On paper, UK digital-only banks look as if they are really motoring. They are attracting millions of new customers from a broader client base. Their costs are low (£20 to £50 – the equivalent of $26 to $65 – per account compared with £170 for a mainstream bank) and their net promoter score measuring customer loyalty is 62 compared with 19 for the incumbents (see table below).
But it is still not possible for digital banks to declare victory. The majority of them are losing money and getting into the black may take some time.
One route forward would be acquisition by an incumbent bank attracted by their slick technology and low operating costs. But some digital banks are valued so highly that traditional banks would struggle to make a business case for an acquisition. At the same time, the incumbents are now a long way down the road in developing their own digital offerings, making acquisitions less attractive.
Among the UK digital banks Monzo, for example, reported in the middle of 2019 that net losses increased 54% to £47.2m for the year ending February 28, 2019 and that, following a £113m investment, it was valued at more than £2bn. Revolut made a £33m loss in 2018 compared with £15m the previous year and is set to achieve a £5bn valuation after the latest funding round.
Both banks are growing fast in terms of customers and revenues, as is Starling Bank, which lost £26.8m in 2018 but whose founder Anne Boden forecasts will be profitable by the end of 2020. Starling is looking at doing an initial public offering in two to three years’ time rather than selling out to a larger bank.
All of these ideas will be explored at the Brand Finance Banking Forum 2020 in London on Wednesday February 5. Starling’s head of data science, Harriet Rees, will be on a panel I am chairing at the event.
We will also be reviewing the latest Top 500 Banking Brands ranking which saw challenger banks such as Virgin Money and Shawbrook Bank make huge gains. Virgin added 49% to its brand value and moved up 70 places to 232nd while Shawbrook added 73% in brand value and went up 133 places to 366th.
Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen
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