The UK is home to several digital-first challenger banks that are valued at more than US$ 1 billion. Examples include Zopa, Monzo, Starling, and Revolut. Many digital banks have been following a growth-first and profit-later strategy. This can be quite a problem, as a recent Simon Kucher and Partners report estimated that less than 5% of Neobanks worldwide had achieved break-even.
The Truth?
Though Starling, Zopa, and Revolut have reached
profitability according to their published financial statements, none are
publicly listed, so they aren't obligated to publicize earning reports. Hence,
it isn't easy to gauge exactly how well they perform in revenue and profit.
Starling reported a 600% jump in revenue from
November 2020 to March 2021. It reached £97.6 million
Revolut shared that for 2020, it saw a 215%
yearly increase in gross profits as it reached £123 million.
FinTech was valued at $33 billion last year and
has raised $1.7 billion to grow its footprint in the Middle East, Europe, South
Asia, and Latin America.
Zopa CEO Jaidev Janardana stated that the
company had achieved profitability within 21 months of attaining its UK banking
license. He said, "Today's news makes Zopa one of the fastest digital
banks to achieve profitability ever and reinforces our thesis on the importance
of sustainable growth as a catalyst for accelerated product and market
expansion."
How Can Neobanks Turn Themselves Around?
If Neobanks want to turn themselves around,
they must act fast and consider the following options for the short term.
They should slow down customer acquisitions by
reducing the rewards being offered and stopping nee-fee products and services
that can be quite expensive.
They should also drive-up deposits and
transactions among existing users to boost revenues.
Neobanks should also seek revenue enhancements
via new lending products like buy now, pay later, and credit cards.
Strategies That Can Help Neobanks
Neobanks can also target a niche that the
mainstream providers do not rightly serve. Financially marginalized consumers,
young people, families, freelancers, microbusinesses, and small companies can
be good options.
They should also consider picking a growing
value pool like gig workers who might have varied incomes. As the number of gig
workers has grown considerably in the last few months and will continue to grow
in the future, it is a reliable option.
They should also invest in commoditized
financial products that give more financial freedom to users. For instance, a
feature allows users to switch past payments to any card they wish.
The Neobanks must also focus on creating a unique
brand identity and ensuring that their app is different and easier to use
than the rest. The user interface can make or break the entire customer
experience, so it should be usable for people of all ages, including young kids
and older adults.
Neobanks should also consider making offers
than stand out from the rest and help it to retain the existing customers and
acquire new ones. As always, innovation is the key to attracting and retaining
customers.
Sources:
https://www.pymnts.com/news/digital-banking/2022/profit-vs-growth-which-strategy-is-paying-off-for-uk-neobanks/
https://www.insiderintelligence.com/content/decreased-funding-valuations-sink-swim-neobanks
https://www.publicissapient.com/industries/financial-services/neobanks-the-threats-and-opportunities-in-2022