Fintech/challenger banks have cast a longer competitive shadow in the European banking industry, compared to the U.S., where new entrants have perhaps encountered more pressure to produce results in a shorter time period. This article suggests that with the pressures of the COVID era, patience in Europe may be waning:
But many of the so-called neobanks have stumbled in 2020, with the likes of Monzo and Revolut revealing deepening losses and getting hit with a multitude of complaints from customers about service.
Monzo, whose founder Tom Blomfield stepped down as CEO earlier this year, caused concern after flagging “significant doubt” about its ability to continue “as a going concern” due to disruption from Covid-19.
Now, neobanks are under tremendous pressure to show they mean business. Investors are pushing the fintech challengers to demonstrate that they’re able to monetize their products, and eventually make a profit. Experts say the space is ripe for some consolidation.
One roadblock to neobank success, suggested by a number of observers, is an over-reliance on transactional revenues related to interchange. With appealing online interfaces and perhaps more affinity from younger, less affluent consumers, revenue growth opportunities tied to payment services alone can be limited without adding user fees or a broader array of financial products with higher margins. For some challengers with innovative technology IP, an opportunity to sell to a legacy institution interested in leveraging that IP could be particularly compelling.
As we sometimes note in the U.S. experience, new banking entrants also may mis-judge the scale of the compliance commitment they will need to fill. Similarly, legacy institutions may be under-valued for the compliance capabilities that they have already built and their ability to operate and grow in a highly regulated industry.
It’s not easy being an incumbent financial institution. And neobanks can’t stay “neo” forever, even in supportive markets like Europe.
Overview by Ken Paterson, VP, Special Projects and Director, Customer Interaction at Mercator Advisory Group