Digital banks: profit or loss?

Digital-only banks, also called neobanks, are expanding swiftly, leveraging cutting-edge digital technology like data analysis and AI to win over customers that are digital-savvy. These challengers, spurred by consumer dissatisfaction with the incumbents are charging zero or low fees and offering faster services and better user experience while saving the costs of running physical branches.

Big names such as Revolut, Nubank or N26 are moving from offering prepaid debit cards to providing more products, like full current accounts, loans, or insurance. Europe is experiencing full traction, the US is at a slow speed, virtual banking licenses are being issued throughout Asia in Hong Kong, Singapore, South Korea, Taiwan, and soon Malaysia.

Goldman Sachs launched their challenger brand Marcus in response to market demands.

What kind of strategies should banks adopt to catch up with disruptors?

Despite growing user base and valuations, neobanks still haven’t become the primary choice for income or savings and haven’t shown any signs of profitability either, fully relying on investor funds. Will their current business models provide revenue streams in the long run?

The pressure to build scale and attract customers faster than their rivals has led many neobanks to sacrifice profitable business models for foot-in-the-door customers. Yet many investors see the potential, having poured over $6Bn into challenger banks since 2014, according to FinTech Global.

The Q1 of 2019 saw $1.5Bn in investments, which is 78% of the figure for whole of 2018. Neobanks are, however, still away from profitability – Metro Bank, founded in 2010, reported its first annual profit, seven years later, and has needed several cash injections to support its growth. N26’s co-founder Maximilian Tayenthal stated that profitability is not one of their core metrics,’ referring to typical tech companies cycle where user base growth is prioritized over margin.

Neobanks have zero or minimum fee, no minimum balance or there’s no charge on transactions in a foreign currency.

How, and will they eventually start making money with such model?

New breed of financial services companies are going beyond banking and entering into social and lifestyle needs of their customers. Russia’s Tinkoff Bank is bringing Instagram-like stories to mobile banking and offering to buy cinema tickets and book flights. PingAn offers online conversations with doctors and develops China’s largest car sale portal.

At the same time tech companies are entering financial services. Southeast Asia’s Go-Jek and Grab offer a range of services from mobile payments to mortgages, in addition, to ride-sharing and food delivery. Singapore’s gaming unicorn Razer has launched its e-wallet, while Tencent’s WeChat in China, Kakao in South Korea and Line in Japan and Taiwan are developing mobile payments and financial products alongside with their messaging platforms.

How can financial services be offered to customers at the point of their needs?

SMEs are underwhelmed by traditional banking. It was revealed that only 63% of UK SMEs are either satisfied or relatively satisfied with their bank’s current offerings, while 80% feel their banks could do more, according to Accenture. Only 35% believe their bank can help them improve their sales results.

Asia-pacific is anticipated to become the most attractive region in terms of government regulations and growing investment opportunities, with WeBank, Timo or Kakao Bank as example success stories.

Hong Kong has given 8 virtual banking licenses this year; Singapore is planning on issuing 5; Taiwan has granted permits to establish internet-only banking to Line, Next and Rakuten, while Malaysia’s virtual banking framework is nearly complete.

A region with such high internet penetration and online spending is predicted to triple to $240Bn by 2025, according to Google report, creating a thriving ecosystem for challenger banks.

Fintech is developing exponentially, and our team of lawyers accompanies many interesting payment startups and banks in different countries. Taking part in international payment conferences we are always up to date on the news of the financial technology market.