop digital wallet status at the point of sale. Although multiple credit and debit cards can be inserted into a digital wallet, consumers (23%) tend to only keep a few cards in their digital wallets based on ease of use and convenience. 

According to Huber, card providers can take the lead in the wallet status by providing consumers with a hassle-free experience of adding the card to their digital wallet, offering flexible payment terms and relevant rewards and incentives to create stickiness. Card providers can also drive loyalty and overall engagement by changing and adding new requested rewards to meet shifts in consumer behavior and to prevent credit card switching.

Traditional vs. digital banks: Is there a consumer favorite and why?

While the pandemic set off a vast diaspora to digital banking, traditional banks are very much still in the picture. 81% of consumers use a traditional bank for their primary bank account and 64% store the majority of their funds in a traditional bank. 

Consumers are using more digital-first channels than ever to make financial transactions – the younger generations at a faster pace than other cohorts – but they are still sticking it out for the security of a brick-and-mortar branch especially when it comes to larger transactions and depositing funds.

Moreover, physical banking branches are closing at a significant rate. Wells Fargo, for example, has shuttered around 17% of its local branch footprint from 172 locations in 2020 to 143 today, and Bank of America has cut its retail locations by 5% – yet the data in the report supports that consumers don’t want to entirely give up on traditional banks and the decades of familiarity they have associated with them.

However, 37% of consumers shared that they also use a digital-only bank in addition to their primary banking provider, primarily due to their satisfaction with digital banks’ mobile apps. With the increasing penetration of smartphones and mobile devices, mobile banking apps have now become a must-have for individuals to manage their finances on the go.

While banks may have the deep pockets to respond to the tech-enabled neobanks and fintechs, some of them may lag behind the talent to develop a well-rounded in-house banking app and provide a satisfactory user experience, eventually pushing consumers to rely on bank branches for their banking needs.

The report also highlights that traditional payment methods, cash and debit cards, still surpass newer digital payment methods like wallets, mobile and contactless payments.

According to Huber, digital payment methods are very narrowly trailing traditional payment methods, which is significant traction considering how new many of the digital payments capabilities are. But because the fact that cards are still relatively easier to use, the existing infrastructure, massive market share, and deeply ingrained consumer habits make it difficult to dethrone card payments altogether. Moreover, most mobile wallets and contactless payments use cards to facilitate payments, indicating that traditional financial services and the digital age are more closely intertwined than ever.

“We don’t anticipate that cash or debit cards will go away, only that more convenient and digital options of payments will become even more commonplace than they are today,” concluded Huber.