Challenger banks are not currently profitable because they “haven’t spent a minute of their lives today focusing on profitability”, according to Sergei Galperin, executive director at JP Morgan.
Galperin made the comments at Money 2020’s online event Moneyfest, speaking on a panel alongside John Doran, general partner and founding member of investors TCV and Paola Papanicolaou, group head of innovation at Italian bank Intesa Sanpaolo.
The panellists discussed whether profitability should be the aim for the likes of Monzo, Starling Bank, and Revolut – which Doran was an early investor in.
In November 2019, research by The Fintech Consulting Group (Fincog) found that all of the major challenger banks had struggled to create profitability for investors and shareholders. According to the research Monzo recorded a loss of $58m, Revolut a loss of $40.3m, and N26 a $35.3m loss.
Papanicolaou suggested that challenger banks had so far struggled to create profits because of three factors; their business models, their low number of clients, and pricing.
“Challenger banks today have a business model that is uniquely digital, which is good but maybe it is not good enough. The second thing is that the number of clients probably is still too low. And the third thing I would say is that their offering or the pricing is probably not the best combination, together with the other factors,” she said.
Doran however, disagreed. He said customer numbers were not an issue with the likes of Nubank having around 25 million customers and Revolut holding around 15 million, adding that it is difficult to put all challenger banks into the same boat.
“If you look at any other industry that has seen massive digital disruption, I don’t think you’ve seen profitable companies in the first two, three, four or five years, which is basically where we are in the whole neo-bank/challenger bank journey. It’s very, very early,” he said.
Doran added that profitability is probably “not the most important thing” for challenger banks at this point in time, while growth rates for these banks had been “in the hundreds of percent”.
“With Google and Facebook, a lot of people had questions about whether they would become profitable then, all of a sudden they had a huge number of users. And then, when the operating leverage started to kick in, the profits were huge over a sustained period. I think you’ll see something very similar here across the winners in this category,” Doran added.
Galperin agreed with Doran’s point that profitability is perhaps not the target at this point in time, but there is a debate over whether that is the right course of action.
“If you’re going to focus on profitability like OakNorth, it became very profitable with very few customers, very early on. If you’re focused on growth and taking over the world, then profitability has taken a backseat and you want to be investing in growth, spending money on marketing, spending money on investing and are not going to be profitable,” he added.
Papanicolaou and Doran both agreed that focusing on profitability was not as important as looking at sustainability.
“Of course, companies have to be profitable [eventually]. But most of all, they have to be sustainable. You can’t always reach out to the market and do fundraising. At a certain, point, you’ll have to pose the question: ‘Am I actually profitable?’,” said Papanicolaou.
“We shouldn’t be talking about profitability here,” Doran said. “We should be talking about sustainability. Is what they’re [challenger banks] doing sustainable?”
Doran said there were many examples of companies who had gone onto “greatness” that didn’t try to monetize straight away, and that ultimately only time will tell if this is the right approach for the challenger banks as well.
“The story isn’t written… we’ll know over time,” Doran said.