What next? Neobanks need to pivot their strategies to adapt and focus on generating profits in a harsher-looking H2 2022.
- Lower costs: Varo is finding out the hard way that high overhead costs that exceed revenues aren’t sustainable. One problem is that customer acquisition costs have generally risen for neobanks due to incumbents improving their digital offerings, and the market has become more saturated.
- Shift to more profitable products: Focusing on higher-profit products and dropping less lucrative ones will be important as newer entrants’ strategies shift away from merely attracting customers. Starling’s decision to focus on software as a service (SaaS) and mortgage lending, rather than European expansion, is one example of this kind of pivot.
- Expanding features for paid tiers: Challenger banks can use new features to draw in paying customers. Monese has aimed to achieve this through its Essential tier, which charges lower fees for international transfers and foreign exchange conversions.
Varo’s launch of a new high-yield savings account earlier this month could be risky. The high-interest offering is likely to draw in more users, but may not generate the revenues required to improve the neobank’s bottom line.
The big takeaway: Neobanks’ inability to turn a profit is nothing new, with less than 5% breaking even, according to Simon-Kucher & Partners. A growth-at-all-costs strategy made sense when the market was buoyant, but they now need to adapt and fight to become profitable to ensure their survival, as Starling has successfully done.
The leaner funding climate favors more established companies and increases pressure on far-from-profitable neobanks like Varo, which may lose investors who question their long-term sustainability. If a neobank shakeout occurs in the coming years, the banks that can adapt to remain profitable are the ones that stand to survive.