Digital banks ‘won't survive Corona-recession’

Digital challenger banks will struggle to scale profitably in the Coronavirus-caused recession, although those able to weather the storm will innovate and thrive.

This is according to a new report from Forrester, which explained that mobile-only players will have to fight harder for deposits and new account signups; will struggle to attract more venture capital funding; may have to reduce operations and see a deterioration of business performance; and will have limited exit strategies as a result of the COVID-19 crisis.

The report also noted that hardly any have achieved profitability to date: Aldermore and OakNorth Bank in the UK stand out as rare exceptions.

However, at the same time, a handful of digital banks will use the crisis as an opportunity to innovate, developing features and services to help customers better manage their finances and reassure them of financial safety.

The report noted Monzo and Starling Bank reaching out to customers to explain that they are fully licensed banks and members of the Financial Services Compensation Scheme and that customers’ deposits are therefore fully protected up to a value of £85,000.

It added that as fraudsters have exploited the outbreak, Starling for instance published a blog post, explaining to customers what to look out for to spot a Coronavirus scam and stay safe.

Senior analyst Aurelie L’Hostis emphasised that challenger banks were already experiencing issues before COVID-19, with a crowded market, a lack of clear product differentiation, and struggles to scale. “The outbreak of the virus has changed the market radically in just a few weeks, further clouding challenger banks’ prospects.”

Some incumbents might want challengers’ technology stacks to upgrade their technology, but this is a risky bet, according to L’Hostis. “Devaluation among digital banks will start a race among incumbents to pick up digital capabilities on the cheap, so founders might only get low offers, if any.”

Moven, a pioneer mobile bank in the US, shut down its business-to-consumer side at the start of 2020, while German digital bank N26 pulled out of the UK market this year as it struggled to acquire new customers in an already saturated market. “We expect many more to follow suit,” noted the report.

A handful of digital banks, including N26 and Starling, were eyeing an Initial Public Offering (IPO) in three to five years’ time - any sooner IPO plans are realistically no longer an option, as valuations are getting hit hard, Forrester suggested.

“Challenger banks will need to fight to survive – a handful of digital banks will manage to weather the pandemic crisis until the third quarter of the year and then make it through a 12–18-month recovery period.”

    Share Story:

Recent Stories

New Business Frontiers
FStech’s Mark Evans discusses the future of financial services with Liu Jianning of Huawei, covering the limitations that current thinking can impose, how financial institutions can embrace technology to be both agile and resilient, and making space for the organisation to focus on the job of creating innovative business models and on delivering business value for their customers.

The Future of Intelligent Finance
FStech Group Editor Mark Evans sits down with Jason Cao, President of Global Financial Services Business Unit, Enterprise BG at Huawei ahead of its Intelligent Finance Summit which was held on 3rd and 4th of June in Shanghai. This Q&A delves into key trends in digital transformation of the financial services industry as well as a look at how data, robotic infrastructure, intelligent storage and innovative technologies are shaping the future for FSIs.

Cracking down on fraud
In this webinar a panel of expert speakers explored the ways in which high-volume PSPs and FinTechs are preventing fraud while providing a seamless customer experience.