UK digital-only banks could amass 35 million customers

Digital-only banks operating in the UK are set to experience massive growth over the next year, and if their current rates of growth continue they could have 35 million global customers by 2020, according to new research. Many of these new challengers are still unable to turn significant profit, however, which buys breathing space for traditional banks looking to protect their market share via their own digitalisation efforts.

In recent years several digital-only banks have successfully managed to nestle themselves in the banking landscape, with their popularity continuing to increase. In the UK this has seen the banking market disrupted by a host of digital challengers, including Revolut, Tandem, Starling, Monzo and N26.

According to a new study on the matter by Accenture Strategy, digital banks that operate in the UK now claim 13 million customers in Europe, with five million new accounts opened in the first six months of 2019. If the digital-only banks continue to gain customers at this rate, they will engage 35 million by 2020 – while traditional UK banks are expected to grow their customer base by less than 1% in that same time to 112 million worldwide.

This meteoric growth track has already seen digital-only banks accelerate beyond millennials to the broader population, and Accenture found that several now state their average customer is in their mid-40s. A growing number are also stationed outside London, suggesting the trend is becoming normalised on a national level. This means many of these digital start-ups are able to turn their attention from customer acquisition to becoming profitable.

As of yet, the majority of new entrants are still not profitable, with the average digital bank losing £9 per customer. However, with no branch networks and legacy IT systems, digital challengers have a substantially lower cost-to-serve than incumbents of £20-£50 per account compared to £170. At the same time, deposit balances for challengers have increased from £70 to £350 per customer. While this is still dwarfed by the £9000 average for market incumbents, change does seem increasingly on the cards.

One issue that digital-only challengers do face is the amount of scrutiny they face from regulators. Governance and control issues will increasingly be encountered as these banks scale, suggesting regulatory hurdles could grow as a result. Meanwhile, incumbent banks continue to invest in their own digital offerings, with an initial focus on transforming their existing infrastructure, and several are now launching their own new digital banks. As digital offerings become ever more important for retaining customers, 88% of banks attached importance to working with FinTechs in the future in a survey earlier in the year by Roland Berger.

Commenting on the findings, Tom Merry, Managing Director at Accenture Strategy, said, “On the face of it, these banks show great promise as being a catalyst for positive change in banking, putting pressure on incumbent banks to invest in technology, convenience and customer experience. But with competition mounting and most digital banks continuing to be unprofitable, customer acquisition alone does not guarantee long-term success. How these banks convert more customers to primary account holders and manage core challenges… will ultimately be the critical deciding factors to their future success.”