Neobanks: Will They Finally Achieve Profitability?

The Exchange Returns: Analyzing Neobank Financial Performance

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Establishing a fintech company that directly serves consumers requires substantial financial resources. This cost is amplified when entering a competitive market already populated by established businesses and well-capitalized startups.

This realization stemmed from our analysis of operational data from several neobanks in late 2020.

Understanding Neobanks

Neobanks function as software platforms built on existing banking infrastructure. They provide customers with digitally focused, mobile-accessible, and frequently lower-cost banking solutions.

A global movement is underway to modernize consumer banking, resulting in the emergence of neobanks in virtually every market. Private investors have actively funded these competing neobanks due to their potential to acquire and retain customers, generating long-term revenue streams.

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Many neobanks have attracted significant investment in growth and product development, leading to substantial operating losses for these unicorn companies. Specifically, while Chime, a U.S. consumer fintech company, has reported positive EBITDA – a measure of adjusted profitability – numerous other neobanks have struggled to demonstrate a clear route to profitability based on available data.

However, this situation may be evolving.

Recent financial reports from Revolut, as covered by TechCrunch, reveal a deeply unprofitable 2020. Nevertheless, a closer examination of its quarterly performance indicates positive trends. It appears neobanks are beginning to align their expenses with their revenue generation.

Examining Recent Results

Today, we will analyze the key financial results from Revolut and explore data from Starling and Monzo. Is the encouraging financial news from Revolut indicative of a broader trend across the neobank sector?

We will investigate whether the positive financial signals observed at Revolut are isolated, or if they represent a wider shift towards improved financial health within the neobank landscape.

The ability to achieve sustainable profitability remains a critical challenge for these digital banking innovators.

Revolut’s 2020 Financial Performance

A comprehensive analysis of Revolut’s business was recently conducted by Romain Dillet, offering a broader perspective. However, our focus remains solely on the company’s financial outcomes.

Key financial highlights include:

• A 57% increase in revenue, rising from £166 million in 2019 to £261 million in 2020.
• Gross profit experienced substantial growth, reaching £123 million in 2020, a 215% improvement over 2019 figures.
• The gross margin reached 49% in 2020, representing a near doubling according to Revolut’s assessment.
• An operating loss of £122 million was recorded for 2020, compared to £98 million in the previous year.
• Total loss for 2020 amounted to £168 million, an increase from £107 million in 2019.

Essentially, the data reveals robust revenue expansion coupled with enhanced gross margins, leading to a significant surge in gross profit during 2020.

Despite the increase in gross profit, the company still incurred substantial losses. This discrepancy can be attributed to an uneven profit distribution throughout the year.

The following chart, sourced from the company’s report, illustrates this point:

A clear correlation exists between gross margin – the portion of revenue remaining after covering costs – and the company’s operating losses. As the gross margin climbed to 61% in Q4 2020, Revolut’s operating loss decreased to just £6 million.

Positive momentum continued into Q1 2021, as noted by the company’s CFO earlier today.

These are remarkably strong results for the start of the year. Therefore, while Revolut experienced losses in 2020, these were concentrated in the earlier months, with improvements observed as the year progressed, and 2021 appears promising.

Revolut is not the only neobank demonstrating encouraging financial results. Starling Bank, following a £272 million funding round earlier this year, announced its own key performance indicators:

• January 2021 revenue reached £12 million, a 400% increase compared to January 2020.
• Gross operating costs remained “broadly flat.”
• The company achieved a positive operating profit for four consecutive months, with net income exceeding £1.5 million monthly.

The number of customer accounts also nearly doubled year-over-year, according to the company. These figures are notably positive. Coupled with Chime’s demonstrated ability to generate adjusted profits, we see a group of neobanks positioned for potential long-term success.

However, not all neobanking ventures have experienced positive outcomes in 2020. Monzo completed a down round of funding at the close of 2020, and its latest results – though somewhat outdated – revealed significant unprofitability.

Even assuming Monzo’s profitability hasn’t improved since the last available data, the collective financial performance of Starling, Revolut, and Chime is encouraging. This is positive news for investors who have committed substantial capital to the neobanking sector, as well as for employees and stakeholders like pension funds with exposure to venture assets.

While neobanking has yet to consistently demonstrate positive and growing free cash flows over an extended period, the recent results suggest that this outcome is achievable in the future.