Banks are plagued with excessive fees, poor customer support and a lack of technology.

But one industry is thriving on its problems — cloud banking software, a market that is expected to grow from a $8b market in 2019 into a $28b market by 2027 and here’s why…

Banks are notoriously slow to adopt technology…

Due to strong banking regulations, slow sales cycles and slow-to-adapt behavior in the banking industry. But all that is changing as…

• COVID accelerated the adoption of digital banking and more than half of Americans now bank on their phones.
• New challenger banks like SoFiS
  oFi) are putting pressure on banks to improve their digital offering.

To catch up, banks are digitizing their operations (i.e. account opening, mobile banking apps etc.) with the help of bank software providers. In the past year, we’ve seen a few go public in the stock market:

• nCinoNCNO
  is building the “operating system” system for banks with customers like Bank of America and TD
• AlkamiALKT
  is another banking software provider that targets smaller banks (i.e. community and regional banks)

The secret to keeping your customers…

Make it incredibly hard for them to leave. Once a bank integrates its data and customer information with a platform, it becomes expensive for them to leave — leading to high net dollar retention rates.

In 2020, nCino had a net dollar retention rate of 147% (i.e. existing customers spent 47% more the next year) while Alkami’s was 117%.

According to nCino, 85% of banks are undertaking digital transformations and 60% are planning to increase their tech budget by at least 10% over the next 12 months. The digital adoption of banks is speeding up, but here’s the catch…

For investors… Cloud companies on hold

The returns on these fintechs have been relatively flat since they’ve gone public — nCino is down 9% since going public in July 2020 while Alkami is down 3% since going public last week.

But it’s not just cloud banking software that is struggling. The whole cloud industry is underperforming with the BVP cloud index — an index that tracks the returns of a basket of emerging cloud stocks — down 7.5% over the past 3 months.

Given the current lack of strength for cloud companies, investors might be better off waiting until the skies are clear.

Learn more: Here’s why cloud companies could become the drivers of growth in the long-run