Performance Benchmarking of Digital Banks in Europe

In addition, N26 has decided to leave the UK market and focus more on its core European markets, where the bank is the market leader.Amid weakened investor sentiment, N26 raised additional capital in 2020, bringing total funding to over €800 million. The N26 Group used the capital injection to implement effective marketing measures and operational efficiency improvements to boost operating margins, which ultimately paved the way to profitability.After refocusing on significant cost reduction and operational efficiency improvements in 2021, the bank improved its net profit margin by 96 percentage points compared to fiscal 2020.In addition, thanks to the dynamic nature of its business model, N26 has expanded its platform services to increase customer engagement, enabling the bank to significantly increase revenue in 2021 and beyond. Even though revenues were still suffering in the early months of the coronavirus pandemic due to lockdowns and cuts in consumer spending, N26's gross revenue increased by 22% for the year.Next, consider the financial results of N26in Table 4.Table 4 – Financial results of N26Key financial indicators for 2020:- net profit margin improved year-over-year by 96 percentage points compared to fiscal 2019;- Group net losses decreased by 30.5% to EUR 150.7 million compared to FY 2019, while net losses from core European business N26 decreased by 33.3% to EUR 110 million;- gross income increased by 22% to 112 million euros compared to fiscal 2019;- The subscription business generated 45% of commission income thanks to an improved monetization strategy;- the balance increased by 79% to 4.3 billion euros, helped by growing customer deposits and an increase in the share of wallets;- Transaction volume increased by 57% to 50.3 billion euros compared to fiscal 2019, supported by significantly increased customer activity.During fiscal year 2020, N26 shifted its focus to customer engagement, driving engagement and customer retention along with customer acquisition. As consumers have switched to digital banking due to the lockdown, N26 has effectively implemented balanced marketing investments, attracting an additional 2 million customers to reach a total of 7 million customers. Despite the slowdown in spending in the first months of the pandemic, the bank significantly increased customer activity, with transaction volume reaching €50.3 billion in fiscal 2020 (previous year: €32 billion). In addition, the consolidated balance rose to 4.3 billion euros (previous year: 2.4 billion euros) and is ahead of expectations, driven by increased client activity and wallet share.Net fee and commission income was €57.3 million (previous year: €47.5 million) from the provision of premium subscription services, payment transaction services and exchange fees. Net fee and commission income amounted to 79.5% of total net income.In 2020, N26 increased the use of its premium subscriptions, wealth management services and payment options. N26's real-time customer insights have also enabled it to continuously implement relevant benefits, products, and functionality on its platform in line with rapidly changing customer needs. The company introduced three new premium accounts (N26 Smart, N26 Business Smart and N26 Business Metal), over a dozen new features including EasyFlex savings, summaries, donations and digital cards, and over 15 platform iterations and updates. As a result, the subscription business was the strongest source of revenue in fiscal 2021, accounting for 45% of total fee and commission income (43.9 million euros).Net interest income of N26 amounted to EUR 14.8 million (previous year: EUR 9.3 million), of which EUR 6.7 million came from the lending business (previous year: EUR 4.3 million) and EUR 8 million from the lending business securities (previous year: EUR 5.0 million). Negative interest rates led to a reduction in the interest rate of 2.5 million euros (previous year: 2.3 million euros).Administrative expenses, including marketing expenses, personnel expenses and other administrative expenses, decreased by 15% to 206.3 million euros (previous year: 244.7 million euros). This was the result of well-targeted marketing efforts to achieve customer acquisition goals, streamline customer service operations and reduce card production, shipping and administration costs. The increase in staff costs reflects higher investment in talent and the expansion of specific teams and functions in FY 2021.Overall, the net loss of N26's core European business fell 33.3% to €110m, while non-core markets including Brazil, the US and the UK accounted for €40.7m in 2020. As a result, the N26 Group's total net loss decreased by 30.5% to EUR 150.7 million (previous year: EUR 216.9 million), in line with expectations.The transition to digital banking has accelerated in 2020 as a result of COVID-19. N26's 2021 revenue growth reflected the relevance of the company's product portfolio, while strategic measures and investments laid the foundation for N26 going forward. In 2021, N26 continued to focus on increasing product usage and customer engagement, resulting in improved customer retention and increased transaction volume.N26's revenue in 2021 was 120 million euros, up 66% on the previous year. By the end of 2021, it had reached eight million users, 3.7 million of which were regular deposits. The annual volume of N26 transactions in 2021 reached 79 billion euros, up 57% compared to the same period last year.Deutsche Bank's net income more than quadrupled to €2.5 billion in 2021, the highest since 2011. The bank's revenue last year increased by 6%, to €25.4 billion. 