Lloyds Banking Group, NatWest and Barclays carried out two remortgage transactions using tokenised sterling deposits, while a separate group of three banks including HSBC tested a person-to-person payment modelled on an online marketplace purchase, UK Finance said.

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As one of Europe’s leading digital banks, Bunq hoped for quick approval when it applied for a US banking licence in 2023. One year later, the Amsterdam-based fintech withdrew that application due to a misalignment between American and Dutch regulators. Now Bunq is trying a different route. In April 2025, it filed for a US broker-dealer licence, which would allow its American users to invest in stocks, mutual funds, and ETFs.

This two-step approach is only the first move in an ambitious American adventure, a Bunq spokesperson says, adding that the company will “start by making investing effortless and fully transparent, with no hidden fees.” It’s possibly a jab at some US competitors’ less transparent practices.

Prioritising growth above all else

Bunq is not the only European digital bank casting eyes across the Atlantic. UK-based neobanking leaders Revolut and Monzo have also been plotting entry into the US market, riding a wave of renewed investor interest following a post-pandemic fintech funding crunch.

The strategy is a no-brainer for these firms, given slowing customer acquisition in Europe after a decade of breakneck growth and intensifying competition that has compressed margins. After years of explosive expansion in their home markets, growth at home has cooled.

A sense of urgency now permeates the fintech sector as it matures, and it’s expected that only a few digital banks (also known as neobanks) will ultimately dominate globally. Many players have spent years in the red chasing scale, but now some are finally in the black. For example, 2024 was Bunq’s second consecutive year of profitability, reporting €85.3 million net profit (up 65% from 2023’s €51.6 million).

Bunq achieved this feat by capitalising on higher interest rates (earning yields on customer deposits) and maintaining lean operations. It’s a trend mirrored by peers like Germany’s N26 and the United Kingdom-based Monzo, which have also edged closer to breakeven as investor pressure to show viable business models mounts.

One persistent problem for neobanks is that they lag far behind traditional incumbents in the quintessential banking business, i.e., lending. These fintech upstarts have relatively small loan books, so they generate far less revenue from credit products than established banks.

Instead, much of their income comes from sources like interchange fees on card payments, subscription fees for premium accounts, and other transactional charges. This model worked during growth phases, but as expansion slows, the limitations become clear, especially since interchange fees in Europe are capped at low levels (around 0.3–0.4% of a transaction), unlike in the United States, where they average closer to 2%. In other words, European neobanks have been operating with thinner margins on payments and must convince investors they can find new revenue streams.

Compounding these business challenges, funding conditions have tightened, and regulators have toughened up in Europe, creating a more hostile environment for fintechs. Venture capital investment in European fintech plunged in 2023 (falling about 65%, from $24 billion in 2022 to just $8.4 billion in 2023), leaving many startups strapped for cash and under pressure to become self-sustaining.

Navigating the regulatory maze

Obtaining a full banking licence in the US requires approval from multiple authorities, as well as securing federal deposit insurance and meeting strict capital requirements. In practice, a foreign fintech that wants to operate nationally as a bank might need a US banking charter that can be federal (through the Office of the Comptroller of the Currency) or state-by-state. This might include obtaining FDIC (Federal Deposit Insurance Corporation) deposit insurance to protect customers’ deposits, securing a state money transmitter licence, and demonstrating sufficient funding and compliance.

This multi-layered regime creates a regulatory minefield for newcomers. It’s no wonder that rising American economic nationalism adds an extra barrier, warns Hatami, “Current instability in engagement with foreign providers is possibly making the rollout of a European fintech in the US problematic.” In short, even if laws are becoming more fintech-friendly in theory, foreign applicants may face subtle protectionist scepticism.

Dealing with the American payment infrastructure can also be tricky for entrants accustomed to Europe’s more modern systems. In Europe, neobanks benefit from near-instant interbank payment networks (such as SEPA Instant) that let customers move money seamlessly 24/7.

By contrast, US banks have been slower to adopt real-time payments, and the Federal Reserve’s new FedNow instant payment system launched in mid-2023; the decades-old reliance on paper cheques persists.

European fintech executives who view the United States as one single market often struggle, notes Dave Glaser, CEO of US payments firm Dwolla. Indeed, past attempts by European neobanks to crack the United States have proved traumatic. Monzo withdrew its US banking licence application in 2021 after regulators signalled that approval was unlikely.

Berlin-based neobank N26 also pulled the plug on its US operations in 2021, having failed to gain traction, in part because it never managed to offer its lucrative premium accounts or bring its full feature set stateside.

