Tuesday 3 September 2019 1:00 am

Online-only banks set for growth spurt but questions over profit linger

The UK’s digital-only banks are set to treble their sales in the year ahead, as they ramp up their efforts to challenge high street rivals and disrupt the retail lending market.

Despite widespread concerns over their long-term profitability, fast-growing online lenders are on track to amass 35m new customers globally over the next 12 months, according to new analysis from Accenture.

Read more: Deutsche Bank boss to buy shares in firm

Challenger banks have snapped up roughly 5m new accounts during the first half of 2019, broadening their customer base beyond millenials in recent months and winning round older customers outside of London.

Yet despite the strong growth, financial technology firms such as Monzo and Revolut have struggled to turn popularity into profit, with the typical online-only bank losing an average £9 per customer.

“The big problem these digital banks have got is converting those customer numbers into something that makes money,” Gary Greenwood, a banking analyst at Shore Capital, told City A.M.

He said: “Particularly in a very low interest rate environment, it’s just not enough to have customers and take in deposits. You need them to be doing revenue generating activities and be borrowing from you in order to make a return.”

A wave of so-called ‘challenger banks’, which emerged as a threat to the traditional banks in the wake of the financial crisis, have achieved stronger cost and customer experience scores when compared with their traditional counterparts.

Read more: PPI mishap shows weaknesses of bank tech

Yet difficulties over gaining primary account customers, scrutiny over governance and increasing digital investment from incumbent banks have all posed hurdles to the fintech firms.

Tom Merry managing director at Accenture Strategy, added: “On the face of it, these banks show great promise as being a catalyst for positive change in banking, putting pressure on incumbent banks to invest in technology, convenience and customer experience. But with competition mounting and most digital banks continuing to be unprofitable, customer acquisition alone does not guarantee long-term success”