Consider the challengers challenged

By Tom Rich, Business Consultant at BJSS

After a long period of seemingly unstoppable growth for neobanks, 2020 proved to be their most challenging year yet. We have seen industry leaders like Revolut and Monzo announce significant losses, with Monzo even including a line in their annual report casting “significant doubt” on its ability to keep operating. Covid has had a role in these struggles, but is there another undercurrent going on that is causing the challengers to finally meet a real challenge?

However, this is not to say that all challengers are struggling equally. Starling, another industry leader, has come out of 2020 remarkably well. It recently announced it had broken even for October and expects to be profitable from now on – a significant milestone for a neobank. In this blog, we’re delighted to get the thoughts of Starling CIO, John Mountain, to understand what they have done so well and what the future might hold.

The Path to profitability

Until Starling’s recent news, all the big neobanks had been loss-making. With continued high customer acquisition coupled with low costs, profitability had always felt like a sooner rather than a later scenario.  Consumers flocked to these start-ups who had sleek, user-friendly and aesthetically clean apps often in contrast to offerings from traditional retail banks. The issue we have seen for digital banks is turning customer acquisition into increasing revenue. This could be driven either through the diversification of offers and services or through customers committing to using these accounts as their primary bank account, rather than a top-up spending card.

This is one clear area where Starling has out-gunned its rivals in recent times. John attributes this directly to some of Starling’s success: “We have always been focused on being a customer’s main bank current account. Now with many customers placing that trust in us, the resulting higher engagement rates and higher average balances have been a major factor in helping Starling to break even.”

Another area in which Starling has excelled is through a smart and savvy business offering. The bank provides intuitive and intelligent functionality to track and manage finances for everything from sole traders to SMEs. This is an area that has lagged behind the retail offerings and is primed for digital transformation. Digital banks can utilise their retail base to accelerate and promote their business offerings which often come with higher returns. It’s worth noting that after RBS closed its digital banking brand, Bó, it continued to develop its digital SME brand – Mettle. This is a sign that even the big four banks view this a target area going forwards.

John highlighted just how vital this area is to Starling’s future: “SME banking is a massive growth area for Starling. During the pandemic, several high street banks have closed their doors to new business accounts. Meanwhile, we have been onboarding thousands of business customers and converting them to pure app-based banking.”

Expanding Income Streams

Both Monzo and Revolut have targeted premium subscription-based services to try and drive increased revenue. Customers can access a slightly expanded set of features for a monthly fee and typically some new goodies. However, I am yet to be convinced that enough people will subscribe to these when the primary draw of these accounts – the aforementioned apps and the ability to spend easily abroad – all come as standard. Monzo’s re-release of their service this year has captured over 50,000 users which is a promising start. Still, there is a long way to go if they are to gain the numbers required to begin to slow their losses.

One way that neobanks could drive revenue is through collaborating with other FinTech providers to offer customers a whole range of other products and solutions, all of which will help drive organic growth. Whether it’s more short-term loans, online mortgages, insurance or other opportunities now available through Open Banking, the margins on these can be considerable. Integrating these products seamlessly into product offerings will reap benefits. It is not easy to find the funding and approvals for such developments in an economic downturn, but for those that can, they may well see a significant longer-term benefit in doing so.

Helen Bierton, Chief Banking Officer at Starling, recognises the benefits of this: “For me, the point of integrations is about creating seamless user experiences with the products that our customers already use and that makes our offering even more compelling. It’s no longer good enough to create the best banking app in itself. We use our integrations to ensure they are optimised to fit within our customers’ overall digital toolbox.”

What the future holds

Ultimately, all the neobanks should be commended for what they have done to date. They have challenged the long-established incumbents in the retail banking space and forced them to rethink and modernise their approach and offerings. Despite Starling’s recent achievement showing that profitability is possible, it is unlikely that all the neobanks will reach that holy grail. It wouldn’t be surprising to see some casualties in the sector in the next few years as investors get tired of waiting for returns that may never come.

But for Starling at least, the only way is up. John finishes by saying: “Starling is a technology company and a regulated bank. We will continue to write code, innovate, enhance our systems and create great products for customers. Whether it’s consumer, business or expansion into new European markets, I am confident that being technology-led is crucial to winning new customers in the future.”