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Accenture study shows growth in UK's 'neobanks'

Mar 06
Tags: Accenture
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Accenture study shows growth in UK's 'neobanks'

'Neobanks' - firms that provide financial products and services purely via digital channels, as opposed to incumbent institutions and challenger banks - could represent a growing opportunity for management consultants this year as they expand their customer bases.

Research by Accenture showed that neobanks in the UK added more than six million new customers in the second half of 2019, finishing the year with 19.6 million users globally.

Marching forward

The firm's Digital Banking Tracker showed that neobanks have increased their total customer base nearly threefold in recent years, expanding it from 7.7 million users in 2018 to nearly 20 million last year.

This growth rate exceeds that achieved by traditional challenger banks (2%) and incumbents (1%). Neobanks have consequently overtaken many of the UK's leading challenger banks in terms of customer numbers.

These brands have been seeking out opportunities to accelerate their growth, with eight out of nine neobanks in the Accenture study launching business banking services and expanding their operations internationally.

Discussing the findings, Tom Merry, managing director at Accenture Strategy, said neobanks are continuing their "march forward", with the expansion in their customer base combined with strong performance over incumbents in areas like customer experience and cost reduction.

But he added: "While there is no denying their popularity, profitability and competitive agility continue to be a challenge for neobanks."

Not all plain sailing

The research also highlighted some of the challenges neobanks are having to negotiate at the moment, including a lag between customer acquisition and deposits.

These businesses saw their customer growth rate slow down last year, from 170% in the first half of the year to 150% in the second half. Average deposit balances fell from £350 to £260 per customer.

Accenture noted that this drop-off in deposits could pose a risk to neobanks' long-term profitability.

"The fall in average deposits shows they still struggle to replace incumbents as the primary destination for monthly salaries," said Mr Merry.

"To succeed, neobanks will have to convert their rapid customer acquisition and cost-to-serve advantages into profit. To remain competitive with new players, incumbents will need to accelerate their move to lower-cost operating models and take advantage of their scale."

Other findings in Accenture's study showed that the valuation of neobanks included in the analysis was £9 billion. This was part of more widespread growth in fintech investments, which increased by 63% in the UK last year to almost £5 billion - almost the same as the total for 2017 and 2018 combined.

Neobanks attracted £1.4 billion of this funding, but at times when funding rounds and market conditions are less favourable, companies that struggle to turn customer acquisition and outside investment into profit could encounter financial difficulties, Deloitte warned.

These purely digital providers achieved average income per customer of £9 in 2019, which was an improvement from £4 in the previous year, but well below the £270 typically achieved by incumbent banks.

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