Neo-banks struggle to make profits

According to a new study by Simon-Kucher & Partners, only 5% of neo-banks have managed to break even or record a profit, despite serving nearly a billion customer accounts together.

The global strategy and marketing consultancy has released its Global Neobanking Radar to track and rank nearly 400 digital and online banking companies around the world based on their potential for sustainable growth.

Simon-Kucher conducted an analysis of 25 of the world’s largest neo-banks and found that only two achieved profitability. The majority earn less than $30 in annual revenue per client.

The results were presented in a white paper, “The Future of Neobanking: How Can Neobanks Unlock Profitable Growth?”, which is available on the consulting firm’s website.

Christopher Stegmeier, Senior Partner at Simon-Kucher, said: “Going from ‘getting accessible’ to ‘getting rich’ requires a drastic shift in mindset that can be difficult to orchestrate.”

Neo-banks began to emerge about a decade ago, aiming to build digital-only relationships with digitally savvy customers. In 2020, 94 new banks in this field entered the global market, but only 59 new launches were registered last year.

Research has also found that in the United States, fewer than “a handful” of the top 85 neo-banks in the country have broken even, and many are losing up to $140 per customer per year.

Stegmeier added: “It’s critical that these digital disruptors make that leap, especially as [some] are approaching their sixth and seventh year of operation. The risk of failure increases exponentially at this stage if the business does not even break even.

Digital subsidiaries launched by large financial services groups or incumbent banks as new ventures now account for one in three neo-bank launches, according to the consultancy.

In an article for Banking Exchange in 2020, Andrew Steele of Activant Capital highlighted similar data showing that neo-bank business models on average involved spending “a dollar to recover fifty cents”.

Despite these challenges, research firm BAI reported in April this year that neo-banks are increasingly attracting small business customers.

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