Over the last eight years, neobanks have emerged as a landmark disruption to financial services across Europe.
Despite the hype, these financial disruptors have enjoyed only mixed success, and those neobanks which are winning out now face the conundrum of profiting from their increasingly enlarged businesses.
This article will review the success of neobanks in Europe with a focus on three key indicators: profitability, customer numbers, and impact on the banking landscape.
Profitability
After years of sacrificing profitability at the altar of growth, neobanks are now focusing on profitability, amid restless VC demands for positive numbers.
In the UK, Starling and Revolut have made their first annual profits, while Monzo is on track for profitability by the end of the current financial year.
Across Europe, Amsterdam-based Bunq, Berlin-based N26, and Lunar are also on track to achieve profitability.
Customer Numbers
Neobanks have undoubtedly dented traditional banks’ customer numbers.
Leading the pack is Revolut which now has 27 million customers across 36 markets.
Monzo has over 7 million UK customers, and Starling has 3.5 million customers.
Bunq, Lunar, and Vivid Money have around 630,000, 500,000, and 630,000 customers, respectively.
Impact on the Banking Landscape
Neobanks have engendered a transformational change in how customers interact with banks, displacing bank branches with seamless, zippy instant online services.
The rise of neobanks has undoubtedly ruffled the feathers of established banks, and they have stimulated a lot of investment on the part of big banks who want to catch up and close that gap.
Diversification
Many neobanks have been heavily reliant on card transaction fees as a primary revenue stream, a strategy which is unsustainable in the long-term and precarious amid an economic downturn given its reliance on customer spending. Over the past few years, neobanks have been broadening their businesses, launching new revenue streams.
Revolut, which began life in 2015 offering cheap foreign exchange fees, has ambitions to be a “super-app” and now has its fingers in multiple pies, including banking services, currency exchange, stock trading, crypto, peer-to-peer payments, travel, insurance and even instant messaging.
Its push into crypto appears to be bearing dividends, with its latest financial figures for its foreign exchange and wealth division (which includes crypto) making up over half (55%) of total revenues in 2021.
Starling has made a big push into SME banking and now holds 8.9% of the UK market share for SME banking, as well as shifting its business into mortgage lending.
Monzo, meanwhile, has vaulted its business into subscriptions, launching Premium and Plus offerings, with subscription revenues jumping to over £11m by last year from launch in 2021.
N26, which is in 24 countries, now spans subscriptions, insurance, crypto and other banking products; likewise, Vivid Money says premium subscriptions are a “major revenue” driver.
Bunq, which bills itself as a sustainable bank, offers banking services, lending products and a real-time budgeting initiative.Lunar, which has a presence in Sweden, Norway and Denmark and counts Hollywood star Will Ferrell as a brand ambassador, is eyeing up a push into mainland Europe. Which of these strategies will prove the winner will be proven over time, but experts believe lending will be a hot area for neobanks in the future.
“What it comes down to and I think what will be the next phase for what generates profits for these neobanks is lending,” says Rudy Yang, fintech analyst, PitchBook.
But lending is a difficult nut to crack, requiring a large and diversified balance sheet, building credit models and data-driven pricing.
To combat this, in the US, neobanks have partnered with chartered banks (which do the heavy lifting) to offer lending products.
Revolut, which does not yet have a UK banking licence, would have to follow a similar path should it want to become a significant lender in the UK.
But lending can be a perilous strategy, adds Yang, pointing to a risk of delinquencies in the current difficult economic climate.
Hines says credit is where the big money is made in banking but capturing customer deposits to lend out can impact profitability.
“It is easy to lend people money, it is hard to lend money profitability,” adds Hines.
The SMB Market
Neobanks are increasingly eyeing up the SMB market, an underserved market as a revenue diversifier.
Starling and Lunar are examples of neobanks pursuing this strategy.
“Everyone is comfortable paying fees for business banking services in a way they are much less comfortable in consumer banking so it’s a natural development point to start looking at the audience,” says Hines.
Neobanks, generally speaking, build their business propositions on top of business transaction accounts by then offering the likes of business savings accounts, invoice financing and lending.
Upselling Subscriptions
A further way neobanks to increase revenues has been upselling through paid-for subscription offerings, which add reliable monthly recurring revenues to the bottom line.
Revolut said its subscriptions revenues grew from £71m to £107m between 2021 and 2022 while Monzo offers Monzo Premium, which offers phone and travel insurance and other benefits for £15 a month, and a cheaper Monzo Prime, with a holographic card, for £5 a month.
One extra benefit of subscription services, says Bain, is they can bring together an ecosystem of partners outside of financial services, such as loyalty card partners.
The future of Neobanks
In a report on the future of banking, McKinsey said the biggest threat to the banking industry comes from cross-industry firms like Amazon, Google and PayPal, with their ”vastly superior economic” models.
And that in the future increasingly neobanks and traditional banks will have to compete in “new arenas”, organised around customer needs.
But experts are undecided as to whether we will see neobanks competing with tech giants and offer a range of non-financial services in the future.
Hines says the neobanks are already shifting in this direction, pointing to them supporting the integration into accounting platforms but says the shift to non-financial services will not be a ”flick of a switch” moment.
However, shifting outside of their core domain might not be easy, as the some of the tech giants have discovered with their troubled payment offerings.
But Davis says the wind is blowing in the other direction, with the rise of non-financial brands offering financial services through embedded financing.
Which strategy will win out?
Which neobank strategy- be it super-app, SMB-focus, or world domination- will prove the most successful will play out over time.
But it is noticeable that successful neobanks, unlike some of their fintech peers, have largely ridden out the economic downturn and not suffered the ignominy of downrounds and swathes of job cuts.
Experts agree we may see less neobanks in the future, but the successful ones will continue to flourish.
Yang says: “I think the ultimate end goal is you will have multiple revenue streams, you will have multiple products and services from neobanks. And the ones that really stand out will be profitable at the end of the day.”
