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36% of Gen Z Pick FinTechs Over Banks for Online Payments

DATE POSTED:September 25, 2024

As digital solutions become more widely adopted, traditional financial institutions (FIs) face an escalating challenge from agile FinTech competitors. Younger consumers gravitate toward personalized financial services over the one-size-fits-all offerings of established banks, and FIs must rethink their strategies.

According to a PYMNTS Intelligence report, “Modular Design: Can Composable Banking Find Favor With FIs?,” a collaboration with Galileo, composable banking emerges as a critical solution, enabling these institutions to mix and match services for a more adaptive and customer-centric approach.

Competition Intensifies as Preferences Shift

Consumers banks callout

The competition landscape is shifting dramatically, particularly among younger consumers who show a clear preference for non-bank financial services. According to the report, 36% of individuals aged 18 to 24 would choose a FinTech service over their traditional bank for online payments. This trend reflects a broader dissatisfaction with existing banking services. More than 75% of consumers indicated they would consider switching FIs for better offerings, a significant increase from 52% just three years prior. Millennials lead this charge, yet even 67% of baby boomers expressed a willingness to switch if dissatisfied with their bank.

This migration toward FinTechs can be attributed to lower fees and more attractive financial conditions. Notably, consumers maintaining primary accounts with digital-only banks are also more likely to use those banks for credit services. As FIs grapple with retaining customers, the urgency to innovate becomes clear and failure to adapt could lead to a mass exodus to more agile alternatives.

Legacy Systems: An Albatross for Traditional Banks

Many traditional banks are struggling to modernize due to outdated technology, with 53% of bank executives citing technology debt from insufficient upgrades to core systems. This debt hinders innovation and negatively affects customer satisfaction; nearly 40% of customers find their banks’ payment processing speeds lacking. Current payment methods can take days, frustrating consumers and pushing them toward competitors.

The cost of maintaining legacy systems is rising, potentially leading to $57 billion in losses by 2028. Although banks acknowledge the necessity of digital transformation, fewer than one-third are investing in new digital ecosystems.

Embracing Composable Banking for Future Success

Composable banking offers a promising path forward, allowing traditional banks to integrate competitive solutions through an API-driven framework. This modular approach facilitates seamless integration of new services while preserving the integrity of existing systems. Banks can selectively adopt innovations tailored to customer preferences, ranging from instant payments to robust fraud protection.

Nearly 60% of banks are already planning to incorporate services like Zelle, while 57% are integrating the Federal Reserve’s instant payment system, the FedNow Service. These initiatives underscore the move toward a more collaborative and responsive banking model. The rise of API banking serves as the backbone of this transformation, allowing institutions to harmonize disparate systems and offer real-time capabilities without disruptive renovations.

Composable banking addresses challenges faced by traditional banks by enabling them to adapt swiftly to changing consumer demands. By leveraging modular components, these institutions can offer personalized experiences that rival FinTech competitors. In a competitive landscape with rising consumer expectations, composable banking is essential for enhancing customer satisfaction and maintaining relevance.

The post 36% of Gen Z Pick FinTechs Over Banks for Online Payments appeared first on PYMNTS.com.