In the constantly evolving realm of digital banking, C- Innovation presents a collection of stories from 2023 closures, offering valuable insights for the future. These narratives underscore the importance of resilience and strategic foresight in overcoming the challenges inherent in the banking industry.
This blog discusses the following:
Cultivating a sustainable business model for both short and long-term viability
The challenges posed by regulatory compliance requirements.
Strategic pivots undertaken by neobanks that failed to achieve their intended objectives.
Lessons learned from these closures.
Farewell to Neobanks: A Recap of Departures in 2023
In tandem with our exploration of new banks that emerged in 2023, there arises an inevitable inquiry into those that have bid adieu. At C - Innovation, we meticulously identify 17 neobanks and challenger banks that have gracefully exited the market, where the predominant reason for this cessation was an unsustainable business model. Please note, this blog exclusively covers entities that have ceased operations entirely and excludes acquisitions.
Neobank Closures in 2023 encapsulates the challenges that led to the downfall of several neobanks. The main reasons for their unsuccessful ventures are categorized into four critical areas. Firstly, many neobanks had an unsustainable business model that failed to generate enough revenue to cover their operational costs. Secondly, an over-reliance on external partners left some banks vulnerable when these partnerships faltered. Thirdly, a few pivoted by transitioning to alternative services to find their footing. Lastly, regulatory missteps and compliance challenges were a common thread, with some banks failing to navigate the complex legal landscapes effectively, leading to their untimely closures. The below image serves as a sobering reminder of the volatility within the fintech sector and the importance of adaptability, strong partnerships, sound business strategies, and regulatory compliance. In the following sections, we explore in detail some of the departures and examine key learnings.
Fintech Shake-Up: Verse, KippaPay, and Daylight Shut Doors Amid Market Challenges
Verse founded in 2015 in Spain who got $35.5 million dollars in funding, closed in August 2023. They stated on their closure that after an exhaustive process of evaluation they could not find a sustainable route to continue, verse was acquired in 2020 by Block inc for $40 million dollars looking to expand in Europe market, Let’s remember as well that verse was sanctioned by Lithuania bank with €280k euros for failing to comply with the anti-money laundering law and provided till October 1st to delete all the deficiencies found, the last day to move funds from Verse was 13 September.
KippaPay, an offshoot of Kippa, created in 2022, to provide banking business to around 500k merchants who were already using Kippa, while according to techcabal, the 57% of the fintech market is taking by TechPoint Africa, Opay and Moniepoint, the CEO of Kippa, Kennedy Joseph says its decision to close kippa pay does not follow a competition struggle but rather a strategic response to a rapidly changing economic landscape.
We decided to pull this product back from the market for profitability reasons. (…) These past two quarters, the cost of doing business in Nigeria went up significantly and 9% of our customers shut their business down in the past 3 months.
However on November, one month after Kippapay’s closure, was revealed an internal fraud of ₦30 million (about $18 k dollars) connected to Kippapay, when customers started withdrawing its funds, Kippa noticed that a customer without a POS was also withdrawing large sums of money- a customer that was an employee.
Subsequently, in December last year, Kippa transferred its operations to Bloc, enabling Bloc to integrate KippaPay's capabilities into its portfolio. Bloc has successfully restored full service on KippaPay’s mobile app and Android terminal. This strategic move positioned Bloc to leverage KippaPay's offerings within its expanding portfolio, aiming to enhance its competitive edge in the dynamic digital banking sector.
Daylight, a well-known bank based in USA, launched in 2020 was a digital license bank dedicated to LGTB+ costumers, who had have $20 million dollars in funding in 2021 and 2022, decided to close its doors in June 2023, Rob Curtis its CEO stated that the decision came due to the inability to provide banking services in a way that could covered their costs, while reading its goodbye letter it comes evident that this statements reflects in a strict budget, long term alignment with short term goals of employees, offering a cheap wide range of services while trying to get profit from it, and in daylights personal case queer-run businesses that helps its vision.
Regulatory Crackdown: Lucy's Closure Spotlights Fraud Risks in Neobanking Sector
LUCY a neo bank based in Singapore focused on women entrepreneurs, launched in 2020 was shut down by Singapore regulators in may 2023, but Lucy not only faced regulatory challenges, while looking for investment to continue its operations, they also struggle to find more funding venture and only accomplish $5 million dollars, while also taking too long to cut costs, LUCY CEO was an experienced women (Debbie Watkins) and as experience come along with a wide range of salary, LUCY opted to maintain their CEO despite de high cost that implicated.
