An EY exec laid out 3 things digital banks like Chime, Monzo, and N26 need to avoid while battling fierce competition in a make-or-break year

• Jan Bellens, a global banking and capital markets sector leader at consultant EY, spoke to Business Insider about what challenger banks need to do to stay ahead of the curve in a competitive field in 2020.
• Bellens said the current environment reminds him of how internet companies used to operate.
• "It's all about customer acquisitions. We don't need to be profitable," he said of challenger banks' approach. "I think that will continue. They will continue to push ads to add."
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Upstart digital banks took center stage in the US in 2019 thanks to massive funding rounds and European-based startups migrating across the pond.

With so many well-funded competitors vying for market share, 2020 is shaping up to be a key year for the startups, commonly referred to as challenger banks or neobanks.

Jan Bellens, a global banking and capital markets sector leader at consultant EY, told Business Insider the landscape reminds him of another industry that rose in prominence a couple decades ago.

"Many of them are now running like the traditional internet companies. So it's all about customer acquisitions. We don't need to be profitable," Bellens said. "I think that will continue. They will continue to push ads to add."

For Bellens, who works with banks on their digital strategies, identifying the winners and losers in the crowded field will come down to three main factors.

First, avoiding a plateau in customer growth will be key, he said. Chime, which was valued at $5.8 billion after a $500 million Series E in December 2019, grew its customer accounts by 67% from March to September to reach 5 million customer accounts.

US-based competitor Varo Money had tripled its customer base over the course of a year, Colin Walsh, its CEO and cofounder, told Business Insider in July 2019 when the startup announced a $100 million Series C.

Meanwhile, European-based neobanks that have enjoyed success domestically, such as German-based N26 and UK-based Monzo and Revolut, have managed to add customers as well. The trio all have unicorn valuations, with N26 at $3.5 billion, Monzo at $2.6 billion and Revolut at $1.7 billion, according to their most recent funding rounds.

However, Bellens said there will always be those customers willing to give a chance to an upstart. The key is moving beyond them.

"You will always have a certain segment of the population that likes challenge banks and that is willing to give them a try," Bellens said. "But at some stage, once you've basically gone there, then that's [that]."

To that point, Bellens said challenger banks need to also ensure their offering remains dynamic. The ones that are doing this best, Bellens said, have been able to cut their product cycle down to three months.

Being able to quickly add features and services isn't just important as the challenger banks compete against each other. Its also one of the key competitive advantages the young companies hold over big banks - such as JPMorgan Chase, Citi, Bank of America, and Wells Fargo - where the vast majority of Americans park their cash.

While the traditional players still hold a considerable market share over the newcomers, their size limits how quickly they can roll out new offerings, allowing challenger banks to make up ground quickly.

Bellens said it's also critical for digital banks to stay diverse when it comes to its products.

"You need to make sure that you don't get stuck into being a one-trick pony and are just operating the deposits for a customer," Bellens said. "If you just get stuck with, 'I'm going to be the daily bank,' but you don't build a whole world around it, then you will have a hard time."

Digital banks, Bellens said, are at risk of still playing second fiddle to traditional players, where customers might keep their "big money" because users feel "they're safe," he said.

A key indicator of breaking that barrier, Bellens said, is getting a direct deposit in the account. On average, Bellens said the profit-per-customer goes up 10 times once a customer sets up direct deposit with a bank.

"That is a big trigger," he said. "And not just because of the salary. But that also means you breached the trust threshold."