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Posted on February 24, 2020 by staff

Digital banks ‘face challenges’ despite closing on 20m customers

Digital banks may struggle with long-term profitability despite adding six million customers in the second half of last year, according to a new report.

Data from professional services firm Accenture showed that the online-first institutions are closing on 20m customers and that numbers almost tripled in 2019.

The growth rate of 150 per cent in the second half of 2019 compared very favourably with the one per cent of traditional banks, and two per cent of high street challengers.

However it was down 20 per cent on the previous period while the average deposit balance at digital banks 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,” Accenture Strategy MD Tom Merry reflected.

“The fall in average deposits points to their current struggle to consistently replace incumbent banks as the primary destination for monthly salaries.”

Currensea co-founder James Lynn told BusinessCloud last week that the recent exit of German digital bank N26 from the UK market may be indicative of a lack of engagement with challenger banks.

He believes that the majority of customers of the likes of Monzo, Revolut and Starling are not using these accounts for large-scale payments such as mortgages.

The nine digital banks’ average income per customer increased from £4 in 2018 to £9 last year but lags way behind the high street banks’ £270 per customer.

In fact, the digital banks made losses of £5-15 per customer last year – with the exception of business lender OakNorth.

“There are still stark challenges that need to be addressed and the current mismatch between sky-high valuations and profitability is becoming increasingly clear,” Merry added.

“While a buoyant fundraising market has been able to support them so far, this has yet to be tested in tougher conditions.”