Digital Only Banks: Challenge we will – or not?

Are consumers finally ready to go all in with digital banking and ditch their branches? Some seem to think so, as a recent survey by Provident Bank indicated that “more than three-fourths of consumers prefer to deal with their bank through online and mobile channels.”

When will we see more Digital Only Banks?

Digital-only banks have been gaining popularity in recent years, especially in developing economies that previously lack formal banking infrastructure. Apps such as M-Pesa (in Kenya), Alipay and Tencent pay (in China), and Nubank (in Latin America) provide their consumers convenient and cost effective means of banking via mobile phones. In particular, according to Apptopia, Nubank’s app has been downloaded 18 million times in the past year, more than Revolut, Monzo, and N26 combined, courting 15 million users in total, a 25% increase from August.

Fueled by multimillion dollar funding rounds, global challenger banks have raised record-breaking capital this year, exceeding 2018’s record of $2.3 billion per CB Insights, and more fintech startups are rushing to add banking services to their portfolio (see figure below). Even retail giant Walmart is riding on the frenzie, announcing a new financial technology accelerator TailFin Labs to develop products and services that “sit at the intersection of retail…shopping and consumer financial services.”

The virtual banking excitement extends to the Far East, including Hong Kong and Singapore, the top financial hubs in Asia, with Monetary Authority of Singapore (MAS) announcing that they will be granting five digital banking licenses by 2020. Meanwhile, Hong Kong’s eight virtual banks are gearing up for launch in the next few months. For a territory that still favors cash and is extremely well-served by the vast number of bank branches, it remains to be seen if these virtual banks can truly disrupt the brick-and-mortar counterparts.

For starters, they are in talks with local ATM operators to access cash and other services. Interestingly though, according to a new analysis from Accenture, as reported by Fintech News Hong Kong, banks in China risk losing $60 billion (or 30%) in payments revenue to fintechs by 2025. This may not be too surprising given the dominance of Alibaba’s Alipay and Tencent’s WeChat Pay in the country.

Despite the popularity, however, one crucial question remains: How sustainable are the business models of some of these digital-only banks? Most of these startups are largely dependent on massive venture capital and they have yet to turn a profit. Case in point: UK-based Revolut announced losses of £32.8 million in 2018 despite 354% increase in revenue.

Meanwhile, N26, a German-based neobank, has raised $670 million in total, with a valuation of $3.5 billion. Its co-founder, Maximilian Tayenthal, told the Financial Times recently that profitability is not a core metric.

For the next few weeks, drawing from the insights from our “The Other 50” podcast guests, we will be examining the top trends in our industry, from cybersecurity and application of artificial intelligence in banking, to the implications of future of work and beyond. Check out this week’s new episode via iTunes and Spotify, where Brad and I chat with Tanya Andreasyan, MD and Editor-in-Chief of FinTech Futures, about the state of challenger banks and fintech funding, and what the future holds.

See more by Theodora here.

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