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Digital banks face COVID-19 conundrum

22 June 2020: Journalist Daniel Lanyon considers how COVID-19 has affected digital banks and whether this will slow their progress in competition with traditional banking.

Fintech's star companies hoping to revolutionise UK banking have faced a tougher time this year compared to 2019 despite the underlying digitisation trend accelerating during COVID-19. It's the sector's first big crisis.

Venture-backed fintech businesses face the dual struggle of balancing cash-burn and raising new funds in an uncertain economy. They have also proved to millions of customers that they can provide innovative banking services to customers.

Monzo is reportedly facing a new funding round that values its business at 40 per cent lower than its £113m fundraise last year, which doubled its valuation to over £2bn. It is also potentially cutting its workforce by 8 per cent with up to 120 staff at risk of redundancy.

Revolut has come under pressure too and is cutting costs by letting staff go. It's due to the pressures of COVID-19 and reduction in demand for foreign exchange from its customers. It's CEO Nik Storonsky said in a message to staff earlier this month customer growth, activity and revenues were lower in 2020.

Starling Bank too did initially see some apprehension from customers in the month of March, says its head of corporate affairs Alexandra Frean.

"There was a little dip initially in the rate of growth in the very beginning of the lockdown. But we never saw a fall. The growth rate slowed down, but it's picked up again now," she said.

With bank branches and cash looking more and redundant; however, fintech challengers could benefit from new customers going digital. Trust is key.

As the economy eventually recovers, digitisation will be more critical than ever but who survives and who thrives until then during COVID-19 is a new kind of disruption for fintech banks, one that wasn't on the roadmap. 

You can read more about this at the Financial Services Faculty full feature here.