When incumbent banks start neo banks, it can be tricky to make it work. Now complicate it further by launching a Neo bank in a new geography- one that is away from your home base. However, the US-headquartered JP Morgan Chase (called Chase in the UK) seems to have done it right. Launched in Sep 2021, it has managed to gain over 1M customers in a short period and around 10BN in deposits. That is more than what Monzo and Starling banks have but less than that of Marcus (Goldman Sach's retail bank).
Enticing Product features:
In the US, Chase has over 56 Million customers. Chase UK has a full banking charter protected by the FSCS deposit insurance up to GBP 85k. They have a launch offer of 1% cashback on their debit card (qualifying spends) for 12 months. They have a round-up savings scheme that helps customers to get a 5% interest on purchase amounts rounded up to the nearest 1 pound. That product offer does help customers in this inflationary economy, which could be one of the reasons why customers are opening Chase accounts. We know from research reports on Neo banks that customers in the UK do not switch banks and usually open Neo bank accounts when they see an advantage. The relationship is multi-tenanted and typically opportunistic. However, fast customer acquisition is not to be laughed away, especially when it comes with CASA deposits.
Repeat after me- Banks make money on deposits
The average deposit in the bank is a tidy GBP 27k. Last week, I spoke to a person working in an Abu Dhabi Neo bank, and he reminded me of the value that CASA balances provide to a bank, especially in a rising interest rate regime (right now). Banks ultimately make money by lending out money at a higher net interest rate sans credit losses. So the Chase model is not new, but the rate at which it acquired the customers certainly is.
Here is the issue- JP Morgan Chase expects its overseas Digital Banks to have over $1 BN in losses over the next five years! Success comes at a price, especially when acquiring customers at a high cost. Impressive growth so far, but can the bank turn profitable and sustain its large customer base? Time will tell.
