- Three UK challenger banks posted their financial results for 2019 through July and August.
- Monzo, Starling Bank, and Revolut showed growth in revenues year-on-year but also mounting losses.
- The trio have won customer loyalty and positive press for sleek app designs and colorful payment cards.
- But their financial results and the challenge of COVID-19 raise fresh questions about their long-term viability.
- Visit Business Insider's homepage for more stories.
The shine may be rubbing off a key part of Europe's burgeoning fintech market, after three British challenger banks posted mixed full-year financial results for 2019.
Monzo, Revolut, and Starling Bank all saw revenue, customers, and deposits go up, in good news for the fast-growing disruptors.
But all also posted ballooning losses, with each of the three companies at least doubling their losses in 2019 compared with the previous year.
The additional challenge of COVID-19 may make the prospect of profitability even more remote, even after the trio have raised a collective $1.9 billion from investors.
Despite forays into business banking, premium services, and stock trading of varying degrees, these banking challengers rely heavily on interchange, foreign exchange, and customer spending for revenue, all of which declined during the coronavirus lockdown in the UK as customers stopped travelling or went on furlough.
"Covid has shone a light on the neo-banks' business model; however digital and disruptive you want to be there are clear advantages of a core profitable business through traditional banking means, it can't just be a one-sided deposit business," Tom Merry, head of financial services strategy at Accenture, told Business Insider in an interview.
"It remains to be seen if huge customer numbers can translate into revenues and profits at scale."
Revolut and Starling Bank have both made noises about moving towards profitability or breakeven over the next 12 months.
Revolut is valued at $5.5 billion and now has 13 million customers. CEO Nik Storonsky said the firm remained "focused" on profitability.
Starling Bank promised to break even by 2021.
In a statement issued after this article was published, a spokeswoman insisted it stood apart from its rivals. "Starling, with £1 billion of government-backed lending has a secure and growing revenue base that differentiates it from Monzo or Revolut."
Monzo has warned the pandemic was a threat to its business, and went through layoffs and a down-round of funding this year. But the startup also doubled its revenues and added millions of customers, and managed to raise further funding during the pandemic.
That privately-held and predominantly VC-backed startups even publish annual reports demonstrates remarkable transparency, argues investor Eileen Burbidge. Burbidge is a partner at Passion Capital, an early Monzo investor, and HM Treasury's special envoy for fintech.
"There's a lot of information to digest and it's tempting to try and draw quickfire conclusions, but it's crucial to remember that it's still very early days for all of these challengers, the eldest of which was founded barely five years ago," Burbidge told Business Insider.
"What they've all achieved, along with others in the sector such as Atom, Tandem, Tide, N26, Nubank, Qonto and others, is absolutely remarkable."
It is true that the disruptors have disrupted the retail businesses of legacy banking operators, some of which a have been operating without threat for over a century. The average high-street bank can only dream of attracting the same customer love and enthusiasm as, for example, a Monzo.
The neo-banks don't have forever to win over customers as established banks catch up
But could the impact of neo-banks on incumbents actually be a negative going forward, as traditional banks wise up to improved digital offerings?
"Digital-only banking options are great for consumers and the industry more generally," Merry added. "The neo banks have done a lot to kick start better offerings from incumbents."
He added, however, that the window of opportunity for bank startups to win market share from behemoth rivals was closing.
"In the current climate, it is hard to see a turn to material profit for this group in the next 12-18 months," he said.
Merry added that while the incumbents could expect to be hit hard by the pandemic, with the UK lockdown resulting in branch closures, data suggests that there was something of a "flight to safety in terms of deposit flows to incumbents."
In other words, customers put their cash with brands they know and trust.
In the US, the figures are striking. A record $2 trillion in cash hit deposit accounts of banks since the coronavirus first struck the US in January, according to FDIC data.
In the UK, annual deposit growth estimates grew from a 3.7% compound annual growth rate to 5%, per Global Data.
Merry said the vast majority of increased household deposits have gone to incumbents. UK household deposits increased by a record £25.6 billion in May, per the Bank of England.
The idea that the opportunity is drying up is anathema to Burbidge, however, who cited growing ARPU (annual revenue per user) data to indicate that challenger growth in this area will eventually outstrip legacy banks.
"The fintech sector is just getting started on genuine value creation and positive consumer outcomes," she said, adding that the cost of service and cost base of the neo-banking model is an "order of magnitude less" than incumbents.
The Revolut USA Prepaid Visa® and Prepaid Mastercard® are issued by Metropolitan Commercial Bank pursuant to a license from Visa U.S.A. Inc. for Visa cards, and Mastercard International for Mastercard cards, and may be used everywhere Visa or Mastercard are accepted. Banking services are provided by Metropolitan Commercial Bank, Member FDIC, and are subject to the terms of a Cardholder Agreement. “Metropolitan Commercial Bank” and “Metropolitan” are registered trademarks of Metropolitan Commercial Bank © 2014. A note from Metropolitan Commercial Bank: Funds in your Revolut Prepaid Card Account are held at an FDIC insured institution. Your funds will be held at or transferred to Metropolitan Commercial Bank, an FDIC-insured institution. While there, your funds are insured up to $250,000 by the FDIC in the event Metropolitan Commercial Bank fails if specific deposit insurance requirements are met and your card is registered. See fdic.gov/deposit/deposits/prepaid.html for details. FDIC insurance does not protect your funds in the event of Revolut’s failure or from the risk of theft or fraud. See Terms & Conditions for details. Revolut is a financial technology company. Banking services provided by Metropolitan Commercial Bank, Member FDIC.
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