Neobanks operating in the UK added more than six million new users in the second half of 2019, to reach a total of 19.6 million customers globally, up from 13 million in the first half of last year, according to Accenture’s Digital Banking Tracker.
This rapid increase in customers means these neobanks have nearly trebled their customer base in the past year, from 7.7 million customers in 2018 to almost 20 million in 2019.
Their current growth rate of 150% far outstrips the 2% growth of traditional challenger banks and the 1% of incumbents.
The leading neobanks now surpass the customers numbers of many of the UK’s leading challenger banks.
But the customer growth rate slightly dipped in the second half of 2019 from 170% to 150% and the average deposit balance also dropped by 25%, from £350 to £260 per customer.
This apparent lag between customers joining and money deposited creates challenges for these banks when it comes to long-term profitability, with customer acquisition currently outstripping deposit growth.
In an attempt to find new pockets of growth, eight out of nine neobanks tracked in Accenture’s research have now launched business banking offerings and are expanding internationally.
Tom Merry, managing director at Accenture Strategy, said: “Neobanks continue their march forward, with customers nearly trebling over the past year and on metrics like cost and customer experience, they continue to outperform incumbents. The fall in average deposits points to their current struggle to consistently replace incumbent banks as the primary destination for monthly salaries.”
“It appears that we have two races running concurrently. On the one hand, these newcomers need to prove they can translate customer acquisition into income and capitalise on their clear cost-to-serve advantage. On the other hand, the incumbents must accelerate their move to a new estate to reduce their own cost-to-serve and capitalise on their existing scale. There’s movement in this space but a sense of real momentum has not yet been established.”
Income continues to lag despite rocketing valuations
The most recent funding rounds suggest that the valuation of neobanks included in the analysis now stands at £9 billion. These valuations are part of a wider growth in fintech investments.
In 2019, UK fintech investments rose 63% to nearly £5bn – almost the same as the total for 2018 and 2017 combined. Despite the neobanks attracting £1.4bn of this funding, current failure to monetise customer acquisition and capitalise on investment could see them struggle under less favourable funding rounds and market conditions.
Most neobanks have struggled to generate revenues so far, with the average income per customer marginally increasing from £4 per customer in 2018 to £9 in 2019. This is in stark contrast to nearly £270 for incumbent banks.
With the exception of OakNorth, weak revenue streams and further spend on customer acquisition means that all neobanks included in the analysis made a loss of between £5-£15 per customer last year.
Mr. Merry, concludes: “Neobanks continue to excite and delight customers and their phenomenal growth shows that their business model has great consumer appeal. These banks are forcing all players to adapt and move forward, which can only be good for customers.
“But there are still stark challenges that need to be addressed and the current mismatch between sky-high valuations and profitability is becoming increasingly clear. Accepting that there are some examples where successful companies have foregone profit for several years, their current focus on customer acquisition comes at a significant cost.”