Banks’ Days May Be Numbered Thanks To Digital Wallets

By 2024 there may be more than 220 million digital wallets, representing an $800 billion opportunity. But it won’t be the traditional banks that benefit from this red-hot growth, it’s the fintechs that are poised to win.

That’s according to Cathrine Wood, founder, and CEO of ARK Investment Management, the global asset management firm that invests only in companies bringing disruptive innovation to the market. Its fintech innovation actively managed equity strategy invests in companies focused on digital wallets, mobile payments, lending, AI, eCommerce, and risk transformation. During the Rosenblatt Fintech Summit 2020 last week, she painted a picture in which banks lose their dominance, ultimately ending up like utilities.

“Square SQ Cash App and PayPal PYPL ’s Venmo are evolving to the point where customers won’t have to use a traditional bank,” said Wood. “Once they get their own bank charters they are going to run circles around the banks. That will hollow out banks and they will become more like utilities.”

Even prior to the pandemic, digital wallets were growing in popularity, particularly among younger generations who are used to doing everything with a smartphone. But the COVID-19 pandemic brought even more reasons to transact digitally as shelter-in-place orders shuttered stores and forced people to stay at home. With banks closed consumers accepted digital wallets with open arms.

According to Apptopia, the market research firm focused on app usage, mobile app sessions on the leading digital wallets surged 10.7% since March. In the U.S. Adam Blacker, vice president at Apptopia told Fortune Venmo downloads were up 16.5% while Cash App downloads increased 20.1% from April to May.

But the digital app companies aren’t resting on their laurels. They are chasing bank charters so they can offer all the services that traditional banks have but do it cheaper and better. In March Square announced the Federal Deposit Insurance Corp. voted to conditionally approve Square’s application. It also received charter approval from the Utah Department of Financial Institutions. It's aiming to launch a bank in 2021 dubbed Square Financial Services. The main purpose of the bank will be to offer loans and deposits for small businesses. Varo Money gained approval for a banking charter in February.

Outside of a growing customer base Square and Venmo have another advantage over the traditional banks: the cost of acquiring new customers. According to Wood it costs regional banks as much as $1,500 to acquire one customer. They use interest rates to make up for those costs, she said. Meanwhile Square and Venmo spend on average $20 to win new customers. “Cash app and Venmo are being adopted twice as fast as social networks like Facebook were being adopted back in the day,” she said, noting Cash app and Venmo have surpassed JPMorgan JPM ’s digital app numbers. “It’s taking one year to achieve the network effect that took two years in the early days of social media.”

For good reason. Teens and young adults may not want their parents on social media with them but they aren’t too resistant when it comes to digital wallets. After all if mom or dad is sending them cash who is going to complain. “The more features and functionality they add the more reasons Square and PayPal give consumers to keep going back,” said Wood. “It’s very difficult for traditional banks.”