Leading European digital banks now have nearly 100m customers. This is according to research by Accenture presented at a ABBL online roundtable on 10 June entitled “Neobanks: An opportunity behind each threat”. Even if one-in-six of the continent’s population have an account, the concept of pure online banking has yet to go mainstream. But this could be about to change.
“We’re profitable on a per customer basis,” said Jérémie Rosselli, France and Benelux general manager for N26, a neobank. This hasn’t shown up on the bottom line as “we’re investing massively in new markets and developing new products,” he explained. This new competition benefits the customer and does not ultimately threaten legacy banks, argued Roger Kraemer, head of innovation at Spuerkeess. “Optimisation of work process as profitability comes under pressure will maybe lead to a reduction of price differences, which is one of the key attractions of neobanks,” he said.
Different shades of digital
A digital bank is one that is digital only or digital first, explained Dariusz Orynek, manager, Accenture Research, Banking. He pointed to four different types of digital bank: those that are owned by incumbent banks (such as BNP Paribas’ Hello bank!); those owned by non-banking companies (e.g. Orange Bank by the telco); spin-offs from both these types (such as Fineco Bank, ex of UniCredit); and true neobanks, which are independent players like N26.
Orynek said there are around 100 digital banks in Europe, of which 35 are leading players, of which there are five flavours: payment-focused operations (with standard account services), investment-focused (investment products and advice), “light digital” (universal but with a light lending capacity), digital universal (with a full range of banking services); and “narrow balance sheet” (with limited transactional services). He put the neobank brands that most come to mind (Revolut, N26, Monzo) into the light digital category.
Many clients, slim financials
As for consumers in the Grand Duchy, “the bigger neobanks that have multinational business models are targeting the Luxembourg market” Orynek said. According to Accenture information, N26 has “a few tens of thousands” of customers in Luxembourg. He also sees the emergence of payment-focused players like Sogexia and Olky Pay. This is in a context of a European market in which neobanks had 54.5m customers in 2020 and other digital banks 42.3m, a total which has doubled since 2018 and tripled since 2016, according to Accenture research.
However, this has not translated into financial performance for most so far. A relatively big name such as N26 only generated €49m revenue in 2019, although this grew by 91% year on year. The before tax loss was €216m. Monzo had earnings of €36m, a figure which had more than doubled, with losses of €136m. Most digital banks are in this range, although a handful are growing quickly and profitably. Digital universal bank Tinkoff had €1.7bn revenue up 64% with €651m profit, for example.
Current tastes, future trends
Accenture also surveyed 48,000 clients in 28 countries to ask why they had moved to use a neobank and why they hadn’t. German users said they liked the convenience and user experience (25%), the value for money (17%), the clarity of bank communication (13%), and the features (7%). Clients who have stayed with traditional banks said they were happy with their current provider (45%), were unfamiliar with the neobank offering (35%), and wanted a physical branch (23%).
As for future trends, Orynek highlighted three in the retail sector. Light neobanks such as Revolut are moving into lending, Aion has a subscription model, and Zelf is banking without a banking app but via text message. SME banking is the next emerging area, he added. For example, Revolut has launched online payments, expenses, invoicing and FX forwards services in the last six months. Their half a million business clients are a bigger revenue earner than their 13m retail clients, he said. Then in the wealth management space, Orynek noted that things are starting to get moving with new propositions for the mass-affluent segment from the likes of Alpian, Monument, Ikigai and Pennyworth.
Log-jam broken?
Neobanks have been particularly held back by capital adequacy rules, noted Edwin Van Der Ouderaa, senior managing director of digital banking at Accenture. “But these days, money has become so cheap and valuations of a lot of fintechs are so high that it becomes possible to have a few billion put aside for tier one capital, which can then be used for lending or for absorbing other risks,” he said.
Rosselli said he sees a potential role for Luxembourg in this new landscape. “From a B to C perspective, I see Luxembourg as a hub to organise the balance sheets of players. In this way it could be pioneer in Europe for this financial engineering,” he said