Neobanks face setbacks amid high cash burns and small income streams
A challenging economic environment, reduced funding and valuations, and increased scrutiny by regulators have placed enormous stress on neobanks around the world. Over the past few years, the industry has seen its fair share of business failures often due to high cash holdings with little or no revenue stream, according to a new analysis from WhiteSight, a research firm focused on the fintech space.
The analysis, published earlier this month, looks at past failures and setbacks in the digital banking and neobanking sectors, and delves into business closures, exits, license application withdrawals and business turnarounds to understand the areas where digital challengers are struggling.
According to the report, at least 16 neobanks and digital banks have shut down around the world in the past couple of years, mostly due to their inability to develop a sustainable revenue spurt and secure funding.
In particular, the research found that the US saw a majority of independent neobanks struggling to survive.
Denizen, a San Francisco-based challenger bank incubated from BBVA’s New Digital Business Unit, shut down in 2019 after just one year of operation. According to WhiteSight, the neobank, which provided a global, borderless account for expat banks, was struggling to achieve the scale required to sustain operations.
For Beam Financials, a US mobile savings app, the closure of the business was forced by regulators. In 2021, the company ceased operations under a preliminary settlement with the Federal Trade Commission (FTC) after a 2020 CNBC investigation revealed that dozens of customers were unable to withdraw their money.
The company was mandated to reimburse approx. USD 2.6 million in customer deposits and interest, and banned from operating a mobile banking app or other products or services that can be used to deposit, store or withdraw money. Misrepresenting interest rates, restrictions and other aspects of financial products or services was also prohibited.
Outside the US, other regions, including Asia-Pacific (APAC) and Europe, have also recorded notable business failures.
In India, Yelo Bank closed operations in 2021 after failing to find product market fit and raise follow-on funding. Before the shutdown, Yelo Bank, which focused on gig workers, had raised over $80 million and garnered more than 4 million downloads on its app.
In Australia, at least two licensed challenger banks had to close after failing fundraising efforts and failing to develop sustainable income streams.
Digital bank Xinja, which managed to amass more than 37,000 customers, collapsed when it started paying customers interest on their deposits before they received income from lending.
In late 2020, the company announced that it would discontinue transaction and savings account products, and return its authorized deposit banking institution license, citing “COVID-19 and an increasingly difficult capital-raising environment affecting who is willing to invest in a new bank” which the main reasons why it is veering away from being a bank.
Rival Volt Bank has suffered the same fate, announcing in June 2022 that it would shut down, return deposits and sell its mortgage book after failing to raise enough funds to support the business.
Volt Bank was the first startup to receive a banking license back in 2019, and had raised a total of A$212 million before shutting down.
In the UK, neobank apps Loot and Dozens went out of business in 2019 and 2022 respectively, after running out of cash. Loot, which offered a digital-only checking account aimed at students and millennials, had about 250,000 registered accounts, and Dozens, a banking app that offers a variety of budgeting and analytics tools to help users save and invest more effectively, claimed about 60,000 customers.
Neobank failures and setbacks by country, Source: WhiteSights, 2022
Besides business closures, the WhiteSight research also looks at notable challenges and stumbling blocks facing neobanks, noting that a number of players have halted their expansion plans, focusing instead on cutting unnecessary expenses and profitability.
German-licensed digital bank N26 closed its UK operations in 2020 citing difficulties created by Brexit, and in 2022 pulled out of the US after acknowledging that the investment and administration time required in the country made N26 too stretched.
N26 served around 200,000 customers in the UK and 500,000 in the US.
In the US, Solid, formerly known as Wise, pivoted in 2020 from small and medium-sized enterprise (SME)-focused neobanking to embedded business banking. Today, the company offers a digital banking stack built for platforms and banks, focusing on opportunities in embedded finance and banking-as-a-service (BaaS).
Neobank’s failures and setbacks by category, Source: WhiteSights, 2022
Despite being one of the most talked about fintech segments in the last decade, neobanks have struggled with profitability. Consulting firm Simon-Kucher estimates that only 5% of the world’s reported 400 digital banks actually break even, and most earn less than $30 in revenue per customer per year. Also, cash burn rates are stellar for several banks, with annual losses exceeding $100 million in some cases.
Featured Image Credit: Edited from freepik
