N° 142 : Digital players in the financial sector: a step towards profitability?

When compared to the two previous editions, this study is characterised by three developments.

First, it aims to assess and update the positioning of the different players with regard to their break-even point and the conditions needed to reach this threshold. The situation remains mixed, however. It seems that some of the players, especially those who are not part of a banking group, either are already profitable or they claim they can reach their breakeven point by 2022-2023. This is due to better cost control and to the greater specialisation of their business.

Second, the study pays particular attention to the impact of the Covid-19 crisis, as well as the impact of the interest rate environment on profitability and industry developments.

Finally, the study focuses on the emergence and evolution of strategic partnerships between market participants, developed to broaden the offer of financial products and services to clients of these institutions.

In this study, the term "digital financial players" refers to financial players and intermediaries offering banking or payments services available online or accessible through 100% mobile applications. The development of these players is driven by technological progress and the use of new digital technologies. While entry into the banking market is particularly difficult in a situation where traditional banks have been able to capitalise on their experience and reputation to build customer loyalty, these new players have nevertheless managed to establish themselves in this market in a sustainable manner, in some cases with a sharp increase in their customer numbers.

Digital players in finance have different business models or legal forms and offer a wide variety of services and product ranges. In order to clarify the outline of the survey and to give a more precise analysis of the determinants of their profitability, during the summer of 2021, the ACPR conducted a survey on a sample of 15 institutions, most of which had already participated in the previous studies: Boursorama (Société Générale Group), BforBank (Crédit Agricole Group), Hello Bank (Groupe BNP Paribas), ING Direct (Group ING), Monabanq (Groupe Crédit Mutuel Alliance Fédérale - CIC), Orange Bank (Groupe Orange), Ma French Bank (Groupe La Banque Postale), Nickel (Groupe BNP Paribas), Qonto, N26, Fortunéo (Credit Mutuel Arkéa Group), Revolut, Manager.one, Lydia and Younited Credit.

In the second part of 2021, the survey was then supplemented through bilateral discussions with all of these institutions. The focus was more particularly set on the breakeven point and the impact of the low interest rate environment.

Most of these players directly depend on the traditional banking sector, either because the traditional banking sector acquired the business after a few years of existence, or because they were developed in-house within those groups to counter the emergence of new players or to compete with new offers. This reliance on the traditional banking sector is highly structuring, both in terms of the determinants of profitability, and for the offer of banking and financial products and services.

The digital finance players involved in this study saw a significant increase in their market share in 2020 compared with previous years. For example, the number of their customers doubled between 2018 and 2020. About 16 million customers had an account open with one of the institutions in our sample at the beginning of 2020, compared with 8 million at the beginning of 2018. As regards the opening of new accounts in France, at least 35% of the new current accounts opened by retail customers in 2020 were opened with one of the institutions included in our sample.

In terms of business models, this study identifies two main types of players. First, generalist players, who offer a wide range of financial products to a diverse customer base; second, specialised ones, who do not offer such a wide range of products and services, and rather focus on a narrower customer base while being positioned in market segments that are considered more profitable. Another characteristic of the business models is that of a shift in the composition of the customer base, with a growing share of young customers and a declining trend in the relative share of executives in both existing and new customer numbers.

Thus, on an aggregate level, the strong growth in the number of customers in 2020 is not associated with improvements in operating profitability: net banking income (NBI) is growing at an insufficient rate with respect to overhead costs that remain too steep. The downward trend for premiums paid to customers is not enough to halt the decline in NBI per customer, even if the extent of that decline is limited.

Since the previous study, the two major trends observed in this market are: i) the significant growth of services to businesses, delivered either directly to customers or in "business to business" (B2B) mode, and often coupled with invoicing on a per-use basis as part of credit or payment solutions marketed under a white label, and ii) since the Covid-19 crisis, a high demand for specific financial services such as fractional and deferred payment services (BNPL), which has led the market to prioritise the development of the product offer towards this type of services.

The health crisis and lockdown measures decided on in the first half of 2020 had a limited impact on institutions’ business and risk costs. Most market participants experienced in 2020 the resilience of their business model, as the health crisis confirmed the relevance of models based on a remote banking relationship with digital tools (integrated platforms, 7-day customer service) that allowed customers to become more autonomous in their day-to-day banking operations. Moreover, products have not suffered any particular shock, thanks to the dynamism of online commerce and the rise of contactless payment, especially for very small transactions.

Lastly, in terms of methodology, it should be noted that this study is based on a collection of ad hoc statistical data, the quality of which was poor for some of the surveyed institutions. Coming from digital players, this might come as a surprise, insofar as the knowledge of customers and their data are key to strategic development and profitability. However, the voluntary nature of this exercise, the strategic dimension of the data required and the institutional organisation and risk governance within some of these banks undoubtedly explain this situation. Moreover, some institutions contacted by the Authority did not follow up. Overall, it is essential to improve the quality of information, both for the sake of customer protection, and with a view to a financial stability.