Revolut, meanwhile, has been stuck in regulatory limbo; a long delay in obtaining a British banking licence made pursuing a US banking licence impractical until recently. Without their own American banking charters, these digital banks have been unable to offer credit products or hold customer deposits directly, limiting their revenue opportunities in America.

“Previous attempts faltered due to underestimating the complexity of US regulation, overestimating brand pull, and launching without a compelling local value proposition,” observes David Donovan, head of financial services for North America at consulting firm Publicis Sapient.

For fintechs that cannot obtain their own banking charter, the shortcut into the market is partnering with an American bank, a model known as Banking-as-a-Service (BaaS) or using a sponsor bank. Monzo, for example, has partnered with Ohio-based Sutton Bank to hold American customer deposits, allowing Monzo to offer accounts without a licence of its own.

Similarly, smaller British fintech Cleo (which provides a personal finance chatbot) entered the United States by teaming up with community banks (Thread Bank and WebBank) and now serves over seven million customers in North America. These arrangements let fintechs piggyback on a licensed bank’s infrastructure.

However, the compromise is that the partner bank typically retains a slice of the interchange fees and imposes its own compliance requirements. Given that interchange fees on the American credit and debit cards are significantly higher than in Europe, those fees are a major revenue source, and splitting them “eats into your margins,” notes Stephen Greer, a banking industry consultant at SAS.

Recent events have also highlighted the risks of the partnership route. In early 2024, the American fintech world was rocked by the collapse of Synapse, a once-promising BaaS (Backend as a Service) provider that sat in the middle between fintech apps and their partner banks.

Synapse’s “gross mismanagement” of customer funds led to around $85 million going missing and the firm filing for bankruptcy. One of Synapse’s key partner institutions, Evolve Bank & Trust, became embroiled in the fiasco as customers of various fintech apps lost access to their deposits. Regulators have since intensified scrutiny of these bank-fintech partnerships.

The US Office of the Comptroller of the Currency (OCC) and the FDIC have even solicited public input on tightening oversight of BaaS arrangements, and the FDIC proposed new rules requiring daily reconciliation of funds between tech firms and banks to prevent another Synapse-style incident. The lesson for ambitious neobanks: hitching your American expansion to a partner bank can carry significant compliance and reputation hazards if that partner or an intermediary mismanages funds.

Given these constraints, more ambitious European neobanks have decided that going it alone with a full licence is a bet worth taking, despite the up-front pain. Revolut, for instance, still offers its cards and accounts in the US via a partner (Missouri-based Lead Bank) and holds a US broker-dealer licence, but it has made clear it is pursuing its own US banking licence. Bunq also views the broker-dealer move as a prelude to eventually launching a fully licensed US bank of its own.

“The best strategy for a European fintech is to create a US entity and nurture this by tapping into the US investor markets, from venture capital all the way to IPO. And to play down its European roots as far as possible,” Hatami advises.

In other words, treat the US expansion almost like founding a new company, build a dedicated local team and product, raise money from American investors who understand the market, and don’t lean too heavily on your European brand if it doesn’t resonate locally. The subtext is that American consumers (and regulators) might be more receptive if a service feels homegrown rather than an import.

Cut-throat competition in the USA

Even with a charter in hand and funding secured, European neobanks will land in a fiercely competitive arena. The US retail banking market is crowded with over 4,000 institutions, from giants like Chase and Bank of America to regional banks, credit unions, and community banks, all fiercely guarding their customer bases.

New entrants must be prepared for slower growth and higher customer acquisition costs than they faced in the relatively consolidated markets of Western Europe. US fintech darlings like Venmo, SoFi, Zelle, and Chime have set a high bar with massive marketing budgets and ubiquitous branding.

On the other hand, the sheer size and diversity of the US market mean new entrants can aim for niche segments that are still large in absolute terms. Unlike in smaller European countries, in the United States, a niche play can yield millions of customers. European neobanks can try to differentiate by offering one-stop, digital-first banking solutions to Americans who are hungry for modern user experiences.

This might include slick apps that combine checking, savings, investing tools, real-time spending analytics, budgeting features, and more under one roof, something many US legacy banks have struggled to deliver.

Publicis Sapient’s Donovan said, “Many US fintechs are built on banking-as-a-service models that limit control and innovation. European firms, having built more of their stack in-house, can differentiate on both cost and customisation.”

In other words, a neobank that owns its own tech and platform can potentially out-innovate competitors who rely on white-label banking providers. For example, a European entrant might roll out features Americans aren’t used to seeing from their bank, think instant international transfers with low fees, or multi-currency accounts that update exchange rates in real time.

