Digital banking may have experienced a boom in 2020, but European neo banks instead stumbled against expectations, proving the difficult path for digital challenger banks to truly survive the pandemic. With companies like Monzo and Revolut sharing their deepening losses, neobanks will need to find solutions to get out from under the tremendous pressure to keep up with traditional banking in terms of scale and customer satisfaction.
The issue neobanks are facing in Europe comes in spite of statistics that reveal a positive market for their survival. MasterCard recently revealed research to share that 42% of Europeans handle their finances digitally more often than prior to the pandemic, while 62% will likely switch from physical to digital platforms entirely. An article by CNBC surmised that the hurdles faced by neo banks to succeed most likely come from a failure to provide the high-level service customers are used to from traditional banking - as reflected in recorded complaints against the digital challengers.
CEO and founder of Dutch online bank Bunq, Ali Niknam, said, “Thanks to this crisis, there has been a wake-up call to some of these neobanks…to run a healthy business, you need healthy business conduct.”
A secondary issue is highlighted in the difficulty of a start-up truly measuring up to the service variety, systems, and offering scale of large, traditional banks. As a result, the region is seeing an increase in investors pushing fintechs to prove their ability to monetize products to a profit. To this point, Niknam shared “The complexity of having a start-up, having to compete with these gigantic incumbents and having such a heavy burden of regulation is a mix that not many can muster.” An over-reliance on payments and interchange is also a challenge with many start-up banks’ revenues over-relying on fees generated from card payments.
Lack of scale is also cited as an issue. Challenger banks are struggling to roll out new products at a profitable pace to revenue streams with their resources and level of experience. For those forgoing funding rounds, takeovers become imminent for smaller fintechs. Last year, the U.K.’s Times newspaper reported that JPMorgan and Barclays had shown an interest in buying U.K. digital lender Starling. But Anne Boden, Starling’s Founder and CEO said her firm was more likely to acquire a lender itself. “It’s very flattering when you hear rumors about big banks like that,” Boden told CNBC. “For ourselves, we are probably going to acquire something during 2021.”
With companies like Revolut, the biggest neobank in Europe, with over 13 million users and a valuation of $5.5 billion, only breaking even for a second time in November, it is difficult for challenger fintechs to break through to true success. While the companies scramble for profitable solutions, the question remains as to whether the industry will prove itself strong after the pandemic. Not all digital banking upstarts will make it through, but time can only tell.