Neobanks are wagers that modern, digitally native services can supplant the traditional banking landscape. Founders flocked to the idea, investors wrote myriad checks, and despite how far along we are in the neobanking boom, startups are still being formed today to attack the problem space.
Lately, we’ve seen neobanks focused on targeted niches, often segmented by demographics. Startups are building for populations that may have been left behind by the traditional banking world. But not all are so specific. Many of the best-known neobanks are in fact rather general, hoping to attract a large customer base from one geographic area or another.
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You know their names. Chime is perhaps the best known in the U.S. market, Monzo and Starling are leading players in the U.K., and N26 is busy working to grow in Europe.
N26 released its 2021 financial results today, spurring this column to recollect data from other neobanks to sharpen our perspective on how the startup cohort’s players are performing. We’ve seen one neobank, Brazil’s Nubank, go public. Will others join it soon?
Let’s chat about new data from N26 and reprise what we know concerning Starling and Monzo.
The data is somewhat uneven, showing lots of growth but a rather divergent set of profitability outcomes. The picture that forms is one that indicates that while it is possible to build a neobank that isn’t bone-grafted to the venture capital markets, it can be a very long road to get to that point.
N26
N26, to refresh our memory, has raised a veritable ocean of venture capital during its life, including what Crunchbase describes as a €775 million round last year that valued the neobank at nearly €8 billion. We’re talking a late-stage startup here.
How is N26 doing? It grew nicely through 2021, but it’s as far from profitability as it was the year before. Observe:
Image Credits: N26 financial results
The N26 fiscal year lines up with the calendar period, so its fiscal years are simply the years as we understand them.
That in hand, we can see lots to like in the above: 50% gross revenue expansion at scale, even faster net revenue growth, and a two-part revenue model that is seeing faster growth in its smaller segment, implying that there’s more top-line expansion to come.
Then there’s the expense side of the coin. The company’s operating costs grew by about as much as its gross revenue did in dollar terms, albeit at a slower pace when measured in percentage terms. The result of that expanding cost base was a larger 2021 operating loss before risk provisioning.
What N26 has done is prove that its products are popular and that it can rip revenue out of its business activities. What it has not shown, through last year, is operating leverage leading to an ability to cut losses while it expands. (Though we would note that in 2021, the company’s net loss was smaller than its gross revenue, an improvement over its 2020 results and therefore worth noting.)
The above data is dated, so we can’t say what the company has managed this year, or whether its historical unprofitability has turned a corner. But through the booming 2021 year, N26 grew at what appears to be a high cost. Not that it made an error by doing so; it raised the above-mentioned round in 2021, the same year it posted the losses we just discussed. Investors were into it.
In 2022 growth at the cost of burn is less in fashion, which means that we can’t get too irked at N26’s operating results until we get more data.
Monzo and Starling
When we last looked at Monzo and Starling, we were surprised at the difference in their results. Starling managed to swap from pre-tax losses to profits in its most recent period (its fiscal year ending in March 2022) as its revenue scaled from £87.8 million to £188.1 million.
In contrast, Monzo had a rougher go of it:
Monzo reports that its June 2022 run-rate revenue reached £270 million. However, it’s “underlying loss before non-recurring items” widened slightly to £119.0 million in the financial year ended February 2022 from £116.2 million a year earlier.
When we had just the two companies’ results in mind, we were confident enough to say that at least some neobanks were going to manage to turn the profitability corner (something that was not as obvious back in 2020.) Sure, Monzo’s yearly losses were trimmed in its most recent fiscal year, but it was still unprofitable enough to be a country mile from breakeven.
Today, however, with N26’s results in hand, we have another example of a neobank that is growing quickly but at the cost of large recurring deficits. This makes Starling look more like an outlier than an indication that a good chunk of the neobanking sector is about to start kicking out real income.
While we have now seen that there is enough TAM for a number of neobanks to reach public-market scale in the same general geography, we haven’t yet seen that growth turn into net income, at least through the data that we have access to today. We’ll clarify our thinking when we get more information, of course.
From what we can see at the moment, there’s a profit divide running through the neobanking sector. There’s revenue aplenty, helping explain investors’ historic interest in the sector. But with profit now the word on everyone’s lips, the game has changed. Here’s hoping that neobanks that previously focused more on their top lines than their bottom are having a more profitable 2022 than we saw in their preceding numbers.
Otherwise, it’s hard to imagine that we are on the cusp of, you know, the wave of neobanking IPOs that we have been waiting on.