How have Europe’s challenger banks been adapting to the new normal? While the pandemic has forced the need for digital-first business models, the economic crisis has hit neobanks just as hard as incumbents. Abi Millar profiles what the likes of bunq and neon have been doing to stay afloat.
Since the start of the pandemic, there has been a lot of rhetoric around ‘going digital’. As remote working became the norm and physical interactions were curbed, organisations rapidly stepped up their digital capabilities. According to research by McKinsey & Company, consumer and business digital adoption leapt five years forward during the first eight weeks of the Covid crisis.
Within the banking world, you might expect that challenger banks would have had a boom year. Predicated on ‘digital first’ models, without the need for branches, the likes of Monzo and Revolut may have seemed well placed to weather a socially distanced crisis.
“We believe that digital banking is the future – that is why we are so dedicated to providing the best banking experience to our users purely in the app,” says Bartosz Urban, a spokesperson for the Dutch neobank bunq. “Current times are becoming a test of that – to stay safe, people minimise their real-life interactions, and traditional brick-and-mortar banks are proving ineffective. That is why digital banks are crucial.”
Certainly, Covid has forced a change in the way people interact with financial services. In a World Bank survey, most types of fintech firm posted strong growth in the first half of 2020, with digital lending the only service to register a slump. Mastercard has found that 62% of Europeans are interested in switching wholesale from physical banking to digital platforms.
There have been some individual success stories too. The advisory company deVere, which has launched a suite of financial apps, saw app usage rise by 72% during the first week of lockdown. Starling Bank became the first UK-based neobank to turn a profit, while ‘buy now, pay later’ group Klarna hit headlines with a valuation of $11bn.
“We are at a true inflection point in both retail and finance. The shift to online retail is now truly supercharged and there is a very tangible change in the behaviour of consumers,” said Sebastian Siemiatkowski, CEO and co-founder of Klarna, whose business has benefited from the rapid rise of e-commerce.
However, the overall picture has actually been somewhat complicated, given customers’ desire for security and the disruptions wrought by Covid. Consumer spending – a key revenue stream for neobanks – dropped sharply. And at a time when customers’ own financial situation is under strain, many may prefer to stick to the stodgier, but safer-seeming, incumbents.
Monzo and Revolut both laid off staff, with Monzo warning at one stage that the pandemic was threatening its ability to operate. German neobank N26 has also cut its headcount, while RBS wound down its digital bank, Bo, just six months after launch.
“We are prioritising our investment spend across the bank on products and services that allow us to provide the best possible support for customers and colleagues. This is more critical than ever given the challenges we are all facing at this time,” said RBS CEO Alison Rose.
It isn’t really possible, then, to claim 2020 as a net good or a net bad for Europe’s neobanks. What we can say with more certainty is that it was a rollercoaster year, with many factors in the mix that affected each bank in different ways.
Among the banks that say they have done well out of the crisis is neon, a Swiss challenger that launched on the market in 2019. A few months into the pandemic, the bank completed a €4.6m financing round in parallel with strong customer growth.
“It’s maybe weird to talk about the pandemic and start with the phrase ‘we had a good year’,” says Jorg Sandrock, CEO of neon. “But actually in 2020, we began with something like 30,000 clients after nine months on the market, and now we have more than 55,000 clients. We aim to have 125,000 by the end of 2021, as well as generating more revenue.”
He thinks that while this growth had a lot to do with the product itself, the crisis probably helped a bit – neon saw a high intake of new clients in April, for instance. Sandrock suspects that at this point in time, people had begun working from home and had the time to play around with opening new bank accounts.
“I think it’s a great advantage that fintechs have a higher degree of digitalisation in their offering – it makes them very attractive compared to the established banks,” he says. “The funding side may be more difficult at the moment, due to the uncertainty of the pandemic, but if you have a strong business model it might actually be easier than normal.”
Another bank that has weathered the storm is bunq. Like many other challengers, bunq is making losses – expected to run to around €14m in 2020. However, CEO Ali Niknam has said he can fund these losses via the profit from TransIP, another company he owns. Notably, bunq survived the crisis without any need for lay-offs, and user deposits surged to €654.6m as of July 2020.
“In the first half of 2020 only, user deposits have doubled, which we are very proud of – our users trust us with their money and savings even in those difficult times, and it clearly shows that online banking is the future,” says Urban. “We’ve managed to keep on growing, opening our brand new Rotterdam office earlier this year and expanding our mortgage investment, and we have high hopes when it comes to the future.”
Part of the challenge for neobanks has been adapting to a shift in consumer behaviour. Throughout the pandemic, people have mostly stayed at home. They’ve stopped travelling, have made fewer small discretionary purchases, and have definitely stopped going abroad.
“Public transportation went down almost to zero in April last year,” says Sandrock. “The average purchase volume at some grocery stores grew by about 200%, but the total number of purchases went down pretty significantly.”
This has posed a problem for banks like Monzo, which, despite their efforts to take on the incumbents, have generally been used as a secondary bank account. Only about 30% of users get their salaries paid directly into their Monzo account, and as of February 2020 the average customer deposit stood at just £359.
A typical Monzo user might use their card to swipe in and out of public transport, or to buy a coffee on their way into work. They might also use it while traveling internationally, attracted by the bank’s promise not to block their card or add any fees onto the exchange rate.
Although the bank has made some attempts to diversify its revenue streams, as per its paid-for premium account Monzo Plus, it’s not surprising that the pandemic should have taken a toll on its valuation.
“Our revenue streams have been significantly impacted by the COVID-19 pandemic and resulting macro-economic uncertainty,” said Monzo in a July 2020 report. “Regulatory reviews will also lead to stricter financial crime requirements.”
That said, while Europe’s challenger banks are under significant pressure, what they are above all else is agile. This is a particular strength at a time of such uncertainty, allowing the bank to roll out new features in response to changing circumstances.
One of bunq’s most popular products, for instance, is a ‘Green Card’, a premium card costing €99 a year. For every €100 the customer spends, bunq plants a tree on their behalf. neon has also launched a tree-planting initiative, debuting neon green in November 2020. Other challengers have launched pandemic-specific features, such as Revolut’s in-app donation button, which allows customers to donate to the food bank charity Trussell Trust.
Features like these are particularly appealing to a younger, socially conscious demographic, and have the advantage of being pandemic-proof. A focus on ESG issues may become a USP for challenger banks, helping them build trust with customers post-Covid.
“We’re very much a bank for everyone’s daily needs, not just for travelling or small online purchases,” says Urban. “We’re constantly introducing features that save time, money and CO2 for our users every step of the way. We’re going keep our focus on providing the best day-to-day banking while also keeping it simple, and that seems to be the key to grow during the current crisis.”
Throughout the pandemic, headlines about challenger banks have been split down the middle, with some pronouncing the decline of challenger banks and others heralding a bright new era for fintech. The truth is probably somewhere in the middle. Through disrupting business as usual, the crisis has tested their adaptability and may guide them in surprising new directions.
This article appears in the Summer 2021 edition of Future Banking