Europe’s neobanks search for elusive profit in SMEs and the US

Europe’s neobanks are switching their attention to small business banking and expansion in the US, as they strive for global scale and profitability.

Business banking will soon be a bigger revenue earner for UK neobank Revolut than retail clients, which already number about 10 million, according to its head of business Vaidas Adomauskas.

“We are the profit-generating side of the business,” he says, adding that Revolut will increase its number of business clients by four or five times by 2020, reaching well over a million.

Among the other UK-based neobanks, Monzo launched business accounts in March.

Meanwhile, Starling Bank – which has a longer-standing focus on business banking and lending, but targets smaller firms than, say, OakNorth – is also seeing its growth in that segment fare better than in retail since the coronavirus, in part thanks to its launch of television advertising targeting small and medium-sized enterprises (SMEs) in February.

Last year, Starling won a £100 million grant from the Capability and Innovation Fund, a UK government vehicle to reduce Royal Bank of Scotland’s dominant market share in SMEs. Monzo – whose chief executive Tom Blomfield was previously Starling’s chief technology officer – applied, but got turned down.

“A lot of the new banks that have pursued other strategies are now realising that in order to have a sustainable business, you have to be a bank, and part of that service and a very profitable part of the service is SME banking,” Starling’s chief executive Anne Boden tells Euromoney.

“I don’t think the big banks were ever worried about pre-paid cards that 18-year olds use to go to the coffee shop.”

Neobanks in the UK, where there is less competition for small business clients from mutual and public-sector banks, are pushing especially hard in business banking.

Even UK-based neobanks previously focused on retail – such as Revolut and Monzo – are taking the view that small business clients could be more profitable than retail, as the transactions will be larger, boosting the Visa and Mastercard interchange fees on which they rely.

SME financial needs are more complex, even for the freelancers and sole traders that the mass-market neobanks are targeting. This adds scope to charge account subscription fees, based on their ability to package things such as invoicing software into their apps.

The US

Starling, however, lags behind other large neobanks – including Germany-based N26 – in terms of its number of clients and its international roll-out.

That’s especially true in the US, where N26, Monzo and Revolut have launched through partner banks during the past year. In Monzo’s case, it has done so before it launched anywhere else in Europe.

By early 2020, N26 had about a quarter of million US clients. It hopes to make a profit there relatively rapidly.

According to Georg Hauer, head of German-speaking markets, N26 went to the cost and hassle of gaining a licence in Germany because the market for white-labelled banking products is less developed in Europe, so it had to cede more revenue, and had less flexibility on its products, than a partner bank in the US allows.

Boden, nevertheless, warns against the complexity of the federal regulatory set-up in the US, where banks need state-by-state licences. She says she knows the rest of Europe well from working at Dutch lender ABN Amro and notes the UK’s framework is still close to what exists in the European Union, despite Brexit.

Meanwhile, Starling’s discussions on a licence with the Irish regulator will be delayed by three or four months, due to the coronavirus, but Boden still hopes to have more clients elsewhere in Europe than in the UK within two or three years.

“We are fully focused on Europe, that’s not changed,” she says. “There’s huge opportunity across Europe for us, especially for SME banking.”

For further coverage of Europe’s neobanks, don’t miss the June issue of Euromoney