In the United States, start-ups have brought impressive changes to the banking world: the end of NSF fees, access to direct payroll deposits two days earlier, sometimes the end of all fees and even small loans to short term without interest to cover overdrafts. . Chime, the greatest neo
A bank in the United States offers up to $200 in fee-free overdraft. Under competitive pressure from neos, several large incumbent operators have finally become a little more user-friendly.
What the neos have not achieved, however, is profitability.
Simon Kucher, an international consultancy with extensive experience in financial services, has published a report on neobanks around the world. Some news is good: There are 10 neobanks in the United States with more than 6 million customers, the consultancy said. Chime is the 11th largest U.S. bank with more than 14.5 million customers, nine million of whom use it as their primary bank. But…” Neo-banks in the United States lose on average $4 per customer; there are 76 challenger banks in the United States and they are all unprofitable.
A significant percentage – 40% to 60% – of neo-bank customers use them as their primary bank account, but many of these are younger customers who don’t generate as much income as baby boomers, the report adds. The 2023 report follows an earlier study published in May 2022.
Christoph Stegmeier, partner, Simon Kucher & Partners Munich; Photo: © Astrid Eckert, Munich
“A lot has changed, partly because the environment has changed,” said Christoph Stegmeier, senior partner in Simon-Kucher’s global banking practice. “We had not planned to produce another report so quickly, but times have changed over the last 18 months, particularly with regard to inflation and the level of interest rates, which have had a considerable impact on the industry.
“When we spoke to the neos, they all told us they had to evolve and grow to be profitable.”
Simon Kucher wonders if the neo-banks have understood the causes and effects correctly.
Or as the report puts it: “Neobanks have been obsessed with scale rather than profitability, a concept applied successfully in technology or e-commerce but lacking evidence in banking.”
Now, Christophe said, the neos say they are under a lot of pressure from investors who want them to move toward profitability.
“We’re really seeing that some neos seem to understand and seem to be more focused on profitability. However, most neos have not found a way to be profitable.
Banks often get their pricing wrong and give away too much for free, he added. “If you have a unique selling proposition (USP), make sure you focus on a segment that is willing to pay for those items. This didn’t happen in Neo. Make sure you don’t push your best deals to your accounts at the lowest prices. Netflix understands customers’ willingness to pay and sets prices accordingly.
Simon Kucher carried out a study asking customers if they knew the current market rate for deposits. “Eighty percent had no idea, only about 20 percent are rate sensitive. In the United States, more and more people are concerned about other aspects, such as the habit of saving. You can increase your margin if you understand the elasticity of different customers.
One problem with the growth of online banking is that it forces neos to move into new lines of business. Neobanks typically offer savings products and debit cards with features such as the ability to freeze a card by smartphone if you left it at a bar, then unfreeze it the next day if you found or picked up at the bar. Relying on promises of no fees, online banks have often relied on interchange fees. So they collected deposits, but to get to the next level they had to figure out how to make money from those deposits, such as by lending them out. This involved developing expertise in credit and risk management.
Marcus, the consumer business launched by Goldman Sachs, has shown that lending is not as simple as it seems, Christophe said. “From a regulatory point of view, it is not easy to develop a loan proposal. Once you make a loan, you need to be able to raise capital, and you need to have risk management and ALM in place. It is therefore a big step for a newbie, but one that he will have to take eventually.
“The best neos in the world have mostly started with credit, primarily through a card or BNPL – transactional, short-term loans, much more linked to direct financing of purchases, or to credit cards as an important category in U.S. You don’t start with big credit, because you have to learn it,” he added.