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Who’s Winning The Digital Bank War?

Digital banks are no longer the obscure, rarely heard of cousins of traditional banks. Banks operating in various markets – the US, the UK and Europe included – are now household names to millions. And many countries are instituting new policies and pathways for these banks to flourish.

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But which digital banks are winning the fight to the top? There are a few different ways that these banks are expanding, getting customers and proving their worth.

Global Versus Local

There are two expansion strategies adopted by popular digital banks: fight and flourish in their country of origin, or expand and acquire users worldwide. One bank that has opted for the latter is Revolut.

Revolut was founded in 2015 in London. Since then it has expanded to the entire European Economic Area, Canada, Australia, Switzerland, Singapore, Japan and the US. The digital bank has over 10 million customers and looks to continue its international growth strategy to grow this base. If you search for Revolut with any country name, it’s likely that they have a dedicated page for that country complete with a waitlist. This strategy will surely help them with their global expansion plans as it can see where demand is.

Another country that has adopted the global expansion strategy is German digital bank N26. N26 reported having 5 million customers as of January 2020. The bank operates in the European Economic Area as well as the US. However, this global takeover strategy has seen missteps. In April, it closed its UK operations due to Brexit.

One bank that has employed the local growth strategy with success is UK digital bank Monzo. Also founded in 2015, Monzo is currently only available to residents of the UK. It announced plans to launch in the US in 2019 but did not give an estimated launch date. However, focusing on the UK has allowed for impressive growth rates. As of February 2020, it had 3.8 million UK customers. This represents more than half the challenger bank market share.

Digital Bank Profits

Launching a digital bank is an expensive endeavour. Securing banking licences, developing products that meet regulatory requirements and marketing, among other things, rely on deep pockets. These are usually the pockets of investors.

Successful digital banks need to be successful at raising funds. Revolut’s latest funding round was $500 million, taking the total money it had raised to $836 million. However, profits are nowhere in sight. Revolut posted a loss of £107.4 million in 2019. This tripled its losses from 2018.

There are actually only a handful of profitable digital banks. This includes OakNorth from the UK and Tinkoff Bank in Russia.

So is profitability a sign of a successful digital bank?

To their investors, it’s certainly an important metric, but less so for the digital banks themselves. An N26 executive told the Financial Times that profitability isn’t a core metric, while Monzo’s chief executive Tom Blomfield admitted that revenue was at once seen as a bad thing by the bank, equating it to ripping off customers.

A more useful success metric might be valuations. A frontrunner for valuations comes out of Brazil. Nubank is currently valued at a massive $10 billion. The bank focuses on the Latin American market. Other notable digital banks are at nearly half this valuation: Chime in the US is valued at $5.8 billion, Revolut is at $5.5 billion and N26 is at $3.5 billion.

Which Digital Bank Has The Best Product?

The entire lure of digital banks is their products. These are usually app-based, sleek and feature-packed. All popular digital banks are popular for a reason, but which ones come out on top?

Revolut offers a number of innovative features. You can hold multiple currencies in your account (including cryptocurrencies), get smart analytics to help you understand your spending, receive discounts and cashback and save money on overseas spending. Revolut is also known for launching outside-of-the-box features, including charity donations through the app, insurance, stock trading and a junior account for kids.

Monzo offers a few different types of accounts, including business and personal options. Its current accounts utilise spending notifications, spend categories and fee-free transfers in the UK. It also offers a Plus account for €5 a month. With this account, you receive interest on your balance, customisable categories and virtual cards. You can also see other bank accounts in the Monzo app.

Brazilian digital bank Nubank does not offer a bank account, but instead its account is a “payment account”. Nubank lets you earn interest for any money you hold in your account. You can also benefit from free, unlimited transfers and the Nubank rewards program. The real lure for Nubank customers is the ability to get a bank account with no fees. A large part of the population is unbanked and unable or unwilling to get an account from one of Brazil’s five main banks. These banks charge high fees and you can easily be blacklisted for the failure to make payments.

So are any of these products better than the others? Not particularly. Monzo and Revolut offer more features than Nubank, but these don’t necessarily make them better accounts. Nubank’s product is designed to serve the needs of unbanked users and so doesn’t need as many bells and whistles. Each of the banks mentioned have also found success for serving the needs of their user base, whether that is no-fee transfers, interest on funds deposited or cheap foreign currency spending.

And The Best Digital Bank Is...

The answer is: it depends. Digital banks were developed for a purpose, which is to offer a new way of banking. If we focus on valuation, Nubank comes out on top. However, Nubank is designed to serve the needs of unbanked users and so doesn’t come with the features offered by other banks. This is also why looking at product features can’t tell us which bank comes out on top.

Each digital bank has found success for serving the needs of its user base, whether that is no-fee transfers, interest on funds deposited or cheap foreign currency spending.

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