Digital banks on track to treble customers . . . but profits harder to come by
Digital banks based in Britain are expected to almost triple new customers across the globe to 35 million, according to a new report.
New banks such as Revolut, Monzo and Starling will see their ease of use, lower operating costs and widening customer profiles drive new accounts across Europe and the US, said new research from professional services firm Accenture. These banks currently have around 13 million customers, which has more than doubled over the previous 12 months.
In the first six months of this year alone digital banks added five million customers across Europe, while seeing average customer balances jump five times from around £70 to £350. However, this is dwarfed by the amount customers hold in traditional banks, estimated at around £9,000.
New banks are also broadening their customer profiles from tech-savvy millennials as they gain more market traction. The survey said: “A number now cite their average customer as being in their mid-40s and increasingly outside of London.”
Digital lenders grew in the aftermath of the 2008 financial crisis as customers and small firms as looked alternative finance because they were unhappy with customer service levels and tighter lending criteria.
This has lead to high street banks such as Barclays, HSBC and Lloyds Bank upgrading their services to battle challenger banks.
Digital banks continue to benefit from much lower operating costs, which run at between £20 to £50 per customer. This compares to over £170 per customer at legacy banks, which carry branch networks and large staff numbers to run them.
But the report highlights that the accounts of most digital banks languish in the red.
“The majority are still not profitable, with the average digital bank losing £9 per customer,” said the report.
Traditional banks fightback
It adds that the pace of customer account switching remains slow, while digital banks face greater regulatory scrutiny as they grow rapidly.
Revolut, which has amassed around six million customers since it was founded four years ago, has faced questions this year from regulators over its money-laundering controls, while recording the highest number of customer complaints to the Financial Ombudsman Service for a digital bank.
Traditional banks are also fighting new challengers by investing heavily in digital brands of their own, such as Royal Bank of Scotland’s Bo or Goldman Sachs’ Marcus.
Accenture Strategy managing director Tom Merry said: “While digital banks are popular, most are not profitable. On the face of it, these banks show great promise as being a catalyst for positive change in banking, putting pressure on incumbent banks to invest in technology, convenience and customer experience. But with competition mounting and most digital banks continuing to be unprofitable, customer acquisition alone does not guarantee long-term success.
Merry added: “How these banks convert more customers to primary account holders and manage core challenges in terms of balance sheet scale and funding, risk management and compliance, will ultimately be the critical deciding factors to their future success.”
The full Accenture report can be found here.