One obvious opportunity area is remittances and cross-border banking, given the large population of immigrants and expats in the United States. Roughly 20 million US residents are foreign-born Americans from countries in Europe, Africa, and elsewhere. These globally mobile customers often face steep fees and frustration when sending money abroad or managing finances across borders. A case in point is the success of Wise (formerly TransferWise), a London-based platform that has gained a strong US following by offering international money transfers with transparent fees and exchange rates.

“Wise addresses international money movement with a clarity and fee structure that is still uncommon in the US,” Hatami notes.

Bunq, for its part, explicitly says it is targeting digital nomads and expats. The company points out that “nearly five million European expats, entrepreneurs, and professionals” live in the US and often struggle with banking bureaucracy.

Those users are frustrated by traditional banks that aren’t set up for cross-border life. Bunq’s hope is that its experience serving such customers in Europe (with features like travel accounts and easy international transfers) will resonate strongly with this segment in America.

However, cultural differences in consumer expectations also come into play. American customers tend to be far more credit-focused than Europeans. Decades of aggressive credit card marketing have conditioned US consumers to expect rich rewards programmes (cashback, airline miles, points, etc.), sign-up bonuses, and easy credit.

New entrants who only offer debit cards and basic accounts might find it hard to lure customers away from incumbent banks or specialist credit card issuers unless they, too, dangle attractive perks that can be expensive to provide.

Additionally, Americans exhibit a certain stubborn loyalty to traditional banks. Despite the prevalence of fintech options, most consumers are not itching to switch their primary bank. A recent survey by Phoenix Synergistics found that 81% of US consumers considered themselves “loyal” to their main financial institution. Lerner from Javelin agrees, “Americans are largely satisfied with their financial institutions. They are not eager to switch banking relationships.”

According to Javelin’s research, roughly three-quarters of consumers say they are unlikely to move their primary account to a new provider.

This inertia indicates that a foreign neobank requires a compelling proposition or significant incentive to encourage Americans to give it a try. It might require offering significantly better interest rates, zero fees, or unique products to entice customers to overcome the hassle of switching, especially when many Americans have multiple products like direct deposits, bill pays, and maybe a safe deposit box tied to their current bank.

Some industry insiders believe that European neobanks focusing exclusively on direct-to-consumer services face significant challenges in the US due to high customer acquisition costs and established brand loyalties.

“Without a pivot to some differentiated credit product, prepaid and debit offerings often don’t generate enough revenue to warrant those costs,” notes Kevin Fox, chief revenue officer at Thredd, a UK payments processor that expanded to the United States and has helped several neobanks scale internationally.

Fox suggests that fintechs stand a better chance if they expand into business services (B2B) or partner more closely with businesses. For example, some challengers have found success offering expense management cards and software to small companies, or white-labelling their tech to employers and other brands.

These business customers can be more lucrative and cheaper to sign up than millions of individual consumers. Indeed, several European fintech “unicorns” have been extending into SME banking or payments (even Revolut has rolled out business accounts and tools for companies). This B2B focus could provide a beachhead in the United States where pure retail banking might be hard to crack.

Money lies in the stock market

Beyond immediate revenues, a major prize that comes with a US expansion is the possibility of a public listing on a US stock exchange. New York’s capital markets remain the deepest in the world, and IPOs in the US tend to achieve higher valuations and attract a bigger pool of investors than those in Europe.

For Europe’s most valuable fintechs, a US footprint makes it more plausible to court American investors and eventually float on the Nasdaq or NYSE. Both Revolut and Monzo, for instance, are widely expected to go public by the end of the decade, and their leaders have hinted at preferring a US listing over a London one.

Revolut’s CEO, Nik Storonsky, has even publicly complained about the UK’s business climate and suggested the company might list in the US if conditions in London don’t improve.

Such decisions have political undercurrents: European governments are eager to have their “unicorn” fintech champions list at home, while founders and early investors often lean toward the higher liquidity and valuations available in New York.

“Revolut was recently granted a UK banking licence, probably in part because of a promise to list in London, not in the US. Most companies want to list on Nasdaq or the NYSE, raise a ton of money, and cash out. But governments want to keep their unicorns close to home,” Azizov observes.

He adds that if a European fintech truly wants to win in the US market, “they will need to go all in, full teams, full infrastructure, full commitment. They may even need to move their HQ.” In other words, dabbling in the US with a small satellite office won’t cut it if the goal is to become a global player, as it requires a fundamental shift to treat the US as core to the company’s identity.

The holy grail for digital banks is proving that their tech-first, product-led model can generate consistent profits even in the world’s most competitive and entrenched banking market. If a European neobank can crack that code in the US, achieving American-scale profitability while keeping true to its innovative roots, it would validate the entire fintech disruption playbook. But that remains a big “if.” Until then, Europe’s neobanks will continue eyeing American wallets, cautiously optimistic that they can bring something new to the land of red, white, and plenty of green.

