The coronavirus pandemic has boosted adoption of challenger banks on both sides of the Atlantic.
That momentum is expected to continue into 2021 as users and businesses become increasingly comfortable with managing their finances through an app, and expect improved levels of customer service and usability.
"As we head into 2021 and beyond the pandemic, we see a wide open market with plenty of opportunity for not just challenger banks but for financial technology as an industry to set themselves apart from incumbents to gain market share," Marwan Forzley, CEO of Kleiner Perkins- and GV-backed payments platform Veem, told Business Insider.
Europe's crop of challenger banks Monzo, Starling Bank, and Revolut, all raised fresh funding in 2020, including a $500 million deal for Revolut which valued the startup at $5.5 billion.
Across the Atlantic, neo-bank Chime brought in a $485 million Series F at a $14.5 billion valuation, double its previous figure.
Forzley believes both Revolut and Chime lead the neo-bank pack, but also highlighted the prospects of Australian SME banking unicorn Judo, which recently raised a new funding round, and San Francisco-based challenger Step.
As these businesses seek to retain rather than simply grow users, and become sustainable operations, they are likely to add on more services beyond cheap foreign exchange. Revolut, for example, brought in millions of users with free foreign exchange, but the service isn't much of a money-spinner.
"The original proposition of challenger banks was to unbundle parts of a bank," Vinoth Jayakumar, partner at Draper Esprit. "2021 will see a rebundling of banking services as fintechs cross the trust chasm to continue user growth and penetration, in pursuit of sustainable business models."
Europe's fintech industry continued its run as being by far the biggest area in the bloc for venture capital investment, netting $9.3 billion in fresh capital in 2020 according to annualized data from Dealroom/Atomico. Despite some chatter of a bubble, Jayakumar anticipates more mega funding rounds for fintech firms.
Banks will get into new areas like ID verification and rewards
One potential new area for these new banks, particularly in North America, is identity verification.
"Only about 16% of US and Canadian banks employ the global identity verification technology needed for securely opening a financial account online, but we can expect this number to increase as those lacking in the technology begin investing in it," according to Zac Cohen, COO of Goldman Sachs-backed identification startup Trulioo.
Another area is loyalty rewards, Cohen added. "Beyond low fees, traditional banks will also need to find ways to compete against the other perks challenger banks offer such as a better, more personalized customer experience and an easier and faster onboarding process," he added.
More than ever, challenger banks will need to be innovative to survive in a Covid world. Australian neo-bank Xinja was recently shuttered due to the pandemic. On the whole, challenger banks are not profitable, and there is increased scrutiny on their business models.
In a recent CNBC interview, Revolut's CEO Nik Storonsky said: "Certain banks won't be able to survive this Covid thing because they are too reliant on payments and interchange, especially here in Europe." As a result, diversifying revenues and retaining customer growth numbers are likely to remain essential.
"In order for the leaders in the space to survive against incumbents and against each other, challengers will need to focus on ensuring their services are more innovative and different compared to what exists today," Forzley said. "If the service is going to yield minor incremental changes, it won't be enough for the challenger to truly take off. The services that will do well are the ones providing a fundamentally different and forward-thinking customer experience."