Online Banking is Reaching its Critical Point

Online banking has become a space for fintechs to challenge traditional banks. Over 130,000 current account switches were made between July ...


Online banking has become a space for fintechs to challenge traditional banks. Over 130,000 current account switches were made between July and September in the UK, for example, of which Starling was the most popular — a digital challenger bank founded in 2014.


It’s no different across the pond either. Canadian online bank Tangerine has experienced growth in account numbers since Coronavirus’s inception 10 months ago. $0 in annual fees and no-fee checking and savings accounts, Tangerine is one of many fintechs that are thriving in the time of Coronavirus.


Whilst this is great news for the everyday customer, it’s only thriving popularity isn’t exactly reflecting in its profits. So, are online banks opting for popularity over profitability?

Profitability of online banks

The issue with many fintech founders is that they harbour a culture of being a challenger to the traditional bank. This was needed, because high street banks were getting complacent and innovation was desperately needed.


The issue is that high street banks are extremely profitable, and fintechs don’t like it. The traditional revenue-generators for banks are seen as dirty; ripping off customers at their expense. The issue is that it’s become difficult to generate any sort of profit as a challenger bank because of this attitude, where any profitable strategies are seen as being contaminated with the same.


If we take the European fintechs as an example, Monzo saw net losses in 2019 of £47.2m (54% higher than the year before), whilst N26 are still not profitable. They’re hardly stable either, given that they’re fast-growing, personnel costs are rapidly rising to keep up with their growth, and they’re resistant to traditional profits.


Most challenger banks have been around for 5 to 10 years at the most, which gives them less credibility in the eyes of investors and lenders. It would be interesting to see their strategy upon a 2008-esque banking crisis. On the one hand, they are less leveraged and debt-laden than big banks, but they also offer dire interest on savings, which wouldn’t be popular in a saving-economy.

The allure of fintechs and where they’re heading

Fintechs are at a crossroads at the moment, and they need to prove their worth. The explosion in users comes because of tech-related convenience. For example, signing up to Tangerine takes all of 2 minutes. The security infrastructure and automation allows users to access their savings and perform transactions in an instant.


Advertising for fintechs is slightly easier too. Given that they’re closely integrated into the online ecosystem, such as the Play Store and Twitter, there’s a lot of free exposure. On top of this, digital marketing methods are proving to be pound-for-pound more effective than the traditional methods that high street banks are using.


It’s a very short sales funnel - from exposing users to an app, to having the app download link available. Given the fast sign ups, customers are actually signing up to multiple online banks and money transfer companies to see which they like best - there's no customer loyalty like traditional banks.


There’s currently a situation where there are electronic money accounts, like TransferWise, and online banks, where the services and user experiences are very similar. Given that many online banks are not willing to offer the traditional banking products, users can be put in a situation where they’re not entirely sure if they’re dealing with a bank or an e-wallet. 

After all, TransferWise and other money transfer companies are offering not online virtual cards, but physical debit cards. This is huge, direct competition to all challenger banks because they’re getting mentioned in the same conversations. The difference is important though, because online banks are much more thoroughly regulated, where deposits are insured.


Again, it would be in online banks’ interests to make this distinction clearer. Yet, they’re resistant to being put in the same category as a traditional bank. This could prove to be a mistake, because being a unprofitable high-growth tech company offers less security to both investors and customers than being a bank.

COVID-19 further disrupts online banks

Online banks could be depicted as either suffering or performing well - it merely depends on the metric used. It’s possible that they're sacrificing turning a profit in favour of gaining further market share, but as mentioned, loyalty is less prevalent in this market, so this could prove an unsuccessful strategy. At some point, they will have to monetise.


What is clear though is that COVID-19 is further hurting the bottom line. UK challenger bank Monzo has doubled its losses again in 2020 to £113m since expanding to the US. Monzo claims “Our revenue streams have been significantly impacted by the COVID-19 pandemic and resulting macro-economic uncertainty.” On top of this, financial crime requirements are expected to become stricter.


Monzo have recently released a Monzo Plus premium account in an attempt to diversify its revenue streams. Given online banks’ high user counts (4.4 million in Monzo’s case), this could prove to be a strategy. Freemium models have become all the popular because they cater to all audiences, offering choice.


Loyalty schemes could also prove to be useful. Traditional travel point schemes may be unfeasible during a COVID-19 world, but integrating retail could be viable. Canadian and American online banks may also want to take a leaf out of remittance companies’ books - perhaps marketing their better exchange rates than high street banks.


Finally, a perhaps surprising phenomenon of the current pandemic has been the rampant increase in retail investors (both stocks and FX). Like how Revolut integrated a brokerage on their platform for both equities and cryptocurrencies, this could be an option for online banks.


Many lack the cutting-edge features of online wallets, perhaps for regulatory reasons, but having a space for low-commission FX and investing could be a profitable string to their bow.

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Newsrust: Online Banking is Reaching its Critical Point
Online Banking is Reaching its Critical Point
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