Yet it just so happens that the UK challenger bank with the highest valuation, OakNorth, is also the most profitable. The company posted a £33.9 million profit in 2018, up 220% year-on-year. With its laser focus on lending to a select group of borrowers, OakNorth has found a formula for success. It has just 40,000 savings customers while some of its competitors have millions, but OakNorth's emphasis is on quality instead of quantity.
OakNorth extends loans of £0.5 million to £40 million to promising British businesses - those that are profitable and have the potential to build scale - such as NetPay, TritonExec, Regal London, Baird Capital and Rockpool Investments, notes Tearsheet in a March report. OakNorth has lent out £3 billion since launching almost four years ago.
Other UK challenger banks targeting a wider retail banking market are not faring so well. Monzo, for instance, faces mounting losses. In fiscal year 2018, it lost £47.2 million, 54% more than the previous year. Monzo's leadership says that the losses are necessary to grow quickly, but is signaling its focus on profitability.
"We still need to make more revenue to become profitable as a business, but we’re showing good progress on that front," Monzo chief executive Tom Blomfield said in June. Monzo had almost £462 million in customer deposits as of June. Blomfeld said that the neobank aims to attract more customers to deposit a monthly salary of £1,000 or more in a Monzo account.
Starling, which expects to have 1 million customers and £1 billion in deposits by 2020, has also highlighted its focus on profitability recently. “And what we’re doing now is expanding our product range and innovation hand in hand with growing our businesses, with a clear path to reaching profitability," chief executive officer Anne Boden wrote in an open letter published in early August.
As Altifi notes in August report, Boden previously worked at AIB and has seen firsthand what happens when cash flow dries up at a bank. She isn't likely to pursue a growth strategy that doesn't achieve sustainable profitability.
Interestingly, none of the UK's challenger banks are valued as highly as German's N26 at US$3.5 billion. N26 operates across the European continent and boasts 3.5 million customers, but it is not profitable, nor is it apparently concerned about reaching the black anytime soon.
“In all honesty, profitability is not one of our core metrics," Maximilian Tayenthal, N26's chief executive officer, told The Financial Times.
In an August column about fintech unicorns, fintech expert Chris Skinner wrote: "How can new firms that have yet to gain customers' main bank accounts – most of these new players are being used as secondary or even tertiary accounts by many people – be worth half of a Deutsche Bank, when you combine their current valuations?"
Questions like Skinner's are valid, but often swept aside in the rush by deep-pocketed investors to join the next funding round. In the tech community, a startup's value is often linked to the size of its user base and the potential to scale rather than a proven business model. There's good reason for that: If investors insisted on profitability before investing, firms like Facebook, Twitter and Instagram could never have survived. In fact, Twitter had its first profitable quarter in Q4 2017, more than 11 years after its founding.
Still, perhaps banks - even hip digital ones - should be held to different standards than social-media platforms with nebulous objectives like "building a critical mass of users" or "achieving strong user engagement."
Skinner puts it well. For fintechs, "when valuations are based upon app downloads and future models of income, I remain to be convinced," he said.