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In plain words, a digital-only bank provides banking facilities exclusively through digital platforms such as mobile, tablets, and the internet. It offers basic services in the most simplified manner with the help of electronic documentation, real-time data, and automated processes.

In the West, where consumers demand flawless digital experiences and smartphone usage is almost ubiquitous, neobanks are gathering at an unheard-of speed. Deloitte claims that over 25% of banking consumers in the United Kingdom and over 15% in the United States now primarily or secondarily source their financial needs from digital-only institutions.

Reflecting rapidly evolving consumer behaviour and paving the way for a redefined financial ecosystem, these figures are projected to quadruple by 2030. Neobanks are ready to satisfy a generation used to on-demand services and real-time responsiveness, while traditional banks struggle to remove decades of bureaucratic baggage and antiquated technology.

Fintech integration: The neobank engine

Fundamentally, neobanks are fintech: the combination of finance and technology that lets them provide flawless, quick, highly customised banking services. Unlike conventional banks, hampered by antiquated IT systems, neobanks are designed around cloud-native, API-first technology.

Their quick response to customer feedback, fast rollout of new features without long downtime or integration lags, and rapid innovation (enabled by this technological edge) allow them to stay ahead of customer expectations. Standard options now are real-time transaction alerts, predictive budgeting tools driven by artificial intelligence, dynamic savings objectives, and frictionless account registration.

Consider Monzo as a case study, its gamified savings pots and segmented cost tracking simplify and even make budgeting fun. Conversely, fintech giant Revolut has become a worldwide financial super-app, combining crypto trading, stock investing, travel insurance, budgeting tools, and even foreign money transfers into one simplified platform. These features enter financial lifestyle management beyond banks.

Also, Revolut will now be investing over €1 billion in France over the next three years, marking a significant milestone in its expansion strategy across the European Economic Area (EEA).

Apart from their natural characteristics, neobanks have adopted the platform model: partnership with specialised fintech companies via open APIs. The marketplace of Starling Bank lets users combine outside solutions for chores ranging from tax filing to asset management, therefore depicting how neobanks may provide breadth without compromising central competency. Through partnerships and data monetisation, this ecosystem strategy not only improves user experience but also generates fresh income sources.

Regulatory difficulties: Managing the compliance maze

Neobanks are not immune to regulatory difficulties, notwithstanding their promise and polish. Their lack of physical infrastructure sharpens the scrutiny. Working just online calls for rigorous adherence to Know Your Customer (KYC), Anti-Money Laundering (AML), fraud prevention, and data privacy policies, often across several countries.

Recent controversy highlights these difficulties. The UK’s Financial Conduct Authority fined Starling Bank £29 million in 2024 for AML compliance breakdowns. Concurrent with this, Revolut paid the Bank of Lithuania €3.5 million in penalties for similar failings. These incidents expose a trend: fast-growing digital banks can surpass their internal systems for control.

Many neobanks scale before confirming controls, unlike traditional institutions that have spent decades creating compliance infrastructure and auditing procedures. The outcome is rising pressure from central banks to improve due diligence and openness, as well as regulatory backlash. For example, the European Banking Authority has started closely monitoring digital-only banks and imposing capital adequacy rules and improved reporting requirements.

The Office of the Comptroller of the Currency has cautioned fintech-backed banks in the United States about poor risk management policies, which have resulted in probes and increased regulatory friction.

Developing confidence in digital domain

Any banking relationship is built mostly on trust. Neobanks have to provide a feeling of permanence and dependability even while they offer speed, convenience, and creativity. Lack of physical presence can lead to psychological distance; outages, however brief, can inspire mistrust.

Synapse’s demise in 2024 exposed this frailty. Providing backend technology for hundreds of neobanks, their unexpected bankruptcy left thousands of clients unable to access their money. This crisis made clear the systematic reliance many digital banks have on outside vendors.

Neobanks are creating strategic alliances with chartered institutions more and more in order to guarantee deposit insurance and regulatory protection, therefore boosting confidence. While their counterparts in the UK depend on FSCS coverage, many Americans work with FDIC-insured banks. These guarantees provide consumers concerned about losing access to funds some peace of mind.

Another battlefield is security. Advanced cybersecurity tools such as biometric authentication, behavioural analytics, fraud detection engines, and encrypted communication channels are being included by several of the top digital banks. Given the frequency of phishing and social engineering attempts, customer education also becomes important.

McKinsey reports that more than 70% of consumers base their bank choice on digital security. Neobanks that mix strong security with open communication are gaining user trust more and more.

