Established in 2010, Metro Bank was the first high street bank to open in the UK in more than 100 years. Its aim was to disrupt a space that has historically been dominated by the ‘big six’ lenders: Barclays, HSBC, Lloyds Bank, Nationwide, NatWest and Santander UK.
After years of operating losses and challenges, including a costly branch-centred business model and an accounting scandal in 2019, Metro Bank received a last-minute rescue in early October by Jaime Gilinski Bacal, a Colombian billionaire who has secured a majority stake in the business.
But what does this mean for the prospects for other challenger banks? While Metro Bank had to face its own unique issues, it shares a few of them with its peers — including profitability challenges.
As monetary policy becomes less lenient, earnings prospects for challenger banks have come under pressure due to rising funding costs, greater competition for deposits and more expensive access to wholesale funding.
Aside from current woes, many challengers have struggled to make a profit since inception. For example, at the end of 2022, Metro Bank recorded a pre-tax loss of $85m and Kroo Bank saw a $19.7m loss, while Monzo Bank made a loss of $140.2m (as of February 28, 2023). Atom Bank, which reports at the end of March, recorded a loss of $12.5m in 2023.
Starling Bank is the only challenger to have turned the corner, recording pre-tax profits of $42.17m in March 2022 and $240.2m in March 2023.
In addition to profitability issues, Metro Bank has seen its Tier 1 capital almost halve over the past few years. dropping from $1.88bn in 2019 to $986m in 2022. In contrast, other UK challenger banks have managed to increase their Tier 1 or at least maintain a relatively stable capital position. For example, Monzo Bank’s Tier 1 capital increased from $130m in 2019 to $767m in 2022 (but it dipped this year to $642m).
While smaller niche players have started to erode the position of the biggest lenders in recent years, the big six still dominate the market. Despite the growing popularity of challengers’ offerings, many retail customers are still hesitant to use them as their main account, with just one in five considering it to be their primary account. Instead, most transfer small amounts to their challenger account for day-to-day activities.
Many experts underline the importance of building a well-rounded proposition as challengers still generate low revenue per active customer. This is because they offer limited product portfolios with lower fees, including for subscription, foreign exchange and cards. They lack more lucrative products such as mortgages, business loans or investment products.
While challengers’ focus to date has been on attracting customers, like other businesses defying the status quo, they need to prove their business model and ensure they can generate profits. Remaining nimble and agile organisations is important to these new banks, but a mature business will need to build out new product lines, as Starling Bank has done with Engine, a cloud native, full featured and flexible software-as-a-service banking platform, which it sells to other businesses to embed banking services in their offerings.
Undoubtedly, incumbent players are keeping a close watch to see if a potential acquisition of a challenger is on the cards. This action may be motivated by the need to halt a competitor, or, more importantly, to add a (lucrative) new business line.
