Challenger banks: The end of an era?

Every Monday morning, the Vested team holds an editorial meeting to discuss the weekend’s papers and the themes we expect to see driving the news agenda for the week ahead. Challenger banks were the main topic of discussion this week, with the Financial Times reporting that new entrants are failing to make the impact they promised.

This isn’t the first time an article of this tone has been published; 2019 has been a pretty challenging year for ‘the challengers’, to say the least. Metro Bank’s shares recently fell 30 percent after plans for a bond sale were scrapped, while CYBG lost a fifth of its market value in September after announcing mis-sold PPI would wipe £300-450m off its profits.

When so much was promised from the challenger banks, why are we seeing so many of them struggling?

Once again, many have singled out regulation as the issue. Despite the Bank of England offering more than a dozen new banking licenses, challenger banks claim there is a contradiction in policy, meaning it is difficult for them to grow. Others say “ring-fencing” is the issue, which is particularly difficult for the larger challenger banks.

We could look at the ins and outs of each piece of regulation, but Metro Bank’s current issues can be attributed to unforced errors. Earlier in the year the bank revealed that it had made an error when classifying its loan book, instantly wiping £800m off the value of the company. With shares currently hovering at around £2, after falling from £22 at the start of the year, it seems that a takeover is looking most likely; this will result in a complete restructure of the business.

If Metro Bank and CYBG are more focused on their balance sheets at this moment in time, does this mean neobanks are in the best position to challenge the big four? The likes of Monzo and Revolut certainly have the investment in place to make the big four stand up and take notice, but as soon as they grow any bigger, it’s likely they will meet the same regulatory issues that the bigger challenger brands are currently facing.

Aside from regulation, growing a business so rapidly brings a completely different set of challenges for the neobanks. Revolut has already faced criticism earlier in the year around banking licenses and advertisements. With the firm looking to expand the team from 1,500 to 5,000 and launch in 23 more countries, it will face more scrutiny than ever before. If Revolut can successfully implement this strategy, it will then become a lot clearer as to who is really going to challenge the big four.

By George Pitt

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