Digital banks are extremely popular in recent years, “stealing” millions of customers from traditional banks in the process. Having more customers means more revenue and ultimately more profit, right? Well, not so fast.
Even the more mature digitals banks that have been on the market for more than four or five years still focus on growing their customer base rather than achieving profitability. Out of 249 digital banks worldwide, only 13 have been profitable (10 in Asia-Pacific, two in the UK, and one in Russia). That’s only 5.22%.
That is a staggering number of challenger banks that are only seeing red. Turning users into profitable customers might be harder to do than anticipated. After all, most challenger banks offer accounts with no monthly fees, no minimum deposits, no minimum balance, higher savings interest rates, and many other benefits luring in millions of users; but are hurting the bottom line.
List of profitable banks
- Rakuten Bank
- Sony Bank
- Jibun Bank
- PayPay Bank
- Starling Bank
- OakNorth Bank
- Paytm Payments Bank
- Tinkoff Bank
Why aren’t digital banks profitable?
We already partially answered this question above. If you’re giving customers almost everything for free, it’s hardly surprising that you aren’t making as much money as you hoped for. There’s no free lunch. At least for neobanks.
Digital banks are inherently financial technology companies. Like most other fintech companies, they have never achieved profit because they put their growth above everything else.
They also don’t need to be profitable as long as they can find investors that will keep bankrolling them. Today’s investors don’t expect a fintech company to be profitable. They don’t care about profitability the slightest. Otherwise, Lyft and Uber would be long gone. Even Amazon wouldn’t grow into what it is today if Wall Street and venture capital companies cared about them being profitable.
To further illustrate this, startups that were losing money and that went public in 2018 were doing better on the stock market than the profitable ones.
Wall Street investors are ready to deal with minimal and even negative cash flows for a substantial amount of time as investors care far more for future growth than the present profitability.
How to turn a profit?
Even if a digital bank is willing to put all its efforts into making a profit, it will encounter more than a few hurdles on its path to profitability.
By offering no-fee accounts, challenger banks have their backs against the wall. Therefore, some have started to focus on much more than earning money solely from interchange fees. They started offering premium accounts, SME accounts, credit cards, and providing a marketplace with partner institutions.
They are even venturing into crypto and trading space to squeeze out more revenue from customers.
So, you lured a customer in with your free account offer. But why not upsell them a subscription-based premium account? By offering two or three tiers, each with more or less valuable benefits, you can get more money from existing users.
Revolut, for instance, is already earning around 34% of revenue from its subscriptions. They have two or three additional paid plans, depending on the market. This includes their well-known metal tier (€13.99/£12.99/$16.99/m).
Small and medium business accounts are an excellent revenue source for digital banks. They are still underdeveloped and hence not much of a revenue generator. Small businesses kind of expect to get fleeced if they go with a big bank, so they’re preprogrammed to pay a good amount of money, even for a digital bank account.
Credit cards generated $163 billion in 2016. Interest income ($63B), interchange fees ($42B), cash advance fees ($26B), annual fees and penalty fees ($12B each), and enhancement income ($6B) are all excellent money makers.
If a digital bank can offer a credit card on top of the usual debit card, they can get a piece of the pie.
Smart challenger banks such as Starling Bank from the UK connect their existing customers with other players that help enhance their platform.
Insurance companies, pension funds, mortgage brokers, and credit score companies are all readily available on Starling’s marketplace and offer the kinds of services that the bank isn’t yet ready to offer itself. Each customer they refer to these third-party companies will bring them a commission, of course.
Trading crypto, stocks, and even commodities have exploded during the pandemic. Everyone and their mother have invested some money into it. With more or less success, of course. Some digital banks are offering at least Bitcoin to their customers. As neobanks are buying up crypto, their value fluctuates with the change in crypto prices on the market.
RELATED: How Do Digital Banks Make Money?
Let’s cover some of the more notable examples of digital banks and how they’re profitable or unprofitable.
Starling Bank is perhaps the most widely used example of a digital bank becoming profitable. The profit must have been staggering if they’re used as an example, right? Well, they posted an £800k profit for October 2020. That’s apparently enough to make the headlines.
All joking aside, Starling Bank’s CEO, Anne Boden, is saying that the bank has been profitable each month since then as well and that they’re “on track to post our first full year of profitability” in 2022 fiscal results.
When you consider that Starling’s main competitors in the UK, Monzo and Revolut, are still mounting losses, that makes the result even better. Let’s move on to more interesting examples.
Monzo is having a rough time lately as the pandemic hasn’t been kind to them. Their market value dropped by 40% to £1.25 billion in 2020, and they have racked up losses to £113 million, up from £47 just a year earlier.
This year, the bank has seen a 23% rise in new customers but an even bigger loss of £130 million. Up by 13% from 2020. For a bank that’s never been profitable, they certainly have their work cut out for them.
They are also being investigated over potential breaches of financial crime regulations. Failing to comply with anti-money laundering checks. Yet, in a bid to toughen the checks, they managed to aggravate hundreds of customers by freezing their deposits or even outright closing accounts, leaving them without funds during the first lockdown.
