Digital banks operating in the UK edged towards 20 million customers in 2019, but slowing customer and deposit growth mean the lenders could face challenges on long term profitability, new figures show.
Digital lenders including Monzo, Revolut and Starling gained over six million new customers in the second half of last year to reach a global total of 19.6 million, according to a report by professional services firm Accenture.
This growth represents an almost tripling of their customer base in a year. But while their growth rate of 150 per cent dwarfs the one and two per cent recorded by incumbent and traditional challenger banks respectively, their pace of expansion is slowing.
Digital banks’ customer growth rate slipped 20 per cent in the second half, while their average deposit balance also fell by a quarter from £350 to £260 per customer.
“While there is no denying their popularity, mounting evidence suggests that profitability continues to be a challenge,” said Accenture Strategy managing director Tom Merry.
“The fall in average deposits points to their current struggle to consistently replace incumbent banks as the primary destination for monthly salaries,” he added.
The report, which covers nine digital first or digital only banks founded within the past decade, said that digital lenders need to demonstrate they could translate rapid customer acquisition into income.
While the total valuation of the lenders included in the analysis now stands at £9bn, most have struggled to generate revenues. While their average income per customer increased from £4 in 2018 to £9 last year, this remains far behind the almost £270 per customer generated by incumbents.
With the exception of SME lender Oaknorth, all of the digital banks included in the report made losses of between £5 and £15 per customer last year.
“There are still stark challenges that need to be addressed and the current mismatch between sky-high valuations and profitability is becoming increasingly clear,” said Merry. “While a buoyant fundraising market has been able to support them so far, this has yet to be tested in tougher conditions.”
Merry said that the “elephant in the room” for all banks was whether and when big tech competitors enter the market. “If it does, it will likely shake up the sector in a way that could make the current fight for customers and deposit balances pale into insignificance.”