Are neobanks profitable?

neobanks profit

UK-based neobank Starling break evened in October 2020. Its competitor Revolut announced profitability in November 2020. This proves that yes, a neobank can make a profit. But most of them don’t, yet. And many never will.

According to BCG FinTech Control Tower, there are only 14 profitable neobanks. Among them the Russian Tinkoff Bank, China's WeBank and MyBank, Korean KakaoBank and India's Paytm. 

How do neobanks make money?

Many people wonder how neobanks make a profit. When this new digital kind of banking service appeared on the market, everyone was fascinated by their business model, based on 100% digital platforms and a lot of free features.

Free stuff is great to quickly build a customer base but it doesn’t grow revenues. In the first phase of neobanks history, profits weren’t such an issue to investors. Most neobanks followed a startup model: scale rapidly at any costs, reach a significant customer base, define. your business model as you go.

Neobanks had plenty of money to spend, thanks to huge funding from investors. And there were thousands of potential customers for these newcomers: people who were unsatisfied with their traditional bank offering for any reason. Poor customer experience on digital channels or high fees on withdrawals are two common examples.

The first neobanks entered a virgin market. Nowadays, there are hundreds of neobanks in the world and the competition is increasing. Being profitable – or at least having a clear plan on how to become profitable – is a key issue for getting new investments when taking a funding round. Neobanks don’t just need customers: you need profitable customers.

How do neobanks earn profits?

Being profitable means one simple thing: your revenues are higher than your expenses. Not a suprise, is it? Providing financial services costs a lot of money, even for a completely digital neobank: things like an IT infrastructure, people, and, of course, compliance (neobanks are regulated and subjected to regulatory authorities) are very expensive even for a lean organization.

Neobanks need to sell products and services to their customers. The revenues coming from interchange fees (the fees the banks receive when customers use their payment card to buy something) are not enough. Margins are slim in payments.

Different subscription options

To understand how neobanks make money, we must look at their offering. Many of them work on a freemium model. They offer a basic version for free: it usually includes services like an account, a debit card, money transfers and payments.

More sophisticated services and features are available with paid and premium accounts. Neobanks, like many other digital players, usually offer a subscription model: the customer pays a certain amount of money per month to get a package of products and services, included in his/her subscription.

Neobanks are differentiating their offering, introducing low-tier, mid-tier, and premium-tier subscription plans. Each tier offers improved features and conditions: more free ATM monthly withdrawals, for example, or a travel insurance.

The subscription model works great because it helps neobanks (and any other company) forecast potential revenues.

Other neobanks, like bunq, do not offer a free plan: the basic-tier subscription may be very cheap, but still not gratuitous. This choice may slow down customer acquisition, but makes a clear statement to the market: we offer something that is worth paying.

Work on recurring revenues

The segmentation of subscription options is a way to create recurring revenues, but there are others.

Another strategy is to offer the subscription of premium cards with exclusive features.

Credit products also work great, as installment loans are usually repaid in scheduled payments whose length may span from 3 months (like in BNPL products) to some years.

Reduce acquisition costs and improve customer retention

European banks often try to retain adult customers by giving them the possibility of opening junior banking accounts for their children, usually for those aged 13-17. Revolut, for example, offers this feature in many markets.

According to D-Rating, this junior banking account option is available in 22% of European banks. But it seems extremely popular in Poland, 83%. 

What products are sold on digital channels? 

Home Loans are rarely available online in digital banking.

If we only look at banks' websites, 14% of banks analysed by D-Rating offer the possibility of signing a house loan online. But the subscription process can be started online in 48% of banks. It is quite surprising that only 76% of banks provide information on their offer on their websites.

Home loans offering on the mobile channel is even lower: 55% of the apps provide general information on the product, 19% allow the customer to start the subscription process in the app and 12% implemented solutions to complete it.

Data looks better for consumer credit. Especially in France, where 3 out of the 5 banks analyzed by D-Rating in the 2022 edition of its Report are able to launch a consumer credit application on digital channels.

Are neobanks the future?

In the middle and long term, analysts expect a season of M&A in FinTech and neobanks: only the profitable ones will survive on the market.