2020 was the first profitable year for Deutsche Bank after continuous losses since 2015 - in 2019, the bank began a massive restructuring, during which it cut 8 thousand employees and somewhat shifted the focus from investment banking to work with corporate and retail clients. In 2021, like other investment banks, Deutsche Bank benefited from a boom in investment activity, but recently it has begun to slow down.ING Group's 2022 annual gross profit was $32.049 billion, up 34.79% from 2021. ING Group's 2021 annual gross profit was $23.777 billion, up 19.21% from 2020.Commerzbank AG reported earnings results for the fourth quarter and full year ended December 31, 2022. For the fourth quarter, the company reported net interest income was EUR 1,958 million compared to EUR 1,300 million a year ago. Net income was EUR 472 million compared to EUR 421 million a year ago.For the full year, net interest income was EUR 6,459 million compared to EUR 4,849 million a year ago. Net income was EUR 1,435 million compared to EUR 430 million a year ago.Scalable Capital has raised over $180 million (around €150 million) in 2021 to expand its business. The company confirmed that the Series E investment, led by China's Tencent, comes at a valuation of $1.4 billion.This is a huge leap for Scalable Capital. In July 2020 alone, the startup raised a $58 million Series D at a $460 million valuation.Scalable Capital now has 250,000 clients across Austria, Germany and the UK. At the same time, assets under management rose to $5 billion (vs. $2 billion in 2020). In another interesting twist, Scalable is also building a business as a neobroker partner for many high-profile banks, which include big names like ING, UK-based Barclays Bank, Siemens Private Finance, Santander Group's digital subsidiary Openbank, Oskar GmbH and Targobank.4.3 Future development predictions of Digital bankingIn the banking and financial services industry, the focus is on future innovations that will increasingly depend on technology. Some key trends driving these innovations include collaborations with FinTech, ongoing digital transformation, and the growing role of AI and robotics. As customer requirements and lifestyles change, institutions must rethink themselves to become agile users of technology.The introduction of chatbots and humanoid robots is likely to revolutionize the financial services sector in 2023. Banks are adopting this technology as a first step towards fully automating customer interactions. This will facilitate instant transactions, the ability to offer customized products and services on an ongoing basis, and completely abandon the street banking scenario.Consider the main directions of development of the banking services market.1) Reforming the concept of money.Blockchain has created a quiet revolution in business, quite different from the image presented by bitcoin as a highly speculative and volatile platform. Blockchain for business is changing some traditional business concepts with processes such as peer-to-peer transactions, digital transactions and settlement in trade and digital payments, eliminating middlemen and speeding up the underlying processes.Blockchain technology will provide significant operational cost savings as more banks and financial institutions become fully involved.2) Digital transformation.Digitization and adoption of advanced technologies improve the operational efficiency of the banking sector and provide an excellent customer experience through digital self-service channels in mobile and online banks.Digital banking trends in 2023 will enable banks to increasingly shift from in-person transactions to fully digital services. Banks will offer enhanced targeted services on a range of new devices that duplicate the functionality of smartphones but are more convenient and portable.3) Fintech companies will become increasingly associated with traditional banks.Many traditional banks will need to take advantage of the financial services trends in 2023 represented by the digital evolution. Since they have already lagged behind the more advanced offerings of fintech service providers, the move will be either to spend significant time and money developing their own equivalents by expanding their own systems, or partnering with established fintech companies that can take their place on the market. market.In the future, partnerships between banks and established fintech institutions will become more common. These partnerships will revolutionize the financial services sector. Fintech companies can provide established and proven technology banking services to banks. At the same time, the association offers Fintechs access to a much wider client base and improves their image of security and stability.4) Development of neobanks.In contrast, fintech service providers may also become more direct competitors to standard banking operators. Neobanks, also known as digital banks, can offer some of the same services as traditional banks without any personal interface. Customers use simple online interfaces to complete their transactions and rarely need to communicate with bank staff. In this mode, Neobanks represent the cutting edge mobile banking trends in 2023.Neobanks benefit from lower start-up costs, faster transaction responsiveness for customers, and