Driving the frontier of digital banking

Many digital-only banks not only survived but also changed industry expectations. Each has a different strategic approach catered to their consumer groups and markets.

Based in London, Revolut is the best worldwide financial super-app available. Having over 55 million customers and a presence in more than 35 countries, it provides retail banking, crypto, travel, and small business support, among other things. Its €1 billion investment in France helps Paris to be its European anchor following Brexit.

Targeting underprivileged consumers, Chime, American-based, aims to offer features like fee-free overdraft, early paycheck deposits, and automatic savings to help low-and middle-income consumers solve actual pain issues. It is now a major participant in mobile banking downloads and has over 20 million customers.

Lovable in the UK for its openness and clever in-app communications, Monzo crossed into profitability in 2024 and has since started its US operations. The bank’s open policy has helped them build a very devoted clientele; their vibrant debit cards have become a cultural phenomenon.

Berlin-based N26 appeals to European Union (EU) citizens with a simple UI and understated feature set. Following Brexit-related licensing problems out of the UK, it turned even more focused on continental Europe and lately revealed intentions to re-enter the American market via alliances.

Notable also is Varo, the first US neobank granted a national banking charter. Varo controls more than Chime, which runs through partner banks, since it manages deposits alone. This increases its regulatory risk but also its control.

How countries approach neobanks

Every area presents different consumer habits and legal systems that influence neobank approaches. Early Open Banking rules and the Financial Conduct Authority’s (FCA) creative approach have helped the United Kingdom lead in digital banking. From this rich environment, Monzo, Starling, and Revolut all emerged.

By contrast, the United States offers a more fractured scene. Although the market is vast, state-level licenses and federal monitoring hamper national implementation. Usually, using organisations like The Bancorp Bank or Stride Bank, most neobanks follow a partner bank model. But as Synapse shows, this dependence model can turn into a serious weakness.

With its harmonious Single Market, the European Union offers a middle ground. Uniform restrictions enforced by the European Central Bank and European Banking Authority include consumer protection rules and capital buffers. Still, compliance is not simple, especially given rigorous General Data Protection Regulation enforcement.

Cultural variations are important as well. Though they value privacy more highly than bells and whistles, European consumers often demand fewer of them. Gamified tools and prizes appeal to American customers. These subtleties influence marketing approaches, product development, and app design.

Market forecasts and growth pathways

Consensus among market experts is that digital-only banking is not a fleeting trend. With Europe and North America leading the way, Statista projects global neobank transaction volumes to reach $1.5 trillion by 2027. Adoption rates in the 18–34 age range are currently over 40% in metropolitan areas and rising yearly.

Money moves are still strong. Neobanks drew about $15 billion in venture finance worldwide in 2023 alone. Interest is still strong even if investor attention is moving from growth-at-any-cost to sustainable unit economics, especially in embedded finance bets in developing countries.

Still, for most, profitability is elusive. Apart from Monzo and Starling, many neobanks burn money in consumer acquisition.

Long-term sustainability depends critically on monetising consumers through lending, wealth services, or subscription tiers.

What the analysts say

Author of Bank 4.0, futurist Brett King argues, “We’re seeing a change from banks as places to banks as platforms. Neobanks are only a starting point.”

The next stage, according to CB Insights, will be “contextual finance,” in which services, from ride-sharing to online shopping, are immediately included in user paths.

Bain & Company stresses client retention, meanwhile: “Users may be fickle with digital banks, but the right UX and emotional branding can inspire loyalty.”

According to Accenture’s 2025 research, if given equal services, 60% of Generation Z would rather bank with a tech business than a conventional institution. This should be a warning as well as a chance, since neobanks have to keep changing to stay ahead of major tech invasions.

For neobanks, the road ahead is one of complexity and potential. They have to develop from transactional tools into complete financial systems if they are to flourish.

Improving compliance systems will not be negotiable, not only to prevent fines but also to draw institutional collaborations. Radical openness, constant uptime, and proactive client assistance all help to develop trust. One must be quite diversified.

Offering mortgages, buy-now-pay-later choices, or robo-advice services will generate fresh income sources. Smart pricing, cross-selling, and automation all help to engineer profitability. At last, reach and relevance will depend on ecosystem integration—that is, including services in various digital settings.

Neobanks and challenger banks are changing finance, not only how it is done but also what it entails. They have questioned the idea that banking had to be intimidating, physical, or sophisticated. Though obstacles in trust, profitability, and regulation still exist, their path is upward.

These institutions will not only upset but also change the financial system as we enter a mobile-first, data-driven age. They represent the present of banking, fast approaching a world in which every financial contact is intuitive, ingrained, and empowering rather than its future.

