Customer growth and deposit balances wane for UK neobanks

Customer growth and deposit balances wane for UK neobanks

Digital banking startups in the UK now cater to almost 20 million customers, but face a strenuous challenge to reach profitability in the face of slowing growth rates and a decline in deposit balances.

Neobanks operating in the UK added more than six 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.

However, the data shows customer growth rates in the second half of 2019 began to tail off, dropping by 20% sequentially, while the average deposit balance slipped 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, says 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," he says. "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.”

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 UK lost between £5 and £15 per customer last year due to weak revenue streams and increased spend on customer acquisition.

Says Merry: “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.”

Comments: (2)

Melvin Haskins
Melvin Haskins - Haston International Limited - 03 March, 2020, 12:14Be the first to give this comment the thumbs up 0 likes

What would be a far more interesting statistic would be the number of customers who have no other bank account but the one with the neobank. I would be amazed if this number exceeds one million. In other words, I believe that most people retain their main bank account with a traditional bank. I could be wrong, but if I am not then I don't see the neobanks ever being profitable.

David Chase
David Chase - Oracle Corporation - Atlanta 05 March, 2020, 02:13Be the first to give this comment the thumbs up 0 likes

I agree with Melvin.  Other than a few examples around the world, such as NAB’s UBank, the digital-only banks are attractive when they advertise higher interest rates paid on deposits, but it is difficult for them to be profitable even without brick and mortar and expensive legacy systems.  Putting these digital banks together by cherry-picking the latest and greatest technology and cloud providers is not as cheap as originally expected.  With the right technology, the traditional banks can copy the competitors’ innovative products and keep those customers from ever needing to leave.  Here in the US we’re seeing a rise in attempts to start these neobanks.  Both the ones applying (and still waiting) for banking licenses and the ones who use banking services behind them.  We’ll see how this shakes out.