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French online banks face challenge in achieving profits, says regulator

Online and challenger banks in France will face a major challenge in achieving profitability given tough competition in a mature market that will restrict growth, according to a study by the French banking regulator.

While these banks have gained clients and are transforming retail banking, they are entering a heavily banked market, which will make it difficult for some players to meet their targets for customer growth, the report said. However, their success would lead to a major upheaval in the French banking market.

"There are numerous uncertainties regarding the capacity of new banking players in building a profitable business model," the Autorité de contrôle prudentiel et de résolution, or ACPR, said in the report published Oct. 10, which surveyed 12 online and challenger banks operating in France.

Online players are not only in competition with traditional networks, which have undertaken their digital transformation, but also with new European players on the French market, the report said.

Like many European countries, the playing field in France has been heating up, with the arrival of Orange Bank SA, the digital bank launched by French telecoms group Orange SA in November 2017, while German mobile lender N26 Bank GmbH and U.K. fintech start-up Revolut Ltd. have both entered the French market. However, the leading online banks remain those belonging to traditional banks. According to a 2018 ranking of online banks by Culture Banque, Société Générale SA's Boursorama SA and ING Groep NV's ING Direct are the two leading online banks in France, with one million customers each.

Limited growth

While the 12 banks surveyed for the report are expecting a total of 13.3 million customers by 2020, there is "no element to suggest growth in the French market," the ACPR said.

The French are already heavily banked, demographic growth remains weak and it is unclear whether bank customers are prepared to have several bank accounts at one time, the report said, adding that if the strategic ambitions of the new players were even partly achieved, it would result in "an upheaval of the positions acquired by traditional players."

It noted that very few of the new players had posted positive financial results in 2017 because of heavy investments and marketing spending. Revenues are weak, with the average per customer for digital banks at €138 annually, it said. While low interest rates play a part, a young customer base and a limited range of products are among the challengers new entrants face. Additionally, 14% of accounts held with them are "inactive" and only 23% of customers use them as their main bank. Many online banks operating in France offer between €80 and €120 for opening an account with them, and free bank accounts with credit cards. The ACPR said this constituted a high level of spending for the online banks of up to 24% of revenues.

However, it also noted that banks had 4.4 million customers and 3.1 million current accounts at the end of 2017 — representing 3.9% of current accounts in France — and had a role to play in the transformation of the banking sector. Mobile banks had been among the first to offer ways for customers to manage their personal finances, it said. Those that belong to large banking groups can help lenders innovate and experiment.

"In any case, they have established themselves as players in the future transformation of retail banking," the report said.