The news: Starling reported its first annual profit after successfully diversifying into the mortgage market and tailoring its strategy to focus on bottom-line growth.
Separately, Varo Bank laid off around 10% of its workforce and plans to restructure the business in an effort to cut losses.
Bottom-line pressure builds: Starling will join Atom within an exclusive group of neobanks that have achieved profitability or are on track to break even. But as Varo's losses show, profitability is notoriously elusive for challenger banks.
What next? Neobanks need to pivot their strategies to adapt and focus on generating profits in a harsher-looking H2 2022.
Varo’s launch of a new high-yield savings account earlier this month could be risky. The high-interest offering is likely to draw in more users, but may not generate the revenues required to improve the neobank’s bottom line.
The big takeaway: Neobanks’ inability to turn a profit is nothing new, with less than 5% breaking even, according to Simon-Kucher & Partners. A growth-at-all-costs strategy made sense when the market was buoyant, but they now need to adapt and fight to become profitable to ensure their survival, as Starling has successfully done.
The leaner funding climate favors more established companies and increases pressure on far-from-profitable neobanks like Varo, which may lose investors who question their long-term sustainability. If a neobank shakeout occurs in the coming years, the banks that can adapt to remain profitable are the ones that stand to survive.
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