23 March 2016

BLOG: BANKING'S NEW STORM

by Bruce Packard | 23 March 2016

Earlier this week I hosted a panel at a “FinTech Stormevent in the entirely appropriate co-working space “Rainmaking Loft”. Navigating my way past hipsters drinking “flat whites” I listened to four presentations from Mondo, Civilised, Secco and Kubique.

These are all new entrants/FinTech banks that we may be hearing a lot more of in the future. The flurry of new banking start ups has followed the Bank of England and FSA’s review into the requirements of firms entering or expanding in the banking sector. The reforms take a holistic approach, both making it easier to understand what information the regulator needs, setting clear milestones along the path to authorisation as well as speeding up the process. The thinking behind this major shift is that bank failure should be seen as a normal market process, as long as failure does not threaten system wide stability. In short, the UK regulator is no longer seeking, in their own words: “a zero failure regime”. For more details see A review of requirements for firms entering into or expanding in the banking sector [FSA / Bank of England: March 2013].

This report is beginning to have an impact on banking.

The risk to the universal banks, is that new entrants set a much lower marginal revenue per customer, aided by their lower cost structure and lack of legacy issues. In a relatively benign credit environment post financial crisis (bad debts are down 90% since 2010) revenue at universal banks has shrunk by a third 2010 v 2015. In contrast at the FY results, banks without legacy issues like Shawbrook and Aldermore are growing revenue at double digit rates. The consensus in the room was that once the new new entrants (with names like Mondo, Civilised, Atom, Tandem and Starling) really hit their stride, there will be many more banks competing in a shrinking revenue pool.

One common theme of those presenting was that the economics of digital information are frightening for traditional business models. Jason Bates, co founder of Mondo Bank titled his presentation “But my bank already has an app?” – because this is the response he gets from people at dinner parties when he tells them that he runs a mobile bank. The point he makes is that:

- Traditional newspapers have struggled to compete in a world where news is freely available online.

- Recording labels have struggled to compete in a world where music can be downloaded and streamed.

- Book publishers have struggled to compete in a world where authors can self publish to ebooks.

Both Mondo and Civilised Bank are very much focussed on providing a banking service. They point out that banks have traditionally given away their core product (the current account) for free, but then charge high fees when a customer goes overdrawn, or try to sell poor value insurance with a loan. Instead, these new banks intend to warn customers about the fees, believing their lower cost base can win customers and disrupt the existing business model of universal banks. As yet, their investment story remains unproven – but looking at other industries where this has happened, it seems complacent to ignore the threat.

The fact that several of these new entrants are receiving funding suggests some investors also see this as an exciting opportunity. Mondo Bank is predominately backed by Venture Capital money. But even before it has received its bank licence, the start up bank has managed to equity crowd fund a £1m investment. The crowd funding book closed in just 96 seconds.