2021 marked a big year for neobanks, with firms like Nubank, Revolut, and Chime getting major boosts to their valuations.
Out of the hundreds of neobanks existing today, only 5% are actually earning a profit – most are earning less than $30 per customer per year, according to a May report from Simon-Kucher & Partners.
Meanwhile, neobanks are still appearing in the news, but for less fun reasons. Chime, for example, has delayed its IPO plans because of declining fintech stock, and Varo has been hitting some bugs in its business model. The average Varo account has a balance of $84 – giving the bank only $336 million in total deposits and putting a damper on lending capabilities. Revolut, finally, has been losing a stream of executives – including its only female exec Deirdre Halligan, who was the global chief operating officer.
And this new scenario leaves neobanks in a rocky situation – can they maintain consumer interest and usership amidst a point of financial uncertainty and the threat of a recession?
It’s not neobanks’ fintech-y side that leaves them at risk. Fintechs, themselves, continue to make their way into consumers’ habits. 30% of millennial and Gen Z consumers say their primary accounts are with fintechs, according to research by Cornerstone Advisors. Meanwhile, 40% of consumers aged 21 to 55 say they subscribe to fintech services.
Rather, it’s the depth of neobanks’ hold on their users that leaves their future blurry.
Sure, a lot of them have managed to build a community and hype around their services, but a lot of the magic seems to end there.
Neobanks with precarious business models may have their work cut out for them. Going forward, we may see more of these digital banks taking steps to reduce operational costs, according to Patrick DellaValle, director of financial services advisory and compliance practice at consulting firm Guidehouse. That includes reducing headcount, going after additional funding – leading to lower valuations, and entering acquisition agreements with incumbent banks or larger players in the industry.
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