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Monzo said in its report, “Our revenue streams have been significantly impacted by the Covid-19 pandemic and resulting macro-economic uncertainty. Regulatory reviews will also lead to stricter financial crime requirements. This may result in lower forecasted customer numbers and revenues, along with increased costs associated with correcting areas of concern. This increases the risk that the Group will not be able to execute its business plan, which could adversely impact its ability to generate a profit or raise sufficient capital to meet future regulatory capital requirements.”

With that, the challenge for the digital bank is to find ways to generate revenue from its 4.4 million users. More recently, it launched Monzo Plus which has had a good start with more than 50,000 active users. The service was launched a month ago. The launch of Monzon Plus arrived the digital bank’s first attempt at a premium account offering which did not perform as expected.

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Monzon reported an annual post-tax loss of £113.8 million, which is up from £47.1 million it lost last year owing to investments in US expansion, hiring and marketing. The loss was reported despite the neobank’s revenue more than tripling to £67.2 million from £19.7 million.

Monzo said in its report, “Our revenue streams have been significantly impacted by the COVID-19 pandemic and resulting macro-economic uncertainty. Regulatory reviews will also lead to stricter financial crime requirements. This may result in lower forecasted customer numbers and revenues, along with increased costs associated with correcting areas of concern. This increases the risk that the Group will not be able to execute its business plan, which could adversely impact its ability to generate a profit or raise sufficient capital to meet future regulatory capital requirements.”

The pandemic has had a significant impact on the banking sector at large. Last month, Monzo said that it might lay off 120 employees to cope with the crisis. The bank is now trying to avoid further redundancies,  media reports said. Its revenue streams have been drastically impacted by the pandemic.

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The digital bank had first launched Monzo Plus last year. However, it was scrapped after receiving a host of complaints from customers, media reports said.

It seems that the bank has a made a significant portion of its revenue from fees generated when customers use their cards. Now it is diversifying its revenue streams by introducing loans and overdrafts. In addition, it is also taking cuts from third-party services, media reports said.

Monzo faced a lot of business challenges last year. The company’s valuation has reduced by 40 percent to £1.25 billion last month on the back of the new coronavirus pandemic. According to a memo sent by Monzo to its employees, “Unfortunately we haven’t been able to achieve the goal of preventing the risk of redundancy at this time. It’s genuinely heartbreaking to share the news.” The pandemic is having a huge impact on fintechs.

That said, its co-founder Tom Blomfield also stepped down as CEO and directed his focused more toward a product-focused role in the company.

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According to a study by market research firm Propeller Insights nearly three-quarter of UK consumers engage in online banking, 77 percent of them are considering switching over to a neobank and only 21 percent of them might continue to visit a bank branch.
“In the UK especially, where the financial services market is quite developed, consumers are more willing to at least test banking alternatives. The culture of the UK consumer is vital to the success of new digital banks, says Koen Vanpraet, who is the CEO of PXP Financial, a complete end-to-end payments provider. To second Vanpraet’s view, Propeller Insights’ statistics showed that 65 percent of the country’s younger demographic between 18 years and 34 years use neobanks as alternate banking avenues.

As it appears, neobanks have changed the era where retail consumers traditionally preferred to visit bank branches for paperwork. “Over the past two years, we’ve seen an influx of consumers choosing neobanks or challenger banks as an alternative to traditional banks that we are all so familiar with,” Ian Wright CEO of SmallBusinessPrices.co.uk tells in a statement given to International Finance.

Perhaps the growing popularity of neobanks suggest that they are filling the digital expectations gap in the country. “They are helped by the fact that many of their consumers fall under the bracket of ‘digital natives’ — those who have grown up using technology. And their digital services go a step beyond what many of the traditional banks are offering,” says Ian Bradbury, CTO for Financial Services, Fujitsu UK, in an email interview with International Finance.

A study conducted by Finder on digital banking in the UK on how people might perceive banking in the future, found over one in 10 Brits have fully switched over to a neobank and 47 percent of them keep less than £1,000 in a neobank. Also, two-thirds of consumers have expressed interest to fully adopt neo banking services in the future. Certainly, the numbers highlight that neobanks are doing things differently. “They have agile ways of working, relatively cheap, stable to run and equipped with the latest technology,” Bradbury says.

Digital innovation: The hallmark of digital banks in the UK

Last year The Forrester Banking Wave: UK Mobile Apps, Q3 2019 report reviewed four traditional banks and three neobanks, which attest to Bradbury’s view. The report found that neobanks are competing with traditional banks on the back of intuitive services and retail consumers are experiencing a paradigm shift in the country’s financial landscape.

