It’s been 10 years exactly since I published my first report on digital banks. And what a decade it’s been! Over this time, a wave of challenger banks have launched, winning millions of customers globally with better customer experience (CX) and more competitive pricing (and bright, hot coral cards!).
This success was not inevitable. At the onset of the COVID-19 pandemic, I wrote that many digital banks would struggle to scale profitably amid the economic slowdown. However, I also predicted that a handful would innovate and thrive, capitalizing on their digital DNA to innovate further around customers’ needs. A number of digital banks have indeed failed, faced with soaring acquisition costs and struggling to grow profitably. Tired of hitting barriers to digital transformation, many incumbents also launched their own digital banks or acquired existing ones — with meager success. 2022 and 2023 were tough years for fintech, and digital banks in particular. VC funding dried up, and digital banks were forced to focus on unit economics and profitability.
Now fast-track to 2024. A handful of digital banks are indeed thriving — gaining millions of customers and expanding their market presence, broadening their product and service offerings, and showing profitability, partly thanks to improved net interest margins. After a three-year wait, Revolut — which reported record profits in 2023 and boasts 9 million customers in the UK and 45 million globally — has just secured a banking license in the UK. Starling logged its third straight year of profitability in 2023 on the back of its lending success. The bank is now planning to grow profits further through the rollout of Engine, its banking-as-a-service proposition. Monzo has also recently reported its first annual profit and is attempting (for the second time) to launch in the US. Meanwhile, Brazil’s Nubank — which targets large underbanked populations and has surpassed 100 million customers in Brazil, Colombia, and Mexico — is crushing earnings.
What’s The X-Factor For Digital Banks?
Digital banks are gaining traction globally. Our 2024 research shows that a growing number of consumers in France, Italy, the UK, and the US are interested in having an account with a digital bank — or, in fact, already have one. When asked, consumers say the top reasons for their interest in having an account with a digital bank are:
- Ease of use. Digital banks aim to offer an easier, more seamless, and convenient banking experience. They help customers navigate complex apps by using strong search functionality, proactive help, good content readability, and information architecture that reflects the customer’s mindset. Forrester’s Customer Experience Index (CX Index™) research reveals that digital banks are differentiating themselves with the quality of their CX. For the second year in a row, Starling scored the highest on digital experiences in our UK Banking CX Index Rankings, 2023.
- A better mobile app. Digital banks embrace mobile and emerging technologies to create differentiation through more personalized customer experiences combined with relevant guidance. They continuously innovate with new features and use iterative design to keep enhancing their app — capturing, analyzing, and using personal, transactional, and contextual data to infuse personalization into their customer experiences, increase internal operational efficiency, and optimize products. For example, Monzo has recently launched innovative security controls to protect customers from fraud attempts.
- A quick setup. Digital banks make it easy to open a bank account, simplifying and speeding up account opening and onboarding. Some digital banks, like Revolut, are issuing virtual cards that customers can use to make payments before they receive their physical card.
- Better fees and interest rates. Over the past couple of years, digital banks have benefited from higher interest rates. This enables them to offer attractive rates to customers, take deposits, and lend. Many cash-strapped customers have been shifting their savings away from their primary banks to digital banks’ savings accounts to earn extra income. Indeed, one of our 2024 banking predictions was that 30% of customers would shift deposits away from their primary bank.
What Should Traditional Banks Do To Keep Their Shine?
Incumbents are not standing still. Our annual Digital Experience Review™ reports show that many traditional banks are catching up and developing (and often copying) neobanks’ functionalities.
But the market is heating up, and challengers are here to stay. Customers will continue to shift toward mobile apps to manage their finances — and flock to digital banks to obtain better fees and rates (at least, for as long as interest rates remain high). Incumbent banks need to rethink how they demonstrate value to customers, create differentiated mobile experiences that combine broad functionality with strong user experience, and deliver easy and effective mobile experiences to drive loyalty.
If you’re a Forrester client, you can download the data snapshots for France, Italy, the UK, and the US. And if you’d like to discuss this topic further, please reach out through an inquiry or guidance session.
Many thanks to Victoria Manes for her help with this research.