lower fees. These institutions can operate with significantly lower cost structures and pass these savings on to clients in the form of lower transaction fees or higher interest on their savings.5) Increasing the banking experience of the client in 2023.In 2023 and beyond, one of the main drivers of change affecting banking and financial services will be the need to meet customer expectations. The main aspects of this open banking trend of 2023 and beyond is the need for financial institutions to provide omnichannel banking, which means that customers can seamlessly switch between their activities (mobile, online or face-to-face) without having to initialize an activity each time.For this to work, it is important that the user experience can be personalized and that interactions are based on knowledge of the customer's needs as well as past experiences and requirements.Personalization means that the customer will build a deeper relationship with their bank and be less likely to shop around in a highly competitive market. To provide a fully personalized experience, a bank needs comprehensive and up-to-date data on which it can apply the power of artificial intelligence and machine learning.Financial institutions can empower customers by opening their own applications to third-party application programming interfaces (APIs) that provide new services. The expansion of these open banking trends in 2023 will allow banks to partner with fintech companies rather than compete with them. Open Banking allows you to partner with third-party payment and other service providers to share customer data between banks and financial institutions in a completely secure environment.New technologies such as artificial intelligence (AI), blockchain and the Internet of Things (IoT) will have an increasing impact on banking until 2025.The development of the digital economy requires the creation of new retail payment infrastructures that are secure, inclusive and efficient in the new information age. In recent years, many central banks (hereinafter referred to as the Central Bank) and other financial regulators have closely followed the development of financial technologies and sought to adapt them to the needs of the national monetary circulation. This is how the concept of digital currencies of central banks (central bank digital currency, CBDC) appeared.Currently, the implementation of central bank digital currencies is one of the most discussed among economists and regulators around the world. Leading international financial institutions such as the IMF, BIS, G20 Financial Stability Board have published studies on the prospects for the introduction of digital currencies as a new form of central bank money. A study conducted by the Bank for International Settlements in mid-2021 showed that 86% of central banks, representing countries with 72% of the world population and 91% of world GDP, studied issues of issuing a national digital currency. About 20 countries have already started implementation or have successfully implemented pilot projects for issuing CBDC. The world's leading central banks, such as the ECB, the US Federal Reserve, the Central Bank of Japan, the Bank of England, and others, have already announced their intention to issue a digital currency. Individual central banks, which include the Central Bank of the Bahamas, the East Caribbean Central Bank and the People's Bank of China, have already started issuing a national digital currency.The scientific interest in studying the issues of issuing central bank digital currencies is dictated by the opportunities that open up new information technologies to create new monetary forms and improve the efficiency of the monetary and payment systems. The main motives for issuing central bank digital currencies currently are:- support for monetary sovereignty and financial stability in the context of the active use of money from private issuers, cryptocurrencies and stablecoins;- optimization of monetary circulation and maintenance of demand for central bank money;- improving the efficiency and security of payments at the national and international levels;- financial inclusion;- expansion of monetary policy tools;- de-dollarization of monetary circulation;- geopolitical motives;- consequences of COVID-19, etc.The most pressing issues currently being explored include: emission models and functional features of central bank digital currencies, design of digital currency and wallets, benefits and risks of implementing central bank digital currencies for national monetary and financial systems, as well as the potential for their international use in cross-border payments (multi-CBDC arrangements). At the same time, most of the issues related to the introduction of central bank digital currencies are still debatable, since digital currencies are a completely new object of economic research, the introduction of which can significantly affect the monetary and financial systems of individual countries and the global financial system.There are three main emission and settlement models of digital currency systems for retail payments: single-level R-CBDC system (direct digital currency system); two-tier R-CBDC system (synthetic/mediated digital currency system or hybrid digital currency system). The key differences between the models of emission and settlement systems of digital currencies for retail payments are in the nature of the monetary claim, the method of its storage and transfer, as