The first approach that neobanks have taken is to determine what financial tools and services consumers actually need, and then to find more meaningful ways to deliver on the potential. For example, Monzo, Revolut and Starling are making an impact on older consumers and those left vulnerable by bank branches closing down in the country. Starling and Monzo have partnered with the Post Office and PayPoint respectively to allow consumers to deposit cash in person. Here the idea is to equally serve those who find it cumbersome to use digital technology. Revolut has launched a Plain English customer contract to ease the signing up process.

For businesses, Amaiz is targeting sole traders and small business owners underserved by the banking industry. “Our research shows that this group has particular needs and we want to focus on that,” Steve Taklalsingh, managing director of Amaiz tells International Finance.
While traditional banks are busy carrying big trading assets on their books, neobanks have become more consumer-centric across demographics and are fixated on technology innovation. “Ultimately, digital innovation will be crucial in an increasingly competitive market and neobanks will have to stay ahead of their rivals on this front,” Bradbury says. “So their overall success lies on how well they can innovate — and those who attract the most consumers are those who can differentiate their products in the most creative ways.”

Simplicity and transparency is what these neobanks have been tapping into in the last two years. Amaiz has developed a mobile banking app that provides a 24/7 phone service — a unique selling point in the market today. The app uses smart analytics to manage and track all payments. “We do that because our customers are not typically people who sit in front of a computer all day. They are serving their customers — and therefore, are more likely to want to talk to someone,” Taklalsingh says. “We’ve integrated voice recognition software for top level security and to give our customers the best experience.” Neobanks integrating human touch into their sophisticated digital services have an important stronghold that is missing from much of the traditional banks’ offerings.

Gen Z wants speed and convenience

But what might seem like a quick win for startups is often a lot more to do with hype than substance, Vanpraet explains. The continuous and often advanced neo banking services are changing the traditional understanding of retail banking, but they have a long way to go. “This comes down to the majority of customers who are still sticking with traditional banks. When a new digital bank is introduced, those interested in the industry may look at what they offer and switch services if they think it is beneficial, but the vast majority of ‘casuals’ will stick with what they know.”

PXP Financial carried out a research on Gen Z payment habits in the high street and their top requirement was convenience. Today, customer experience necessitates transaction methods that are the most convenient and fastest. The research highlights that personal data security is of utmost importance for UK consumers. “Despite challengers providing a speedy and slick user experience through digital apps, many consumers still do not feel they are secure,” Bradbury says. This observation is compatible with statistics showing that 40 percent of UK consumers don’t trust neobanks to keep their data safe, and a further 49 percent plan to bank only with a traditional bank unless neobanks can demonstrate they have the right technology to protect them.

This point is debatable. Globalwebindex’s survey last year found that neobanks are more likely to be used by the country’s top income groups. The UK consumers who have used at least one service of Monzo, Starling, Revolut or Atom increased by 83 percent — an impressive growth rate since the third quarter of 2018.

Together, the neobanks in the country are expected to triple customer count to 35 million over the next 12 months, compared to 12 million users last September, according to an Accenture report. In the first half of 2019, five million consumers opened an account with them — resulting in percentage gains in primary account holders. The average account balances increased five-fold to $422 in the first half, from $84, the report noted.

Arguably, this trend could work against traditional banks if they are too slow in rendering advanced digital services. In fact, Vanpraet points out that “change can be slower for traditional banks.” The past two years have seen neobanks demonstrate robust financial performance broadening the competitive playing field of banking in the UK.
Neobanks create significant cost advantage with the average operating cost per customer ranging between £20 and £50, compared to over £170 with a traditional bank.

Performance analysis of top neobanks in the UK

Last year Monzo surpassed 2 million total users — and is expected to add 200,000 new accounts every month, compared to 60,000 a month in the previous year. Monzo crossed £40 million of annual run-rate revenue last May.

Another top neobank Starling aims to break-even by 2020 — targeting 6.7 percent share of the UK SME banking market in the next five years. Since November 2018, it has seen a rise of 110 percent in customer numbers and 200 percent in deposit base.

Revolut, one of the world’s biggest fintech unicorns, was valued at £1.3 billion last year. In 2018, it recorded £58.2 million revenue and cost of sales grew at 247 percent, improving the gross profit margin. Recently, it raised $500 million in a series D funding with a $5.5 billion valuation — and has set an ambitious goal to onboard 100 million customers in the next five years.
Revolut’s global expansion testifies the success of neobanks business model designed to take on big players in the industry, Bradbury says. “But they have a challenging future ahead of them — and it’s certainly an interesting space to watch.”

