How are Neobanks Transforming the UK’s Banking Sector During BREXIT?



Despite an increase in the customer base, the existing barriers need to be addressed for the long-term profitability of neobanks.

With Brexit, neobanks will play a decisive role in the future of the financial services sector in the UK. Also known as challenger banks, neobanks offer digital and off-premises financial services by operating mainly across the internet or the mobile phone app. The concept of neobanking originated in the UK with services similar to that of traditional banks.

Neobanks have evaded the banking sector in the year 2014, and since then, they have become amongst the fastest growing digital entity in the financial services sector.

report by A.T. Kearney estimates neobanks to have up to 85 million customers in Europe by 2023, with over 20 million belonging from the UK. The report also states that the customer base in retail banks has decreased to over 2 million between 2011 and 2019.

Owing to the stringent rules regarding the immigration process in Brexit, many immigrants are forced to go back to their respective countries. The traditional banks take months for account transfer procedures and other procedures necessary for financial services. With the ongoing pandemic and tumultuous relationship between the UK and the EU, this extended period adds to the burden of economic uncertainty. Henceforth many are resorting towards neobanking as a quick and effective solution. With a millennial-friendly focus, these mobile-based services are gaining traction amongst all-aged customers.

In September this year, the ‘Global Neobank 2020 Report” was released by The report presents a detailed description of the digital banking space and how it is altering the consumer experience across the global banking sector.

Neobanks in the UK are outperforming exceptionally compared to traditional banks. Revolut, the leading neobank of UK, has a customer base of four million people, including 1.1 million in the UK. Another UK-based neobank, Transferwise, launched in the year 2011, has over 9 million customers.

report titled “Accenture’s Digital Banking Tracker” states that more than 6 million new customers were added in the UK-based neobanks during the second half of 2019. It also states that the customer base in neobanks increased from 7.7 million in 2018, to almost 20 million in 2019, with a current growth rate of 150%, which outpaces the 2% growth for traditional banks and 1% for incumbents. Additionally, the report also observes that in 2019, the UK Fintech investments in neobanks increased from 63% to almost five billion pounds between 2018-2019.

However, with an increase in popularity, neobanks are also rendered to face many challenges. The report by Accenture points out that despite an increase in the customer base, the customer growth rate fell from 170% to 150% in the second half of 2019. Additionally, the average deposit balance dropped by 25% from 350 pounds to 260 pounds per customer. The report observes the difference in customer acquisition and deposition of money to be a major challenge in these banks’ long-term profitability.

Moreover, the report points out that except for Oakland, UK-based neobanks lost between five pounds and fifteen pounds last year due to weak revenue streams and increased spend on customer acquisition.

A PwC report also indicates that despite the pros associated with neobanks, narrow range of product offerings, inability to offer branch experience, and operational inexperience adds to the shortcomings of neobanks.

Tom Merry, Managing Director of Accenture Strategy, states, “While there is no denying their popularity, profitability and competitive agility continue to be a challenge for neobanks. The fall in average deposits shows they still struggle to replace incumbents as the primary destination for monthly salaries. To succeed, neobanks will have to convert their rapid customer acquisition and cost-to-serve advantages into profit. To remain competitive with new players, incumbents will need to accelerate their move to lower-cost operating models and take advantage of their scale.”