well as the functions performed by the central bank, credit institutions and financial intermediaries.We will also consider three possible scenarios for the development of the EU banking system until 2030, formed on the basis of options for the interaction of banks with fintechs and bigtechs and the impact of digital currencies of central banks.1) Scenario 1: Incumbent banks continue to dominate and maintain their central role in money creation and financial intermediation. They aggressively counter the competitive threat through technological adaptation, fintech acquisitions, and lobbying. Fintechs continue to concentrate on certain niche markets, while bigtechs offer payment services but do not have access to central bank clearing and payment systems (they can cooperate with banks). The banking system is updated by incorporating new suppliers and new products.2) Scenario 2: Incumbent banks shrink while big tech expands financial services through regulated subsidiaries and captures the lending market. Incumbent banks are increasingly focusing on relationship-oriented services, both upstream (investment banks) and downstream (community banks focused on serving businesses and individuals in a small geographical area). The banking system is shrinking, primarily because medium and small banks can no longer use economies of scale. This scenario leads to structural changes in the financial system.3) Scenario 3: The issuance of retail central bank digital currencies leads, under certain intermediation models, to a completely different structure of the financial system. Incumbent banks are facing higher funding costs and a more volatile funding base as the traditionally stable retail deposit clientele switches, at least in part, to digital currency. The financial intermediation function of banks is gradually disappearing, and the central bank is playing an increasingly important role as an intermediary. Fintechs and bigtechs offer customized and specialized services in the areas of lending, asset management and risk management. The traditional banking system no longer plays the role of a stable anchor of the financial system.Given that changes in the financial system are endogenous to regulatory action, especially during potentially disruptive transitions, several policy actions are possible to address financial and non-financial risks. Some of these suggestions apply to all three scenarios, while others will be more relevant to one or another of them.Crucially, the response of regulators will be a key factor in which of the three scenarios materializes.Suggested policy measures are as follows:1) The regulatory perimeter and conditions for accessing the financial safety net should be expanded or adapted. Fintechs and bigtechs should have access to a security system if they carry out financial activities similar to banking. At the same time, a prudential framework for such access should be developed, including consumer protection and anti-money laundering. This becomes even more important in scenarios 2 and 3.2) Increased global cooperation is likely to be required, since most fintech and big tech companies operate on a global scale, without having a permanent establishment in the jurisdictions of their presence. In order to avoid unwanted and untimely discussions, mechanisms for global cooperation should be established in advance.3) Financial intermediation of big tech should probably be separated from the rest of their activities and, therefore, be carried out through a subsidiary that falls within the regulatory perimeter. This policy may require deep organizational changes in big tech companies and may reduce the attractiveness of providing financial services for them, which will significantly reduce the likelihood of scenario 2.4) Increasing the use of financial services by non-financial companies may fall under the scope of a different regulator (for example, in the field of telecommunications) and require more active cooperation of regulators in different sectors and jurisdictions. Since regulatory and legislative approaches to platform companies are changing at the EU level, such changes should include close cooperation with financial sector regulators.5) Expanding the digitalization of financial services may require a change in regulatory and supervisory practices that were defined when digitalization was just beginning and non-financial risks were not high on the regulatory agenda. Digitalization may increase the importance of non-financial risks (many of which are now operational) and prudential regulation may need to better reflect these risks. This also applies to the qualifications of the staff of regulatory and supervisory bodies.6) The decision to issue retail central bank digital currencies must carefully balance efficiency gains against any risks to the stability of the current financial system. Issuing digital currencies can give people more power and lead to increased competition. However, it is important to consider the medium and long-term implications for the structure of the financial system, in terms of both efficiency and stability.7) The structure to support the orderly exit and “downsizing” of incumbent banks should be strengthened: in either scenario, they will face increased competition and even lower profit margins. This will necessarily lead to the fact that existing banks will reduce their activities and possibly leave the market, and this process can cause instability. To make this process