There are odd projects in Europe, such as Smartbank or the bank attempted in France by Orange, which are not exactly successful, but there are also some projects that really seem to open the door to innovations in the financial sector.
In France, Fortuneo (Crédit Mutuel Arkéa) has always prioritized profitability over growth, and, with a distribution model, Italy’s Isybank (ISP) wants to do online banking from the fixed bank. Nickel, which will soon celebrate its 10th anniversary, has been on the French market since 2018. In the realm of fintechs, Britain’s neo-bank Starling has been in business since 2022.
New banks profits in 2023
Finally, in the realm of neobanks, Britain’s Revolut announced its second profitable financial year, with a net profit of 5.8 million pounds (6.8 million euros) in 2022, on revenues of more than 900 million pounds. This is less than the previous year’s result, but it is rare for a new bank to record two consecutive profitable fiscal years.
Today it is the turn of Dutch fintech bunq, which for the first time since its creation in 2012 announced a net profit of 53.1 million euros, making it the second most profitable neobank in Europe after Starling and one of only 4 percent of the world’s neobanks (out of 400 in total) to be profitable.Last July, despite opposition from one of its shareholders, the fintech raised 44.5 million euros, maintaining its valuation at about 1.6 billion euros (32 times earnings). This is no small feat given the difficult fundraising environment, in which fintech valuations have plummeted due to rising interest rates.
Bunq, which positions itself as a bank—a holder of a banking license in Europe—for the self-employed and mobile small businesses, is benefiting from its strong growth, with more than 11 million customers and, most importantly, some €7 billion in deposits (€600 on average per customer), an amount that has quadrupled in one year. These deposits now earn 4 percent interest from the European Central Bank, a gain Bunq intends to use to continue its international expansion.
The new bank plans to return to the United Kingdom and has applied for authorization as an electronic money institution, even though it already had British customers before Brexit. It will face a regulator, the Financial Conduct Authority (FCA), which has become much more demanding of fintechs. Revolut, one of the UK’s largest fintechs, is still waiting for its UK banking license!
“The UK is home to the second largest number of digital nomads in the world, so it is critical for us to be there,” says Ali Niknam, Bunq founder and CEO. Neobank has also applied for a full banking license in the United States.
Betting on artificial intelligence
In addition to being profitable, Bunq also claims to be the first bank in Europe to use a generative artificial intelligence (AI) platform, called Finn, for its customers. Since its launch last year, this enhanced chatbot is said to have already answered nearly 500,000 questions about financial statements or transactions, all in natural language. The range of questions can be wide, such as “What is the restaurant I go to the most?” “How much interest do I have in my savings?” or “What is the best restaurant for a business meeting in the city center?
This technological wager is sometimes fraught with pitfalls. In the Netherlands, the neobank was criticized by the regulator in 2022 for using new technologies, such as machine learning, to fulfill its obligations to fight fraud and money laundering! It took an appellate ruling to agree with Bunq, which evidently wanted to use algorithms rather than an army of lawyers to fulfill its obligations.
A fragile model
The fact remains that, behind its technological guise, Bunq operates as a traditional bank, with interest income and service fees. According to the neo-bank, fee income increased by 30 percent from the previous year to 53.5 million euros. Interest income increased significantly to over 176 million euros in total, according to unaudited data (final figures are expected in June).
At a bank like Revolut, interest income accounts for about half of revenues, which ultimately closely resembles the revenue structure of a network bank. The profitability of these operators shows that disruption is possible.
But the situation remains fragile for many operators, including in the professional and self-employed market segments. According to Les Echos, Société Générale is even considering selling its Shine branch, which boasts 150,000 customers (but how many active customers?), acquired at a high price in 2020, and in which the bank has invested about 100 million euros.
Victims of competition
Not all experiments succeed in a highly competitive world. Société Générale wants to sell its Shine branch, which has 150,000 customers. Orange Bank would like to divest its branch for Anytime professionals, partly because Orange Bank is winding up and the company will go back to doing only telecommunications.
The problem is that there are a lot of good ideas, but it is not certain that a theoretical innovation will turn into something that will really be attractive and generate active customers. Then, in the end, it’s about ideas, and copyright on an idea is very difficult to exercise.