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Article19 Jul 2021

Digital Neobanks: Popular But Not Profitable

Neobanks have demonstrated their ability to add customers at pace. But so far their ability to turn a profit is unproven, according to Citi research analyst Ronit Ghose and team.

Neobanks pride themselves on their large number of users and their ability to offer quicker and easier financial services versus incumbents. The coronavirus pandemic has acted as a catalyst for even greater digital adoption. The number of users for the U.K.'s four leading neobanks totaled over 22 million in 2020, a 45% rise year on year.

Most virtual banks have focused on deposit acquisition in their initial stage, whilst introducing innovations such as mobile on-boarding. The race is on for neobanks to be a so-called Super App by expanding their product and geographical reach.  

Neobanks, the Citi report says, are good at customer acquisition, but challenges around monetization remain. Revenue per user for the U.K. neobanks averaged £14 in 2019/20 vs. £370/user for the retail segment of one of the UK’s largest banks. The UK's Prudential Regulation Authority in a policy statement for new and growing banks cited the need for them to: offer greater clarity on the path to profitability; strengthen their governance and board independence; and invest significantly in risk management.

Profitability challenges also feature in the ASEAN region, which has experienced a wave of digital banks led by regulatory change, government support, increased digital penetration and trends from China & Developed North Asia. In HK, a year into operations, all eight virtual banks incurred losses before tax. Competition will be stiff as they attempt to gain market share.

A key difference between Asean and North Asia is that Asean has a number of large populous countries with still significant numbers that are unbanked or underbanked. Singapore and Malaysia are issuing a finite number of digital bank licenses with regulations specifying a clear target market for such banks to serve, while in other countries the development seems to be more market-driven.

In general, the absence of legacy tech stack and culture debt enables neobanks to have increased product velocity/flexibility relative to incumbent banks. In response, incumbent banks are responding through internal digital transformation, launching their own digital banks or offerings. Others are taking a leaf out of the internet playbook, setting up super-apps and partner ecosystems

For more information on this subject, please see the full report here Global Financial Insights - Digital Neobanks: Clients Grow, Losses Grow

Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.

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