Customer growth rate dipped and average deposit balances fell 25% in last six months of the year
LONDON; Feb. 24, 2020 – Neobanks operating in the U.K. added more than 6 million new customers in the second half of 2019, ending the year with 19.6 million customers globally, according to Accenture’s Digital Banking Tracker (NYSE: ACN).
Accenture’s research tracks the performance of U.K. neobanks – those that offer financial products via digital channels – compared to incumbent banks and traditional challenger banks – those operating with traditional business models and often with a physical footprint.
Accenture’s Digitial Banking Tracker found that neobanks have nearly tripled their customer base in the past year, from 7.7 million customers in 2018 to almost 20 million in 2019 - this current growth rate outpaces the 2% growth for traditional challenger banks and 1% for incumbents. The leading neobanks have surpassed the number of customers of many of the UK’s leading challenger banks.
The customer growth rate fell in the second half of 2019 from 170% to 150% in the first half of the year and the average deposit balance dropped by 25%, from £350 to £260 per customer. The apparent lag between customer acquisition and money deposited creates challenges for these banks when it comes to long-term profitability.
In an attempt to find new pockets of growth, eight out of nine neobanks banks in Accenture’s research have now launched business banking offerings and are expanding internationally.
“Neobanks continue their march forward, nearly tripling their customer base over the past year while outperforming incumbents in the areas of customer experience and lower costs,” said Tom Merry, managing director at Accenture Strategy. “While there is no denying their popularity, profitability and competitive agility continue to be a challenge for neobanks. The fall in average deposits shows they still struggle to replace incumbents as the primary destination for monthly salaries. To succeed, neobanks will have to convert their rapid customer acquisition and cost-to-serve advantages into profit. To remain competitive with new players, incumbents will need to accelerate their move to lower-cost operating models and take advantage of their scale.”
Neobank income continues to lag despite rocketing valuations
The most recent funding rounds suggest that the valuation of neobanks included in the analysis is £9 billion. These valuations are part of a wider growth in fintech investments. In 2019, UK fintech investments grew 63% to almost £5 billion – almost the same as the total for 2018 and 2017 combined. Despite the neobanks attracting £1.4bn of this funding, those that fail to convert customer acquisition and outside investment into profit may struggle under less favorable funding rounds and market conditions.
Accenture’s Digital Banking Tracker also found that the average income per customer for neobanks increased from £4 per customer in 2018 to £9 in 2019; however, this is in stark contrast to nearly £270 for incumbent banks. With the exception of OakNorth, neobanks in the U.K. lost between £5 and £15 per customer last year due to weak revenue streams and increased spend on customer acquisition.
“The rapid growth of neobanks shows they have great consumer appeal, forcing their competitors to adapt and innovate, which can only be good for customers. But there are still stark challenges that need to be addressed as they try to close the massive gap between sky-high valuations and profitability,” adds Merry. “The elephant in the room for all banks is the impact Big Tech will have if it seriously enters the fold, which will likely shake up the sector in a way that will make the current fight for customers and deposit balances insignificant.”
Accenture’s Digital Banking Tracker, released every six months, tracks market data from a representative sample of 30 U.K. banks. Data is sourced from publicly available information, including financial reports and media publications, and is accurate at the time of publication. Growth rates for digital banks were calculated using a six-month average between the first and second halves of 2019.
The banks included in Accenture’s subset are leading players in the UK. For these players, where no geographic breakdown of customer numbers and financial performance is available, we have included some non-UK accounts and data in our analysis.
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