Monday, 11 December 2023

Digital challenger banks increase scale and stature

5 min read

Digital challenger banks have benefitted from the accelerated digital shift caused by the pandemic and are set to keep growing through innovative low-cost offerings, steadily building their market share and widening their product base, Moody’s Investors Service said.

Petr Paklin, vice president-senior analyst at Moody’s said, “Around half of the 20 largest challenger banks are profitable”. “They are financial technology firms with a banking licence and their speciality is leveraging technology to dramatically lower costs and improve the client's experience. Their streamlined operations and tech focus cuts time and costs and allows personalisation of products at scale. We expect the challengers will continue to gain in scale and stature,” he said.

Despite fast-growing adoption of online banking across the globe, challenger banks struggle to achieve primary bank account status, particularly in developed countries. Monetary tightening may mean that venture capital becomes less abundant in the months to come, while shortcomings
in compliance may result in regulatory fines and slower customer growth. However, the challenger banks' low-cost online model and multimillion customer base offers strong potential for cross-selling and further revenue growth. Moody’s expects they will continue to build market share through continued expansion, while gradually broadening their product mix.

The aggregate assets of the 20 largest challenger banks tripled to $319 billion between 2017 and 2020, according to Moody’s estimates, while their aggregate customer base jumped to 610 million from 167 million. WeBank and XW Bank in China outperformed the Chinese banking sector in 2020 with return on average equity of 27% and 15%, respectively, compared with 12% for the sector. Rakuten Bank in Japan, Tinkoff in Russia and OakNorth in the UK also outperformed their sectors in 2020.

Re-disseminated by The Asian Banker from Moody's

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