run smoothly, it can also be actively facilitated by avoiding government support for unviable banks, lowering exit and liquidation barriers, and promoting mergers and banking unions.5. CONCLUSION (RESULTS)Internet banking is the general name for remote banking technologies, as well as access to accounts and transactions (on them), provided at any time and from any device with Internet access. To perform operations, a browser is used, that is, there is no need to install the client part of the system software.While online banking and traditional banking may offer the same services, they remain quite different in terms of their features and capabilities. Distinctive features of Internet banking are as follows:1) No physical locations - online banks do not have physical locations that the customer can visit, so all banking transactions take place via the Internet or mobile application.2) Fast account opening process. Opening an account in Internet Banking can be quick and easy. This requires some personal information and identification documents to be provided, but once the customer identifies himself, a new account can be up and running within minutes.3) Convenient interface. Internet banks are focused on the user experience, making banking transactions through online platforms as easy as possible.4) Few or no fees - Internet banking is the clear winner in terms of fees. They don't always have the costs that traditional banks have, as having no buildings means less overhead, so they can pass on some of those savings to the client.5) The best interest rates. Internet banks usually offer the best interest rates due to their low overhead costs.6) Telephone or online customer support. Although online banks have customer support groups, most often customers look for answers on support forums or chat with an online bot to get the help they need.The development of Internet banking in recent years has served as a significant impetus for the development of banks around the world, and the introduction of digital technologies contributes to higher results in their activities.Through the development and use of websites and applications, customer acquisition and personalized service delivery become more efficient. For example, in line with the latest technology and current security requirements, the German company Deutsche Bank AG has implemented an online banking website and application that includes many additional features such as bond trading or prepaid mobile phone charging.Digital ratings based on a combination of statistics and survey results of business and government representatives contribute to the formation of strategic priorities in the period of digital transformation. When determining digital competitiveness in accordance with the World Digital Competitiveness Ranking, developed by the Center for Global Competitiveness, such basic factors as knowledge, technology, readiness for the future are taken into account. Digitalization of a bank can be defined as a system of measures aimed at deepening cooperation with fintech start-ups in order to achieve long-term development goals related to the introduction of innovative working methods, the offer of new banking products and services to increase and expand the client base, as well as increase the level of competitiveness of the bank. the bank as a whole.The pandemic has highlighted the critical need to develop IT infrastructure for the banking sector to survive in the new reality. The achieved level of maturity of remote channels of service and interaction with customers has allowed many players to provide services in conditions of limited mobility. And the speed and efficiency of the transition to a remote mode of work depended on the flexibility of operating models, both in terms of infrastructure and organizational readiness.At the same time, new risks emerged during the pandemic when organizing a remote or hybrid work format: vulnerabilities and leaks of confidential information due to the expansion of the corporate perimeter and the connection of mobile devices. Data security is of paramount importance amid an increase in payment fraud and cases of theft of citizens' data in order to gain access to their banking information.The focus of most large banks is the development of solutions for customer self-service and the creation of personalized offers. Investments in work with big data will remain, including the infrastructure component (increase in the server fleet, modernization of corporate data centers), as well as the implementation of solutions related to information security. To ensure the required level of banking infrastructure security, cyber monitoring, network security, and identity and access management services will account for the bulk of investments.The digital transformation of the banking sector is an integral part of the development of the modern economy. Due to the introduction of "innovations", the banking system is gradually turning into an independent developing economic sector; and the situation with the pandemic has significantly accelerated the digitalization process. In order to be competitive in the market, a bank should be “digital”, keeping up with modern trends in introducing the latest technologies into the banking system.The development of fintech in Germany has been catching up for a long time, which was explained by a large concentration of classical banks in the country, a skeptical attitude towards risky investments, as well as a