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Which challenger bank model is going to survive?

With the annual reports from Revolut, Monzo and Starling it became apparent that challenger banks were losing money despite the rapid growth in 2019. Which models are viable to profit and which not?

Revolut reported a pre-tax loss of £107m for the year 2019 to December. This means the company’s losses more than tripled to a £33m pound loss in 2018. The losses for Revolut came despite Revolut’s revenue jumping by 180% to £163 million. Revolut has also seen a huge surge of retail customers with the total number increasing from 3.5 million to 10 million.

Monzo bank’s losses jumped from £47.2m to £113.8m amid a hiring spree, marketing and US expansion. This sharp increase in losses is not getting covered by Monzo’s rise in revenues from 19.7m to £67.2m.

The growth of downloads of major challenger banks up to 2019

Starling bank recently announced that it generated £6.7 million for the month of July 2020, meaning that it could make annual revenue of £80m. However, losses doubled to £52 million in 2019, while the company trebled its staff numbers.

Read also: Starling bank ‘on track to break even’ despite the losses doubled to £52m in 2019

Many challenger banks in the world are depending on debit card interchange fees. As TechCrunch reported, debit card interchange fees in the U.S. are at 1.2% of transaction value, so they are high enough to pay for the tech platform.

Both Chime and Aspiration function essentially as bank accounts for the customers at the front-end interface but have been able to structure themselves capital-efficiently. Chime’s actual deposit balances are held by back-end banking partners.

However, in Europe, the banks are under tighter regulatory caps. The debit card interchange fees are at about 0.2% of the transaction value. This makes the European challengers look for other ways of making the business profitable. Some decided to offer credit options, some decided to offer premium options and some even decided to focus on the SME banking segment.

Anne Boden, Starling bank CEO and founder, claimed that Starling is adding a new account every 35 seconds and that Starling is the fastest-growing SME bank in Europe and now holds a more than 3% share of the UK’s SME banking market. With that, she remained optimistic about the future of her business and even called out the competitors:

Anne Boden, Starling CEO

The coronavirus emergency has without doubt accelerated the shift to digital. It has also focused minds in the fintech sector on business models and exposed those without a clear path to profitability. I’m reminded of what Warren Buffet said at the time of the financial crisis, “Only when the tide goes out, do you discover who has been swimming naked.”

This comment is clearly aimed at one of Starling’s biggest rivals, the Monzo bank. Only 20% of Monzo’s customers use it exclusively, most of the rest rely on traditional banks for their primary account. This makes it difficult for Monzo to make their costumers pay for their premium services.

In 2019, Monzo has launched Monzo plus, a premium subscription option. This ended up with very poor results. Monzo has decided to work harder on its premium service and relaunched it this June. However, this year has been especially hard on Monzo. It is now obliged to have a capital worth of 13.6 percent of its risk-weighted assets to be protected against potential losses.

The President of Monzo Bank Tom Blomfield and the current CEO TS Anil

These capital requirements were increased by the Bank of England while Monzo was in the process of raising £60 million in top-up funding. But the paper value of the challenger bank dropped from £2.0 billion to £1.25 billion at that point.

Chief executive TS Anil said: “Similar to many businesses, we’re seeing a significant impact from COVID-19 and the resulting economic downturn. While I’m confident these are short-term, we’ve taken decisive measures to reduce the financial impact.”

Right after the COVID-19 outbreak, Revolut moved on from travel perks to become also a trading app. The Revolut’s app is now marketed as a super-app, with even more features to come for Revolut’s customers. Revolut claims that it saw rising income from domestic spending and cryptocurrency trading.

Nikolay Storonsky, Revolut CEO

Revolut has recently raised $80 million as part of its Series D round that it announced in February. This new funding comes from TSG Consumer Partners. With a total of $580m raised in Series D funding, the CEO Nikolay Storonsky announced that the company is looking to use the money to buy companies that have been hit by the coronavirus pandemic.

The N26 launched N26 Business Metal, a premium business account with an exclusive 0.5% cashback on purchases. This acc. is focused to help freelancers, the self-employed and entrepreneurs to get the most out of their finances. N26 has also extended its partnership with TransferWise to provide its customer with in-app access to the platform.

Max Tayenthal and Valentin Stalf, N26 founders

However, Max Tayenthal and Valentin Stalf, the founders of the German challenger N26, have recently obtained a temporary injunction to prevent the election of the Works Council. Employees in N26 are demanding more co-determination in the company claiming that the trust and confidence in management, which will guarantee the well-being of the entire workforce, is at an all-time low.

Revolut and Starling seem confident to turn into profit despite the COVID-19 aftermath. Revolut has extended its app and Starling is focusing on the SME market. However, if Monzo does not manage to convince their customers to make use of their premium Monzo plus product, the transition into a profitable company could be very hard for them.

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Jan Cerny
Jan is an innovation enthusiast and Fintech news reporter. He specializes in news distribution, social media, and content analysis.

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