The neobank era is just beginning

Good friend Ron Shevlin sparked off a great debate about neobanks with his snarky column on Forbes the other day. His basic argument is that neobanks are over. A few choice passages:

The 10 leading neobanks in the US grew by a little more than 10 million accounts in 2021, from 23.3 million to 33.5 million, according to Cornerstone Advisors.

However:

• Dave—a fintech, not some random guy—said that capital constraints have limited its ability to invest in the second half of last year.
• MoneyLion faces investor skepticism as it burns cash, according to the Financial Times.
• Varo Bank could run out of money by the end of the year. According to the Fintech Business Daily, “with $32 million in salaries and $38 million in marketing spend in Q1, costs continue to far outweigh non-interest income.”

I blogged about Varo Bank recently, and claimed that we are going through a recession, so of course it will separate the FinTech wheat from the chaff.

Ron goes on to claim that for every two customers onboarded, only one believes that the bank is their primary account. I have to ask him: what is a primary account? For me, accounts are now for different uses and there is no primary account. Just accounts for day-to-day living, accounts for complex things, accounts for my large investments and savings and so on. You call them jam jars or whatever. I call them accounts for different uses, and that there is no primary account.

Ron claims that many neobanks depend upon interchange for their revenue model. That may be true of how they start, but they’re not all the same. For example, Zopa started as P2P lender and is now a fully fledged bank doing pretty well:

After just 21 months from acquiring its banking licence, Zopa bank, the digital bank that raised $500 million from the early investors of Slack, Uber, and Alibaba to build the UK’s best bank for borrowing and saving, has hit profitability.

So, I agree with Ron in some context, but not all neobanks are the same.

As of January 2022, out of 249 digital banks worldwide, only 13 have been profitable, 2 of which were UK based, Starling and OakNorth Bank. Many digital banks or fintechs prioritise growth over profit, but to achieve both shows the success of some of these organisations. 

Source: FinTech & Finance News

Ron argues that the megafintechs like PayPal and big techs like Apple are winning … except that these are not banks.

Another good friend Simon Taylor has also commented on this space:

Despite consumer Neobanks having more than 100 million accounts globally, less than 5% make a profit. Great UX and hook products have driven adoption, but few show signs of long-term sustainability. Even worse, those that have millions of users in the US and UK have spent vast sums getting a charter/license, which only increased their cost burn. 

Nevertheless, as with me, he notes that not all neobanks are the same. Some are moving from interchange to subscriptions, embedded financial services and other revenue models. He also notes the advantage neobanks have over traditional or, as he calls them, incumbent banks.

Incumbents will pay anywhere between $150 to $350 to acquire a customer (cost of acquisition or CAC). The lower figure is purely operational costs, and at the higher end, it might include a switching incentive like $100 for opening an account. For digital banks, the acquisition cost ranges from $5 to $15, with the top end tending to bake in all activities like sending a physical card.

The incumbent cost to serve a checking or current account again ranges from $150 to $300 per year, in my experience. This will include a lot of shared / operational overhead from branches, payment systems, and other shared infrastructure costs. Neobanks have published figures ranging from $60 per year to $10 per year on an account basis. Some include operational overhead, some aren't, and a lot of this depends on their provider stack.

The same is true for chartered digital banks like Monzo, who would quote closer to $20 to $30 to run an account for a year.

Funnily enough Simon’s column points to Ron’s research, as does Ron point to Simon’s rant.

Incumbent banks can copy Neo and Digital Bank revenue models, as Cornerstone pointed out in their research report Banking in 2022 - rebounding from the revenue recession.

We are all in the same crowd here, just with different views.

My view: neobanks, especially a few standouts like NuBank and Starling, will change this world of banking. It’s just that you don’t need so many of them. As I pointed out the other day:

• There are 400 neobanks around the world with over a billion clients (more than Simon and FinTech & Finance News thinks)
• Over 50 neobanks launched in 2021
• The main focus of Neobanking is UK, Sweden, USA, Brazil and South Korea
• The neobanks are worth around USD$300 billion with at least 36 unicorns (2021)
• Less than 5 percent have reached breakeven, with most making heavy losses

So, much as I enjoyed Ron’s snarky column and Simon's rant, I’m going to call them on this one and say that the neobanking era isn’t over … it’s only just beginning.

"This is not the end, it is not even the beginning of the end, but it is perhaps the end of the beginning." Winston Churchill