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Do European neo-banks have a future?

European neo-banks are struggling with losses, a limited number of clients, low deposit per client and heavy operational and marketing costs. They are still far from profitable. And far from putting a real threat to incumbent banks.

Monzo, Revolut, N26 are leading neo-banks in Europe. They did achieve something: shaking a bit the industry, getting a few million clients and lowering the ridiculous margins imposed by banks on individuals for money transfers and currency exchange. However, the outcome remains marginal. Information technology has revolutionized the finance industry from the inside, with the massive use of new software, but unlike industries such as tourism, retail, advertising or mobility, the incumbent retail banks have not been overthrown or massively shaken by the new entrants. Furthermore, it cost a lot of money to establish a bank and a trusted brand, which may have been slightly underestimated by the newcomers. The neo-bank customer have very little money on their neo-bank accounts. For serious projects and savings, people still trust more established names, even though these large banks have seen their reputation going down with the public. All in all, European neo-banks are really far from profitability and from being a real threat to the traditional banking establishment. Their main benefit might have been to push incumbent retail banks to improve their online services for their customers.

So what will happen? The neo-banks seems to be the little fish in the pond. A pond where the real fight might happen between large banks and large tech willing to capture their share of the financial services market. Some of the neo-banks might be attractive preys for incumbent retail banks to improve their image and show they do something about digital transformation. An opportunity to reconnect with the millennial generation that can't stand the heavy processes of the high street banks.

The incumbent retail banks might be more worried about the next move by large techs. This is the real threat for them: large tech have cash, they know how do handle millions of clients and their data, they already have strong brands, their image is not worse than the banks and they have the financial means to pursue a true technological transformation of the financial services industry. A fascinating fight might be coming up between giants.

It will be a matter of focus by the large tech as well. They do have the resources and capabilities to take over any market in the world, but they can't take them all at once: finance, healthcare, fashion, mobility... We have seen many recent signs of interest for financial services by Amazon, Apple, Alibaba or Facebook but it will take dedication and focus to take on this fight. That's where the incumbent retail banks may have their chances if they do, in the meantime, transform themselves to improve the trust bond with their customers - retail customers and small businesses. A trust that has been seriously deteriorated by the 2008 crisis and that the Coronavirus crisis did not help to rebuild, with so many examples of small businesses poorly managed by their banks during the crisis. This is where incumbent banks should learn just one lesson from the neo-banks' initial dream: try to put customer care at the heart of your business.

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