Investment and wealth services in the age of neobanks II. – The profitability dilemma of neobanks

Kattintson ide a magyar verzióért.

In our previous article about neobanks, we looked at how this relatively new business model disrupted the banking segment, with a specific focus on their entry into the investments and wealth management scene. The main proponent of their success has been their focus on growth, which is a common strategy that tech companies use during their startup years. In short, they use investor money raised through funding rounds to support their growth. As a result, even the big European names struggle to turn a profit or at least break even. Extremely competitive pricing strategies and huge marketing costs (as part of their growth strategy) and sub-optimal product penetration are some of the main factors that stand in the way of profitability for these players. 

It appears that some neobanks might have to shift to profitability sooner than they have expected. The negative impact of the pandemic, increasing pressure from investors and nearing target scale are all pushing them to shift from growth toward self-sufficiency and profits as some strategies are beginning to coalesce: 

  • Finding a niche segment and offering a more personalised service that incumbents simply cannot provide 
  • Price optimisation, e.g., cutting back on hooks, increasing automation or introducing premium plans or other exclusive services 
  • Expanding into more profitable areas 

Expanding into investments or asset and wealth management services can prove to be an excellent tool for neobanks to generate profit and maintain a steady growth of monthly active users and, as we discussed in our previous post, this seems to be quite a popular path that neobanks are stepping on, therefore it is worth taking a closer look at. 

There is no denying that investment and trading apps have been a huge success during the pandemic. A new generation of small investors flooded the market last year, mainly through investment platforms such as Robinhood and Stash. For instance, the time spent on Robinhood’s trading platform increased by 183% during the pandemic, which generated $682 million in payment-for-order-flow revenue in 2020, a 514% increase year-on-year. And it seems like neobanks are also trying to capitalise on this trend. Revolut already added limited trading capabilities to its app: users can buy and sell selected stocks, cryptocurrencies and commodities (what is considered by the company to be one of their most profitable product launches as of late). German Bitwala targets cryptocurrency investors, offering trading fees as low as 1% and earning interest on Bitcoin investments. With the crypto market’s surge in 2020, Bitwala is now the third largest neobank in Germany and is currently operating at a profit.  

Investments have clearly captured the attention and resources of neobanks, and wealth management services have also become a part of this trend. An apparent advantage of wealth management services is that they promise a relatively stable revenue from clients that is not exposed to user activity and seasonality as opposed to, for example, exchange-related services with their usual holiday downtimes. This sort of stability is a very strong reason for neobanks to enter the digital wealth management segment. They have the data about their customers’ spending habits that they can utilise to develop personalised products. All in all, with their current resources and knowledge, neobanks are well positioned to attract digital investors. 

Based on emerging trends, an increasing number of neobanks are indeed entering the wealth management scene as well as investments. SoFi, for example, originally launched as a loan comparison and debt refinance tool that grew into a company offering all kinds of personal financial services. By continuously collecting and operating with customer data and feedback, they have developed a set of complementary financial offerings (loans, investments, insurance, wealth management, banking) and transformed themselves into a comprehensive financial platform serving a broad spectrum of customer needs. 

As it currently stands, neobanks and other fintechs have a huge opportunity to bring about a similar digital transformation in the wealth management scene to what took place in banking, and by capturing this new, tech-savvy generation of investors that entered the market recently, these players could very well shape the future of the wealth management industry.  

Stay tuned for the next entry in our article series, in which we will look at the difficulties and opportunities incumbents face as opposed to neobanks. 

Sources:

https://www.atombank.co.uk/blog/path-to-profitability 

https://newsroom.accenture.com/news/uk-neobanks-near-20-million-customers-in-2019-but-customer-and-deposit-growth-rates-slow-according-to-research-from-accenture.htm 

https://www.finextra.com/blogposting/19756/why-neobanks-have-refocused-from-skyrocketing-growth-to-reaching-profitability 

https://a63b2072-9fff-4016-9aac-6cfc4de3e76e.filesusr.com/ugd/8d2a01_56236e7fe7674d07b292cefe091c666e.pdf 

https://fincog.nl/blog/15/the-profitability-challenge-for-challenger-banks 

https://www.ft.com/content/8522829e-2314-4476-9d52-b0e9e731f2f6 

https://medium.com/fintech-strategy/european-neobanks-review-of-2020-and-outlook-for-2021-d3304b0d034f 

https://www.revolut.com/hu-HU/legal/fees 

https://monzo.com/help/account-and-profile/our-new-fees-and-allowances 

https://www.starlingbank.com/blog/changes-to-our-terms-and-conditions/ 

https://fincog.nl/blog/18/performance-of-neo-banks-in-times-of-covid-19 

http://www.oecd.org/daf/competition/digital-disruption-in-banking-and-its-impact-on-competition-2020.pdf 

https://medium.com/fintech-strategy/neobanks-path-to-profitability-exploring-potential-route-e20902556ae8 

https://www.whitesight.net/post/top-20-neo-banks-of-2020  

https://fincog.nl/blog/15/the-profitability-challenge-for-challenger-banks 

https://additiv.com/2020/12/01/growing-opportunities-for-digital-banks-in-wealth-management/ 

https://www.accenture.com/us-en/industries/banking-index  

https://www.infopulse.com/blog/digital-banking-evolution-neobanks-neobrokers/ 

https://www.capgemini.com/news/research-world-wealth-report-2020/

WHY CHOOSE DORSUM

OUR CORE COMPETENCIES

20 years of experience ikon
20 YEARS OF EXPERIENCE
The company was established in 1996 and since that it has grown from a few employees into an organization with a staff of 300 for delivering integrated investments IT solutions.
Experienced project team ikon
EXPERIENCED PROJECT TEAM
We have an experienced project team, with team members working at Dorsum almost since the beginning, gaining a lot of experience in multinational and broad projects.
Continuous product innovation ikon
CONTINUOUS PRODUCT INNOVATION
We are delivering solutions based on the trends we monitor and on the knowledge we gathered over the decades. We listen to our customers to create innovative solutions.
Long term support ikon
LONG TERM SUPPORT AND PARTNERSHIP
We support our clients by offering them unique cooperation throughout the lifecycle of the products, managing expectations in terms of functionality, time and budget.

WOULD YOU LIKE TO LEARN MORE?

Simply write us a message and we will be in contact with you soon!

  • This field is for validation purposes and should be left unchanged.