It’s a race to the finish line for the UK’s challenger banks, but can premium subscriptions push them over the edge?
The fintech world was abuzz with activity over the past two weeks as the three largest digital banks, Monzo, Starling and Revolut all released their annual reports for the last financial year.
What ensued was a flurry of comparisons between the ‘big three’ and their differing strategies to make enough money to not only survive but thrive
All three challengers mentioned above have subscription packages (Starling currently only offers Business account subscriptions) so, it begs the question: Can premium banking push fintechs to profitability?
Monzo was the first to release its annual report, in which it admitted that its 2020 results cast “material uncertainty” on its future following steep losses and only a small increase in revenues not helped by several delays in pushing out its paid-for Monzo Plus project.
Starling followed a week later, with its results showing “no material change” from coronavirus, soaring revenues (up 370 per cent), boosted by strong growth in SME customers, and fairly sizeable losses but not on the same level as its hot-coral-coloured rival.
Premium bank accounts often come with a host of perks that standard accounts just don’t have access to.
For instance, Revolut Premium and Metal users have access to travel insurance, access to airport lounges, unlimited cross border transfers, unlimited exchanges, and access to discounts from partner brands that standard users don’t get.
In 2019, Revolut earned £39.5m from its subscription services, up from £13.5m the year before, equating to nearly a quarter of its total revenue.
Felix Jamestin, head of premium product at Revolut, told AltFi: “Revolut has been focused on both serving our customers and being profitable from the very beginning. Hence, we’ve always had a focus on adding value to our paid plans and increasing uptake. And that’s what we continue to do.”
While Revolut’s growth of its fee-paying customers is impressive, it still only puts a slight dent in the banking service’s losses in 2019, which totalled £106.5m.
Revolut’s fee-paying customers would need to grow significantly to help propel it towards profitability, rather its other services, such as crypto trading which received a lockdown-aided boost, unlike interchange fees, which could be the thing to tip it over the edge.
“We will continue to offer free banking, but with the right products and the right pricing, we believe we can drive up customer numbers and revenue while also creating real value for our users.”
Currently, the digital bank offers three paid accounts, all of which are for its business customers.
Starling’s digital business toolkit costs £7 per month, its US dollar business account costs £5 per month and, lastly, its Euro business account costs £2 per month, with more paid-for services on the way.
Starling has long been pegged to be one first of the digital banks to reach profitability, a goal that has been slightly pushed back because of coronavirus, and a spokesperson for the bank confirmed that Starling still hopes to turn a profit by December 2020.
Out of the digital challenger banks, only one so far has reached profitability—OakNorth broke even in 2016 after just 11 months of operations.
Digital banking darling Monzo appeared to have struggled the most in 2019 and in the first half of 2020.
Monzo’s losses jumped 140 per cent to £113.8m in 2019, up from £47.2m the year before and its revenues, while there was an increase, it wasn’t enough to pull the bank through.
In its annual report, Monzo posted revenues of £67.2m, up from just £19.7m in 2018, casting “doubt of the Group’s ability to continue as a going concern.
Adam Davies, head of delivery at 11:FS, told AltFi: “Monzo’s second crack at a premium subscription model seems to be capturing market sentiment - and the subsequent revenue can’t come quickly enough.”
It seems clear that, for now, Monzo is heading down the ‘freemium’ route, rather than making money in a more traditional way for a bank, by lending money.
The digital bank did, however, tease other upcoming features in its annual report, no less some travel-friendly additions to rival its main competitors who offer perks such as travel insurance or airport lounge access.
Analysis from Sifted shows that, out of its main rivals, Revolut also earned the most per customer in 2019, making £24 per customer per year.
Starling and Monzo trailed behind with £21 and £20 per customer per year, respectively.
Adam Davies, head of delivery at 11:FS, told AltFi that, because of the coronavirus pandemic, there will be “more scrutiny on digital banks’ profitability over the coming months.”
“As we have seen with cross-industry SaaS models, the introduction of scale delivers better economies for the customer, so the challengers will be looking at Monzo Plus very carefully to see if the customer numbers continue to rise.”
There are other digital banks that relied first on a subscription model and then moved onto enticing customers with free accounts, such as Monese, with a spokesperson for the digital banking service confirming that, before it had its free account model, Monese’s users had to pay for their account.
The larger digital banks all rolled out a free account before launching their all-the-bells-and-whistles subscription accounts, so did they miss a trick by not rolling out paid accounts first?
I don’t think so, but it would be interesting to see if Monzo, the most recent addition to the paid account club, will reach profitability in a shorter time span than its main rivals, although given its annual report, I’m not so sure about that one.
Ultimately, subscription services work better for some than they do for others.
For instance, it’s clear that Starling’s paid for services, which are only available to its 180,000 SME customers, will be instrumental in pushing it towards profitability, and potentially making it the first of the three leading challenger banks to reach the coveted land of profitability.
Clearly there is an argument for launching paid accounts for users as a way to help digital banks edge closer to profitability, something that Davies told AltFi has been changed by the ongoing pandemic.
“What is clear is that Covid has put the brakes on volumes and margins of traditional revenue streams, such as foreign transactions and lending - so launching a premium subscription product that can demonstrate traction and lead to scale could just be the winning formula for a very unpredictable market,” Davies told AltFi.
Even smaller fintechs are pursuing paid subscription models, for instance, AltFi exclusively revealed that money management app Plum is to introduce a premium service, starting with cashback and discounts for its paying customers.
Spotify and Netflix enticed millions of customers across the world to pay for their services monthly, but it looks like fintechs still have a way to go with their own monthly subscription services.