Have UK neobanks missed the pandemic opportunity?

By Gaia Lamperti

As UK neobanks released their 2020 financials last month, the sector’s snapshot appeared mixed, with further losses, new players on the rise and optimistic plans (perhaps too optimistic?) for the future.

The main digital banks, Revolut, Monzo and Starling, all registered losses (for the sixth year in a row) but while Starling did manage to shrink pre-tax losses compared to 2019, Revolut’s nearly doubled its own to £207 million. Seems like the $33 billion record valuation did not save the London FinTech from last year’s unprecedented challenges.

Monzo, who was the latest digital bank to release its 2020 financials, reported a £114 million annual loss, a similar loss rate to the previous year. The company’s annual report also revealed that the digital bank is in the early stages of an FCA investigation over anti-money laundering rules.

As the UK exits lockdown, Monzo insisted that is on track to be profitable by 2022, revealing it is now seeing 30% revenue growth compared to March 2020. But its valuation’s drop during the pandemic, several executive-level layoffs, and concerns coming from its accountants do not offer confirmation on the neobank’s future.

In this scenario, only one player seems to be rising, Starling Bank, which announced that it generated revenue of £97.6 million over a strong 16 months. Starling succeded in growing during the pandemic, mostly for its ability to bolster lending via government schemes.

In the first quarter of 2021, Starling became the most switched-to UK bank according to the Current Account Switch Service (CASS). Between January and March, a net 17,769 customers switched their primary accounts to Starling (in comparison to the 7.744 switches to Monzo), confirming its leading position in the digital banking space for the foreseeable future.

While they are still working on the route to profitability, all three neobanks are announcing (when not already attempting at) international expansion plans. However, according to recently released research by SRM Europe, neobanks might have lost a great opportunity during the pandemic by failing to convert new digital banking consumers into increased customer loyalty.

“With such a marked increase in digital banking amongst the majority of UK consumers as a result of the impact of the pandemic, it would have been fair to assume that digital banking specialists would have shone in this research. That’s proven not to be the case in most instances,” Jehan Sherjan, Insights Director at SRM Europe, commented.

“Whilst Starling Bank has convincingly assumed its role amongst the leading pack, thanks to easy to use and functionally rich digital channels, a sense of relationship with its customers, and a strong pandemic performance, inconsistent performance in-service experience and aspects of pandemic performance have negatively impacted the likes Revolut and, to a lesser degree, Monzo.”

SRM Europe’s research, which covers 28 of the UK’s leading retail banks and was carried out in July 2021, examined in detail the factors influencing levels of customer loyalty towards their bank, including digital, emotional, social and relationship experience.

Starling Bank and Monzo were the only pure-digital banks to appear within the top ten (at 3rd and 10th respectively), with Starling, in particular, improving its performance ranking on underlying measures. Revolut fared particularly badly in 17th position.

Such results suggest that rather than an opportunity for growth the pandemic mostly took its toll on the UK’s neobanks. Yet, with all of the major digital banks announcing an expected break-even by the tail-end of 2022, international expansion plans in store and a possible IPO on the cards for Starling, their future may unfold brighter.