Neobanking has been one of the most talked-about fintech segments of the past decade, a buzzing industry that’s seen an average of 68 new ventures being launched each year since 2017, data from consulting firm Simon-Kucher show.

But despite the craze, a new research shows that neobanks are actually struggling to turn a profit, with only a mere 5% of the world’s reported 400 digital banks reaching breakeven.

This is according to a new paper by the consulting firm which looks back at the developments that occurred in the neobanking industry in 2021 and gives an overview of the current state of the sector.

According to the report, 2021 was a fructuous year for the neobanking industry, which welcomed 59 new players. This brought the total number of neobanks live as of January 2022 to 397. These companies now serve an estimated 1 billion customers, the firm estimates.

Worldwide Neobank launches, liquidations, acquisitions and pending launches, Source: Simon-Kucher Neobank database, 2022

Worldwide neobank launches, liquidations, acquisitions and pending launches, Source: Simon-Kucher Neobank database, 2022

Soaring venture capital funding in 2021 pushed neobanks’ valuations to new heights, lifting the value of the entire industry to an estimated US$300 billion. This market valuation spread across nearly 40 unicorns and distributed relatively evenly across major regions, it found.

Neobanks' valuations, Source: Simon-Kucher Global Neobanking Radar, 2022

Neobanks’ valuations, Source: Simon-Kucher Global Neobanking Radar, 2022

But despite the sector’s strong growth and continuous investors’ interest, less than 5% of neobanks in the world are profitable, the firm estimates, with most earning less than US$30 in revenue per customer per year. Moreover, cash burn rates remain stellar for several banks, with annual losses exceeding US$100 million in some cases.

Estimates from Simon-Kucher are consistent with other research on the neobanking industry. A 2021 Boston Consulting Group (BCG) analysis shows that of the 249 digital challenger banks operational at the end of 2020, just 13 achieved profitability, or 5%.

A need for sustainable profitability

According to Simon-Kucher, part of the reason why neobanks are failing to achieve sustainable profitability lies in their inherent obsession on growth, and subsequently, strategic choices.

Most have concentrated their efforts on scale and geographic expansion, and have underutilized their capacity to invest in emerging product trends and expand their portfolio of products, it notes.

To survive in the long run, neobanks need a longer-term strategy for monetization and profitability, a path that will likely materialize in the widening of their product offering beyond accounts and card-based payment services, their two core products.

Emerging product trends, like buy now, pay later (BNPL), embedded finance, digital investments, cryptocurrencies and digital mortgages/digital lending, are worth considering and could potentially become cash cows for neobanks, the report says.

BNPL and embedded finance are two booming markets; digital investments are among the most profitable digital banking products and are seeing rapid adoption among digital natives; cryptocurrency-related services including wallets and investments, are high margin products and have many first-time users; and digital mortgage/digital lending is still an underdeveloped segment that’s lacking true digital solutions.

Neobanking developments across Asia-Pacific

In Asia-Pacific (APAC), adoption of neobanking has been quick and enabled by favorable regulations. So far, eight jurisdictions have introduced digital-only banking licenses – China, Hong Kong, South Korea, Taiwan, the Philippines, Singapore, Malaysia and Pakistan.

Indonesia does not have a license specific to digital banks but has introduced new rules to allow near-full foreign ownership of local lenders and reduce red tape for new services, and Thailand is planning new policy guidelines for the banking sector, including digital bank and open banking, for later this year.

Regulatory enabler: maturity of digital-only banking licenses, Source: Simon-Kucher Global Neobanking Radar database, 2022

Regulatory enabler: maturity of digital-only banking licenses, Source: Simon-Kucher Global Neobanking Radar database, 2022

Singapore, which awarded four digital banking licenses in December 2020, saw the launch of its very first digital-only banks just couple of weeks ago.

On June 03, 2022, Green Link Digital Bank (GLDB), which is owned by Chinese developer and state-owned enterprise Greenland Holdings and supply chain financing platform Linklogis Hong Kong, opened its doors to micro, small and medium-sized enterprises (MSMEs) and non-retail clients. The digital bank offers cash, payments, loans and trade financing services.

And on June 05, 2022, Anext Bank, a wholly-owned subsidiary of the Ant Group, soft-launched its SME-focused digital wholesale banking offering. The digital bank will focus on providing digital financial services to local and regional MSMEs, especially those engaging in cross-border operations for growth and global expansion. The Anext Business Account will be made available to the general SME community from Q3 2022.

In the Philippines, digital banking group Tyme will be launching its digital banking offering GoTyme in October 2022. Tyme launched its first digital banking offering TymeBank in 2019 in South Africa where it has amassed nearly five million customers.

In Pakistan, the central bank will be issuing up to five digital banking licenses which it hopes will help improve financial inclusion and accessibility. The regulator said earlier this week that it has received 20 applications so far.

 

Featured image credit: Edited from Freepik

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