Neobanks are fighting layers of complexities

Despite the numbers, their market share is low as they are relatively new. Consumers still require their banks to have a physical presence. In fact, 56 percent of consumers show concerns over bank branches closing down in the next five years, says Bradbury, reinstating that neobanks are under strain to build trust and value.

The challenges for neobanks are not subtle. Many of them struggle to churn revenue from existing customers who are used to free services. Following that is their greatest test to prove to investors their ability to make profits — or they might not reach the level of funding received by traditional banks, Bradbury says.

Traditional banks versus neobanks: Threat or hype?

The creation of neobanks has the potential to challenge traditional banks, but for now, “they are still being seen as an add-on service, rather than a primary service,” Vanpraet says. It is impossible to turn a blind eye to the credibility and trust that traditional banks have established over the years. This should be worrying for neobanks, says Vanpraet, pointing to the fact that they are often used for smaller, less important payments. However, “neobanks proving themselves over a sustained period of time will lead to consumer trust on par with traditional banks,” Bradbury says.

The allure of going digital has increased among UK traditional banks. “As neobanks become more popular, traditional banks will hit back,” Bradbury explains. And the big news is “traditional banks already see neobanks as competitors, and this competition will only grow as more UK consumers start to use them as their main current accounts,” he adds.

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Monzo carried out an extensive trial period for its new current account services that lasted around 12 months and saw participation from 2500 businesses in the UK.

Tom Blomfield, chief executive at Monzo told the media, “We’ve heard how difficult it is to find a business account that delivers what businesses need—and have also heard over and over that, it can take days, and even weeks, to get an account up and running.”

“Companies need stress-free banking that just works, so they can focus on what’s important—growing their business.”

Monzo has introduced two new segments in this current account category. Firstly, a free Business Lite account which includes a basic business account, receipt scanning, and web access, and secondly a £5/month business Pro account that adds tax pots for automatically saving towards a tax bill, invoicing, multi-user accounts and more.

In order to access the new current account services, businesses will be required to have a Monzo personal account.

According to reports published earlier this year, Monzo is planning to re-launch its premium bank account services. Monzo launched the product in April 2019; however, it was taken offline in September after poor customer feedback.

Monzo, along with Revolut and Starling Bank are preparing for a potential shutdown to curb the spread of the Covid-19 virus. Reportedly, most of these neobank’s staff are working from home.

Monzo, which is yet to make profits, is planning to add 500 new members to its workforce this year. This neobank currently has 4.8 million customers in the UK.

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Founder Tom Blomfield told the media that he expects the workforce to go up from 1,500 to 2,000 employees this year as part of its growth strategy. Its employees are currently based in London, Cardiff and Las Vegas.

Monzo loans £120 million on deposits of around £2 billion. According to Blomfield, Monzo had plans to float within three or four years, however. It incurred a loss of £47.2 million in 2018, encouraging the bank to hold talks with investors about the next best move. 

Now Monzo is valued at around £2 billion. The digital bank was launched in 2015. Since then, the bank has attracted 3.8 million customers in the UK with its offerings Coral Card and track-spending data, media reports said. 

Monzo received a banking licence in 2017. Last year, the digital bank’s attempt to trademark its signature bright coral colour card was rejected. The move was to secure Monzo’s brand identity against companies using a similar colour tone in their products, media reports said. 

Also, Blomfield said that Monzo is largely focused on monetisation. It plans to drive revenue using methods that are practical and transparent. Monzo now accounts for more than half of the digital challenger bank market on the basis of new data, media reports said. 

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“It is a really great signifier of how far we’ve come since the last round,” Tristan Thomas, Monzo’s head of marketing, told CNBC.

She added that Monzo has doubled its customer base to more than two million during the same period.

The recent valuation cements Monzo’s place as one of the leading fintech startups across Europe, despite recording a loss of 33.1 million pounds last year.

The new round of funding for Monzo was led by US based startup accelerator Y Combinator that has also funded companies such as Airbnb and Stripe.

Other participants in the funding round are Latitude, General Catalyst, Stripe, Passion Capital, Thrive, Goodwater, Accel, and Orange Digital Ventures.

Even though the company has raised enough capital, Monzo will use this fund fight for market share in the US, according to CNBC. Monzo has already announced its plan to launch operations in major US cities such as Los Angeles.

Despite its recent valuation, the digital bank is yet to make profit. The biggest challenge for Monzo will now be to convince its customers to make it their preferred choice of bank and also start making profit.

Revolut, one of Monzo’s competitors with about 4.5 million was valued at £1.3bn at its last fundraising.

Launched in 2015, Monzo was initially offering prepaid debit cards manageable through a mobile app. Facilities such as cheap foreign exchange rate helped the startup garner over two million users over a short period of time. The company got its banking licence in 2017.

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