Neobanks struggle to turn popularity into profit

17 March 2020 3 min. read
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Digitally savvy neobanks in the UK have seen their customer base grow rapidly in the last year, adding around 6 million new users. However, many banks are struggling to translate this into heightened revenue, with some losing as much as £15 per customer in 2019.

In retail banking, the disruption of challenger banks is visible across the value chain, from customer contact and lending to mortgages, payments and alternative financing. At the same time, the likes of Monzo, Starling and TSB have all recently announced they are launching a marketplace banking offering. Throughout the banking sector, then, new challenger banks and FinTechs are attacking business models, with newcomers rapidly making inroads into the sector’s profits by offering agile, digitalised alternatives.

One kind of financial sector challenger is the neobank: a type of direct bank that operates exclusively online without traditional physical branch networks. By avoiding hosting physical branches and reducing non-digital paper-work, neobanks look to bring down banking costs and expand services to the so-called ‘underbanked’ (people or organisations who do not have sufficient access to mainstream financial services and products typically offered by retail banks and thus often deprived of banking services such as credit cards or loans).

Neobanks struggle to turn popularity into profit

According to the latest release of Accenture’s Digital Banking Tracker, this approach is already bearing fruit for neobanks. The research found that those operating in the UK added more than 6 million new customers in the second half of 2019, ending the year with 19.6 million customers globally. Overall, then, neobanks have nearly tripled their worldwide customer base in the past year, from 7.7 million customers in 2018. This current growth rate of 150% far outpaces the bricks-and-mortar based 2% growth of traditional challenger banks and 1% for incumbents.

Neobanks’ expanding customer-bases do not translate to a boom in income yet, though. Accenture found that recent funding rounds suggest the valuation of neobanks included in the analysis is £9 billion. These valuations are part of a wider growth in FinTech investments. In 2019, UK FinTech investments grew 63% to almost £5 billion – almost the same as the total for 2018 and 2017 combined. Despite the neobanks attracting £1.4 billion of this funding, those that fail to convert customer acquisition and outside investment into profit may struggle under less favourable funding rounds and market conditions. 

Accenture’s Digital Banking Tracker also found that in stark contrast to nearly £270 for incumbent banks, the average income per customer for neobanks increased from £4 in 2018 to £9 in 2019. With the exception of OakNorth, neobanks in the UK subsequently lost between £5 and £15 per customer last year due to weak revenue streams and increased spend on customer acquisition.

Tom Merry, Managing Director at Accenture Strategy, said, “The rapid growth of neobanks shows they have great consumer appeal, forcing their competitors to adapt and innovate, which can only be good for customers. But there are still stark challenges that need to be addressed as they try to close the massive gap between sky-high valuations and profitability… The elephant in the room for all banks is the impact Big Tech will have if it seriously enters the fold, which will likely shake up the sector in a way that will make the current fight for customers and deposit balances insignificant.”