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Europe’s digital banks got a ‘wake-up call’ in 2020. And consolidation could be coming

The icons for the Monzo and Starling Bank banking apps on a smartphone.

Adrian Dennis | AFP via Getty Images

LONDON — In a year when online banking has taken off, you’d think it would be a golden opportunity for Europe’s digital challenger banks to shine.

Research from Mastercard last month found that 42% of Europeans handle their finances digitally more frequently than they did before the coronavirus pandemic, while 62% are thinking of switching from physical banking to digital platforms altogether.

But many of the so-called “neobanks” have stumbled in 2020, with the likes of Monzo and Revolut revealing deepening losses and getting hit with a multitude of complaints from customers about service.

Monzo, whose founder Tom Blomfield stepped down as CEO earlier this year, caused concern after flagging “significant doubt” about its ability to continue “as a going concern” due to disruption from Covid-19.

Now, neobanks are under tremendous pressure to show they mean business. Investors are pushing the fintech challengers to demonstrate that they’re able to monetize their products, and eventually make a profit. Experts say the space is ripe for some consolidation.

“Thanks to this crisis, there has been a wake-up call to some of these neobanks,” Ali Niknam, CEO and founder of Dutch online bank Bunq, told CNBC in an interview. “To run a healthy business, you need healthy business conduct.”

Can the digital banks survive Covid?

For Niknam, not all digital banking upstarts will make it through the Covid-19 pandemic.

“The complexity of having a start-up, having to compete with these gigantic incumbents and having such a heavy burden of regulation is a mix that not many can muster,” he said. “Those who survive this economic downturn will have a great future ahead.”

Like many start-ups, Bunq is itself loss-making, with Niknam expecting the firm to lose around 14 million euros ($18.5 million) this year.

The firm’s founder said he is able to fund those losses with the profit he makes from another company he owns, internet domain name provider TransIP. To date, Bunq hasn’t accepted any external funding from venture capitalists, and Niknam remains its sole shareholder.

Nik Storonsky, founder and CEO of Revolut, agreed with Bunq’s boss, and suggested some firms could become the target of takeovers bids.

“Certain banks won’t be able to survive this Covid thing because they are too reliant on payments and interchange, especially here in Europe,” he told CNBC.

Much of the start-up banks’ revenues come from fees which are generated each time a customer uses their card to make a payment.

“We’ll clearly see some winners and losers in this game in Europ