strong share of government regulation in the financial industry. A set of classical factors in the form of rising inflation and lower deposit rates led to a gradual increase in attention to new areas of investment. However, COVID-19 has made the greatest adjustments, facilitating the entry of many new startups into the market, whose technologies allow everyone to easily access investments that sometimes just need to have a smartphone.The emerging lag of Germany in some areas of digitalization is explained not only by the long-term underfunding of infrastructure development (therefore, the future government is now required, first of all, to sharply increase investment in the laying of fiberglass cables), but also by the peculiarities of German legislation. It is extremely or even excessively strict in regulating, for example, the protection of personal data or liability for abuse of the Internet, which at one time held back, say, the widespread introduction of wireless Internet access in public places (Wlan or Wi-Fi).The heavy structure of the German banking system leads to high costs and a slowdown in innovation. Most German banks struggle with existing basic IT systems, and savings and cooperative banks are burdened with a huge and costly branch network. In addition, the country's two largest universal banks are diverted to ongoing restructuring programs. A high cost base, coupled with significant revenue pressure from low yields in the eurozone, is leading to a higher cost-to-income ratio. Among other things, this means reducing the available budgets for investment in the transformation of the operating model. New players are using the weakness and inertia of the German banking industry as an opportunity to enter the market. Fintech and, to a greater extent, pure online banking have gained market shares in retail banking over the past few years. The product portfolio for these market participants mainly consists of personal loans, SME lending, savings, and investment services. Germany is an attractive market for fintechs in light of its sheer size and wealth. However, the size of the fintech industry in the country remains smaller than in other major economies. Faced with funding challenges and the struggle to find a successful business model, the country's fintech industry will consolidate either through mergers with other startups, takeovers by major banks, or strategic partnerships across the industry.The work examined the activities of two online banks in Germany - N26 and Revolut. Each N26 bank account has deposit protection: the compensation scheme of German banks guarantees up to 100,000 euros (about £85,000). The application itself has a three-level account protection, and transactions are protected by 2048-bit SSL encryption. Compared to traditional banks, N26 is one of the best solutions on the market, especially for those who travel frequently and are faced with the need to spend money in different currencies. However, after Brexit, the service is not available to UK residents, so the best alternative for them is Monese or Revolut.To date, Revolut has a client portfolio of over 4 million users with over 125 million transactions worth over £14 billion. The service estimated that the total amount saved by customers using the company's services was £740 million. The reliability of the company is also evidenced by the total amount of investments, for example, in 2019-2020 alone, the company attracted about 500 million US dollars as investments. The company is regulated by the UK Financial Conduct Authority. All payment card transactions are processed by Mastercard or Visa payment systems. All data transferred between Revolut mobile apps, servers and third parties is secured with 2048-bit SSL encryption.2021 was a turning point as N26 proved the resilience of its business model in turbulent times. The business delivered revenue growth, with a favorable distribution across subscriptions, payments, and core banking products. At the same time, operational efficiency improved significantly, resulting in higher margins. This demonstrated N26's ability to increase its customers' wallet share despite ongoing macroeconomic uncertainty, and paved the way for even higher numbers.Despite the ongoing impact of the COVID-19 pandemic, 2021 has been another year of continuous innovation and growth for Revolut Bank. Customer growth in 2021 was significant, growing from 11 million customers worldwide to over 16 millioncustomers by the end of the year. The number of users who engage more actively with Revolut through adherence to paid plans - Plus, Premium and Metal. The total number of users of paid plans increased by 75% during 2021, a signal of the desire of customers to access more features and benefits of the bank.Digitization and adoption of advanced technologies improve the operational efficiency of the banking sector and provide an excellent customer experience through digital self-service channels in mobile and online banks.Digital banking trends in 2023 will enable banks to increasingly shift from in-person transactions to fully digital services. Banks will offer enhanced targeted services on a range of new devices that duplicate the functionality of smartphones but are more convenient and portable.The development of the digital economy requires the creation of new retail payment infrastructures that are secure, inclusive and efficient in the new information age. 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