MD Insights 12/7 - 12/13
Neobank Viability Gains Credibility
One data point, an outlier. Two, a trend?
My curiosity about the long-term viability of neobanks was piqued this week when Revolut announced that it had reached break-even for the month of November 2020. Not newsworthy in and of itself, but when viewed in the context of Starling’s breakthrough to profitability in October, it seems to me that the evidence supporting the viability of these virtual banks does portend long-term growth, and a very real threat to the legacy, brick-and-mortar bank behemoths.
That these neobanks have gained purchase with small depositors and the underbanked is of no surprise. These largely ignored and often shut-out banking constituencies are natural end-users for neobanking technology, which provides low cost, high functionality money movement at scale. However, the “low cost” component has meant that these banks have to generate returns from another source. Traditional banks are primary lending facilities for all sorts of financial products, from credit card revolvers to mortgages, but neobanks don’t have the innate capacity to perform those functions at scale...yet.
So where’s the revenue generation coming from? Well, based on reports, it's derived from the accelerating growth of business clients, and the attendant interchange revenue from payments processing. Starling Bank, the smaller of the two, boasts over 250,000 businesses as of November; Revolut, almost twice as many at 500,000. Not exactly JP Morgan numbers, but with the majority of these businesses being located in the UK, these numbers are meaningful.
The bottom line is we are now witnessing nascent neobanks transitioning through a proof-of-concept stage where they can generate profits. This is a game-changer. With profitability comes investment, and I suspect sooner rather than later, these neobanks will be the beneficiaries of acute interest from both financial sponsor investment and strategic, legacy players looking to acquire them.
- Adam T. Hark, Managing Director, Wellesley Hills Financial, LLC