In May, Lucy from Singapore met its demise at the hands of regulators, citing fraudulent activities facilitated through its accounts. People were using Lucy to scam other individuals out of money. Lucy's closure sheds light on the pervasive issue of fraudulent activities plaguing the neobanking sector. By becoming unwitting accomplices in scams, neobanks risk reputational damage and regulatory intervention. The ease of opening accounts in digital banks like Lucy can inadvertently facilitate illicit activities, underscoring the importance of robust customer verification processes and anti-fraud measures.
Moreover, the closure of Lucy occurred amidst broader regulatory efforts to combat money laundering and financial crimes in Singapore and Asia. Following a money-laundering scandal involving $2 billion in assets, Singapore banks tightened scrutiny of clients, reflecting a broader trend towards enhanced regulatory oversight and compliance measures in the region.
In 2022, our analysis divulged a discernible trend wherein investors increasingly sought profitability as a prerequisite for continued investment. Consequently, in 2023, neobanks lacking a clear trajectory towards profitability found themselves on the receiving end of withheld funding.
The shift towards profitability-driven investment reflects a maturation of the neo banking sector. Investors are becoming more discerning, favoring ventures with realistic paths to sustainable revenue streams over those solely focused on rapid growth. For neo banks, this necessitates a strategic pivot towards profitability and scalability to secure ongoing investor support.
Expanding Horizons: Strategic Pivots in Response to Market Dynamics
Amidst the closures, some neobanks opted for transformative shifts in their business strategies. Eco app, originally a wallet app offering a 5% interest APY and custodial services, pivoted towards Beam—a seamless payment platform with self-custody features, integrating Eco, a cryptocurrency. This strategic evolution empowered Eco app to innovate more freely, catering to the evolving needs of its customer base.
Similarly, HMBradley faced challenges in reaching its target customer base. HMBradley chose to pivot towards collaboration, integrating its technology with established banks. This strategic move not only ensured the continuation of its innovative solutions, but also a way to continue in the fintech business.
Lessons learned from these closures.
The closures of 2023 offer invaluable lessons for stakeholders in the digital banking sector, here are ours:
Legal compliance is key to success in the digital banking, as for its opening and it continue in business, as saw with Verse regulatory sanctions, Dash interventions from the board leading to its closure due to fraud, similarly with Lucy who at the end was closed by regulators, adherence to laws ensures trust and stability. It's non-negotiable for sustainable operations, safeguarding against penalties, reputational damage, and closure.
Implementing timely cost-cutting measures, is never easy to lay off employees who have worked actively, or to reduce salaries in high level positions, but these decisions are essential for long-term success. As demonstrated by Daylight's closure due to an inability to cover costs. These difficult decisions ensure financial viability and sustainability in the face of economic challenges, paving the way for future growth and prosperity.
Efficient resource allocation and strategic decision-making are imperative for startups, especially in the competitive digital banking landscape. The closures of KippaPay and Daylight underscore the significance of fiscal discipline in maintaining financial sustainability. Operating on a tighter budget compared to traditional banks, startups must prioritize cost management to navigate economic shifts effectively and ensure long-term success.
In the context of the closures observed in the neobanking sector, it's evident that strategic decision-making is pivotal for startup survival. Beyond efficient resource allocation, startups must prioritize strategic pivots that align with long-term goals. This may involve adapting business models to ensure both short and long-term viability, responding to regulatory challenges effectively, and making strategic shifts to address changing market dynamics. By embracing strategic decision-making, startups can navigate uncertainties, mitigate risks, and position themselves for sustainable growth amidst industry disruptions.
Cultivating a sustainable business model adaptable to both short- and long-term viability: Ensuring business viability in both the short and long term is essential for sustained success. While profitability might have been optional in 202, the closures of 2023 underscore the importance of aligning with investor and customer expectations. This adaptability ensures business efficiency, enabling digital banks to thrive amidst growing competition and evolving market demands.
The closures observed within the digital banking sector in 2023 offer profound insights for industry participants. They underscore the critical importance of adhering to legal regulations, implementing judicious cost-cutting measures, and optimizing resource allocation. Furthermore, they emphasize the necessity of developing a sustainable business model capable of adapting to the evolving market landscape. Strategic adaptations aligned with long-term objectives are crucial for building resilience and maintaining competitiveness in this dynamic industry. These invaluable lessons serve as a compass for industry stakeholders, empowering them to navigate uncertainties and chart a course towards sustained success in the digital banking arena, particularly as we progress into 2024 and beyond.
At C- innovation we will continue following closely the ins and outs of Digital Banks, so stay tuned!
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