Revolutionizing Neobanking: unlocking profits and sustained growth

With funding becoming scarcer, neobanks face mounting pressure to transition from unchecked growth to a focus on profitability. Over the last 18 months, the number of new neobank launches barely exceeds the number of closures. However, both revenues and customer numbers continue to rise impressively.

A significant shift is underway in the neobanking sector. Rather than prioritizing rapid expansion, profitability is now under the spotlight. The 'Future of Neobanking – Profits at the End of the Tunnel' report by global consultancy Simon-Kucher delves into this evolving industry landscape, emphasizing how neobanks are attempting to monetize their offer.

Key insights and highlights from the report:

• Strategic Balance: Neobanks urged to prioritize profitability alongside growth, a critical factor of long-term success.
• Client Surge: Neobanking clients surpass the one billion mark, indicating a remarkable 30 percent growth in 18 months.
• Revenue Ascendancy: Industry revenues soar by ~43 percent in the same period, reflecting potential for further growth and market expansion. On a per client level, average revenues increased from $69 to $75 although with wide dispersion across markets and banks.
• Growth Giants: 20 neobanks now hosting over 10 million clients each, reshaping the landscape and competing with traditional banking giants.
• Emerging Leaders: Six global neobanks identified that combine full year profits and above average growth – uncovering five key success factors that led them to outpace the rest

Eighteen months following their inaugural report, Simon-Kucher – the world’s leading pricing and growth specialist - observed a continued slowdown in the launching of new neobanks. Globally, the recent year and a half saw 36 new neobank introductions, which only slightly outnumbers the 34 that either closed or were acquired.

In the Australian neobanking sector, significant challenges have historically arisen in the pursuit of disrupting the established banking landscape, largely due to the substantial scale and entrenched competitive advantage of the nation's dominant big four banks. Consequently, there have been noteworthy instances of neobanks relinquishing their Authorised Deposit-Taking Institution (ADI) licenses to the Australian Prudential Regulation Authority (APRA). Presently, only one of the four original neobanks to be granted an ADI in 2019, Judo Bank, retains its license.

The initial cohort of neobanks faced challenges stemming from their substantial reliance on investor funds, which subsequently dwindled due to external factors, including the COVID-19 pandemic and more recently, inflation. Delays in the launch of revenue-generating products further exacerbated these difficulties, leading to the high-profile closures of Xinja in 2021 and, more recently, Volt Bank in 2022, which held the distinction of being Australia's inaugural challenger bank. Consequently, the growth of neobanks in Australia has been markedly constrained over the past few years.

However, there are indications that the tide is turning. In the past 12 months, APRA has granted full ADI licenses to two neobanks, Alex Bank in December 2022 and In1Bank in May 2023. These neobanks join Judo Bank as Australia's disruptor challenger alternatives to traditional banks. Together these neobanks along with the digital offshoots of incumbent financial institutions, such as Up Bank, UBank, ME Bank, and others, have collectively amassed a customer base exceeding one million individuals. This growing customer base underscores Neobanks increasing prominence within the financial landscape.

Leveraging their technological advantages over incumbent institutions and streamlined operational processes, neobanks still stand poised for potential success in the Australian market. To achieve this, they must maintain a laser-sharp focus on monetizing their growing customer base and emphasize the critical ‘profit hacking pillars’ highlighted in our report.

A year and a half ago, Simon-Kucher noted that a mere five percent (or even fewer) of global neobanks were profitable. Today, while unprofitable banks remain in the majority, there is a promising surge in the number of neobanks nearing or achieving profitability."

"We've witnessed a pivotal shift as neobanks prioritize profitability," said Christoph Stegmeier, a Senior Partner in Simon-Kucher’s global banking practice, emphasizing the need to balance growth and profitability from the early stages. “The report identifies and analyzes the practices of the six neobanks globally positioned in the 'Better Growth' quadrant of the Neobanking Profitability Matrix 2023, having achieved positive Earnings Before Interest and Taxes (EBIT) while outpacing peer averages.”

For a comprehensive understanding of the neobanking landscape and insights into the future, the complete Future of Neobanking – Profits at the End of the Tunnel report is available upon request.

Rachel Pope

rachel.pope@simon-kucher.com

About Simon-Kucher

Simon-Kucher is a global consultancy with more than 2,000 employees in 30 countries. Our sole focus is on unlocking better growth that drives measurable revenue and profit for our clients. We achieve
this by optimizing every lever of their commercial strategy – product, price, innovation, marketing, and sales – based on deep insights into what customers want and value. With 37 years of experience in monetization topics of all kinds, we are regarded as the world’s leading pricing and growth specialist.