While British neobanks gained six million new customers in the last six months of 2019, losses and the looming threat of big tech are issues they still need to take seriously.
A new report from Accenture, the professional services company, revealed the news after tracking market data from a representative sample of 30 UK banks.
Digital lenders such in the UK now has ended 2019 with 19.6 million customers around the world, roughly three times more than the 7.7 million followers they had in 2018. Comparatively, Brazilian challenger bank Nubank revealed in January that it now has over 20 million customers of its own.
Still, the uptick in customers means UK neobanks like Revolut, Monzo and Starling Bank have had a growth rate of 150%. Traditional challenger banks have a growth rate of 2% and incumbents have a growth rate of 1% on average, according to Accenture. Although, the neobanks’ 150% growth rate in the second half of 2019 was slightly slower
That being, said, the growth rate at 150% in the last half of 2019 still represented a slight drop from 170% in the first half of the year.
“Neobanks continue their march forward, nearly tripling their customer base over the past year while outperforming incumbents in the areas of customer experience and lower costs,” said Tom Merry, managing director at Accenture Strategy. “While there is no denying their popularity, profitability and competitive agility continue to be a challenge for neobanks.”
This is exemplified by the average deposit balance dropping by 25%, from £350 to £260 per customer. The apparent lag between customer acquisition and money deposited has created challenges for these banks when it comes to long-term profitability, Accenture noted.
“The fall in average deposits shows they still struggle to replace incumbents as the primary destination for monthly salaries,” Merry continued. “To succeed, neobanks will have to convert their rapid customer acquisition and cost-to-serve advantages into profit. To remain competitive with new players, incumbents will need to accelerate their move to lower-cost operating models and take advantage of their scale.”
The firm also revealed that UK challenger banks’ customers are getting wealthier. In 2018, the average income per customer was £4. That jumped to £9 in 2019, which is still a long way off from the £270 average seen by incumbent banks.
UK challenger banks also struggle to make money out of their customers. In 2019, neobanks lost between £5 and £15 per customer last year due to weak revenue streams and increased spend on customer acquisition. The only exception noted by Accenture was OakNorth.
“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,” said Merry. “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.”
Monzo, in particular, felt the squeeze in September 2019 when it was forced to cancel its premium subscription service after just a few months. The rollback raised questions about when and if the challenger bank would become profitable. Monzo’s CEO has since said he is expecting to unveil a new version of the service some time in the first quarter of 2020.
Although, while banks are adapting by releasing digital banking solutions of their own, not all of them have been successful. NatWest’s Bó app was hailed at the November launch its answer to challenger banks. However, the initiative has since been tormented by setbacks such as being accused of posting fake reviews, told the product was not up to snuff, having to deal with several fraudulent accounts opening at the launch and having to replace 6,000 credit cards because they were non-compliant with the EU’s strong customer authentication (SCA) rules. It remains to be seen if Mettle CEO Marieke Flament, who has been named as the the new leader of Bó, will be able to turn the tide.
However, neobanks have more hurdles to overcome than just making money out of their customers. “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,” Merry said.
It is not just challenger banks who could be threatened by big tech firms like Facebook, Uber, Amazon, Alibaba and Apple are entering the FinTech space.
As FinTech Global has previously reported, their size, reach, resources and access to data means they could significantly change the balance of the sector. Not only could that mean that it might be harder for startups to get a foothold, but even central banks have expressed concerns about their ability to compete with private initiatives like the Facebook-led cryptocurrency project Libra.
Incumbent banks have also expressed fear of tech titans stepping in to leverage their reach to take market shares.
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