Despite lofty valuations, most neobanks (digital banks) are not profitable, Simon-Kucher study showed Thursday.

The global commercial strategy consultancy said in a statement that digital banks entered the banking scene a decade ago as mobile-focused challenger banks looking to establish primary, digital-only relationships with digitally savvy clients, and it estimates there are currently close to 400 neobanks around the world, together serving nearly one billion client accounts.

However, despite their lofty valuations, its study found that only five percent of these challenger banks have managed to reach a breakeven point.

Its analysis of 25 of the largest neobanks in the world also found only two have achieved profitability, and that a majority of them earn less than 30 US dollars in annual revenues per customer.

Even for the most renowned challenger banks this is the case, it said.

It also revealed that only five percent of neobanks are breaking even, with most earning less than $30 in revenues per customer per year.

“Moving from ‘get reach’ to ‘get rich’ requires a dramatic mindset shift that can be difficult to orchestrate. Yet it is critical that these digital banks make that leap before their sixth and seventh year in operation. The risk of failure rises exponentially at that point if the business is not even breaking even,” said Christoph Stegmeier, Senior Partner at Simon-Kucher.

Meanwhile, Simon-Kucher Banking Lead Asia Pacific (APAC) Silvio Struebi said this observation was in line with Malaysian Central Bank’s eligibility criteria for digital banks in Malaysia, where the five awarded banks must showcase a clear projected path towards healthy returns.

“A well-defined value proposition and the use of innovative technology to better serve customer needs and reach under-served segments at reasonable cost of acquisition will be vital for success. Licensed banks will have to develop solutions that address the specific needs of the target segment, promote responsible usage of financial services and create positive impact on under-served segments,” he said.

According to the study, the market opportunity in Malaysia is substantial, and Malaysia currently ranks 36 out of 60 countries for digital banking development, at the lower end of APAC countries.

Digital banking penetration is also lower than expected in Malaysia when compared to other similar markets which show up to 50 percent of adults with a digital banking account, and this indicates a significant growth potential for the awarded conglomerates and players in Malaysia, it said.

For new players, it said either the pure digital-only challenger banks like SEA Group or banking speedboats of established players like RHB Bank, it will be crucial to get the value proposition right and to develop the monetization strategy before product launch.

It said that introducing undifferentiated digital offerings like high interest saving accounts, credit cards, and micro, small and medium enterprises (MSME) loans will not be enough to win the under-served segment and digital-savvy customers in Malaysia as incumbent banks have increased their digital capabilities to better service the clients in recent years.

For new digital banks, it said it’s crucial to develop innovative growth strategies that resonate with the target customer base to acquire, hook, and retain these segments.

“The single most important factor is to drive effective product usage and enablement. Many digital bank clients are inactive after opening their accounts despite high acquisition costs. Therefore, a superior customer experience combined with an attractive loyalty program and ecosystem will make the difference in delivering long-term profitability,” said Struebi.

Malaysian Central Bank in April announced five successful applicants for the digital bank licenses in the country. The successful bidders were: Boost Holdings Sdn. Bhd. and RHB Bank Bhd; GSX Bank Pte. Ltd (Grab-Singtel consortium) and Kuok Brothers Sdn Bhd; Sea Ltd and YTL Digital Capital Sdn Bhd; Aeon Financial Service Co. Ltd, Aeon Credit Service (M) Bhd and Moneylion Inc; and KAF Investment Bank Sdn Bhd.

GRAB-Singtel, Axiata’s Boost-RHB, Sea Ltd-YTL, AEON Credit consortiums among winners of Malaysia digital banking licenses