Tinkoff is an early digital bank from Moscow that doesn’t get nearly as much credit in the mainstream fintech media as it should. It started off in 2006 by offering credit cards to Russian people by direct mail, copying the Capital One model. It’s now the second-largest credit card provider in the Russian Federation.
But, more importantly for our story, Tinkoff, which had a banking license from the onset, was already profitable in November 2008. Oleg Tinkov, the bank’s founder and a serial entrepreneur, explains the Tinkoff business model clearly: “the bank’s business consists of buying money, cheaply, and then selling it for more.”
To illustrate just how cutthroat the digital banking space can be – when the bank was struggling to get a bond issued in October of 2007, Tinkov says that “I sat in the office at my round table, just crushed, and I cried. Of course, I am Siberian, a strong man, but I had tears running down my face.”
The bank is doing great in the last 5 years, having a net profit of $256 million in 2017, $364 million in 2018, $485 million in 2019, and almost $600 million in 2020.
China’s WeBank is definitely an outlier in the digital banking space. Backed by Tencent Holdings, the Chinese multinational tech conglomerate, WeBank has more than 200 million customers and 0.9 million SMEs.
WeBank was China’s first digital bank when it received its banking license at the end of 2014. They earned their first profit in 2016, the second year of operation. The net profit at that point was 40 million yuan or $5.9 million. In 2019, the last year that reports are available, WeBank had the highest net profit, standing at $565 million.
Their main source of income comes from interest rates from lending products such as credit cards. They have such an enormous customer base that even smaller loans generate big numbers for the company.
To generate so many customers, WeBank had the help of the entire Tencent ecosystem. Namely, Tencent has several social media companies in their portfolio, coupled with entertainment, information, software, fintech, and lifestyle companies and apps.
It’s easy to see why they’ve grown so quickly and become profitable in their second year of business.
OakNorth is a digital bank from London offering primarily loans and savings accounts for SMEs. They also offer personal savings accounts with above average interest rates.
This UK fintech company was founded in 2015 by Rishi Khosla and Joel Perlman. And guess what, they’ve made a profit within 6 months of launching the bank. In less than four years, the company made it into unicorn status and is now worth almost £3 billion.
So, how did this challenger bank accomplish this amazing feat? Mainly by not focusing on expansion and acquiring new customers at all costs. But also by not spending money, they can’t get back. On top of that, they use an AI program that tells them whether a business will miss repayments or not.
Things are looking bright in the future as well for OakNorth as customer deposits jumped by 15% year on year and are now £2.3 billion. Their profit also climbed to £77.6 million in 2020.
Going against the grain can pay off if you’re smart (and frugal).
Revolut makes 88% of revenue from the UK and 10% from EU countries. That’s a shocking number considering that they’ve expanded to the United States, Japan, Australia, and Singapore. Still, it’s an improvement over 2019, when the UK accounted for 99.8% of revenue.
It will be interesting to see if they turn profitable in 2021 or even in 2022 as they are still focused on a global expansion and heavily investing in new staff, ballooning the cost for the company.
Although crypto markets are recovering at the time of writing, and Revolut is working on expanding its offering, it will be another interesting year at Revolut.
Chime has seen a surge in its valuation but also in the number of customers. They were valued at $1.5 billion in early 2019 and are valued at $25 billion in 2021, having raised $750 million in August. They also went from 3 million customers in 2019 to a projected 13 million at the end of 2021.
The fintech is reported to have $600 million in revenue in 2020, triple the previous year’s amount. It has become EBITDA profitable, according to Chime CEO Chris Britt.
According to Investopedia, EBITDA is used to distract investors when there’s no strong net income or even a positive one. It can be a sign of no real profitability. It also isn’t a part of generally accepted accounting principles (GAAP) as a sign of financial performance.
So, what’s the takeaway? We hope to see Chime, as one of the biggest digital banks in the US, profitable. Although, as we already learned, it doesn’t really matter.
Read more about Chime in How Does Chime Make Money?
Although their bitcoin revenue was $2.72 billion in the same quarter, its gross profit accounted for only 2% of the revenue.
The company heads expect Cash App to be EBITDA profitable in 2021. As the company is spending heavily on marketing to capture as much of the market as it can, these costs will make a huge dent in its bottom line. So it will be interesting to see how much of a profit the company makes for Square if any.
We can say for certain that they will continue investing in bitcoin as Jack Dorsey is one of its biggest proponents.
Why are APAC banks more profitable than others?
If you glance at the founders of most of the digital banks in the Asia Pacific Region, you’ll see that they’re backed by conglomerates with extensive ecosystems. Having a portfolio of corporations that span telecommunication, social media, e-commerce, messaging, gaming companies, etc., means that you have a recognizable brand already and a wealth of data, not to mention existing users in your ecosystem.
Let’s just mention heavy hitters such as Sony, Xiaomi, Taobao, Rakuten, Baidu, and WeChat, and we’re talking about who’s who in Asia.
Having a head start means that you don’t have to focus solely on acquiring customers as they will flock to you and can therefore concentrate on monetizing them from the start.
The bottom line
It seems like eastern digital banks are years ahead of western ones in terms of profitability. APAC is home to 50 challenger banks out of 249 globally. Out of those 50, ten are profitable. The rest of the world has only three profitable neobanks at the moment, and that’s, quite frankly, shocking.