Digital-only banks operating in the UK are set to experience massive growth over the next year, amassing 35 million customers around the world, according to research from Accenture, which nevertheless highlights obstacles to profitability.
After decades of being dominated by a handful of highstreet incumbents, the UK banking market has been upended in recent years by a host of digital challengers, including Revolut, Tandem, Starling, Monzo and N26.
Digital banks that operate in the UK now claim 13 million customers in Europe, with five million new accounts opened in the first six months of 2019. The customer base is also broadening beyond millennials with several firms now citing their average customer as being in their mid-40s and increasingly outside of London. And this customer growth is set to increase over the next year, predicts Accenture, as digital outfits win customers both in the UK and new markets such as the US.
As they mature, digital startups are now turning their attention from customer acquisition to becoming profitable. With no branch networks and legacy IT systems, digital challengers have a substantially lower cost-to-serve than incumbents of £20-£50 per account compared to £170. Meanwhile, deposit balances for challengers have increased from £70 to £350 per customer. However, this is still dwarfed by the £9000 average for incumbents.
However, the majority of new entrants are still not profitable, with the average digital bank losing £9 per customer. Account switching remains low across the industry and while digital banks are now gaining primary account customers and larger balances, the pace is slow.
Accenture notes that scrutiny has also already been drawn to governance and control issues as these banks scale, suggesting regulatory hurdles could increase in response. Furthermore, incumbent banks are investing heavily in digital, with an initial focus on transforming their existing infrastructure, and several are now launching their own new digital banks.
Tom Merry, MD, Accenture Strategy, says: “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.
“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.”