Dis­tance be­tween

We look at the Fin­tech win­ners and losers in the UK dur­ing lock­down

The Daily Telegraph - Business - - Front Page -

They were once the shin­ing stars of Bri­tain’s tech­nol­ogy in­dus­try, promis­ing to bat­tle high street banks and cre­ate bil­lions for the economy. At their peak, Bri­tain’s dig­i­tal banks were so pop­u­lar that peo­ple were forced to sign up to wait­ing lists to get their hands on their me­tal cards.

But one year later, and many of these promis­ing fin­tech start-ups are strug­gling as the im­pact of the coron­avirus pan­demic makes it­self clear. Over the past few weeks, dig­i­tal bank­ing com­pa­nies in the UK have held vir­tual board meet­ings with their in­vestors in which they agreed to dial back ag­gres­sive growth plans.

The lat­est an­nual re­ports from the

UK’s three largest fi­nan­cial tech­nol­ogy start-ups – Revo­lut, Monzo and Star­ling Bank – have made for un­com­fort­able read­ing for in­dus­try ex­perts who had hoped to con­tinue cheer­ing a wave of bank­ing in­no­va­tion.

Monzo’s an­nual re­port, cov­er­ing the year to Fe­bru­ary, saw the start-up’s losses rise from £47.1m to £113.8m.

The busi­ness warned of slow­ing cus­tomer growth in 2020 and said it faced “ma­te­rial un­cer­tain­ties” fol­low­ing the pan­demic.

“We’ve seen or­ganic cus­tomer growth slow as word of mouth drops, and we’ll see re­duc­tions in rev­enues and higher credit losses,” co-founder Tom Blom­field wrote in the re­port.

“Day-to-day bank­ing just hasn’t hap­pened for three months,” says David Brear, the chief ex­ec­u­tive of fi­nan­cial tech­nol­ogy con­sul­tancy firm 11:FS.

Ris­ing losses at a bank­ing start-up isn’t in it­self a prob­lem, in­stead it’s ex­actly what in­vestors ex­pect to see as these busi­nesses grow.

But losses ris­ing against a back­drop of growth slow­ing down and a pan­demic af­fect­ing con­sumer be­hav­iour have raised con­cerns.

“We know that they were un­der pres­sure be­fore, so I think that pres­sure is ex­ac­er­bated,” says Tom Merry, the man­ag­ing direc­tor of Ac­cen­ture Strat­egy.

The pan­demic ar­rived just as many bank­ing start-ups had hoped that ris­ing rev­enues and man­age­able costs would set them on a path to prof­itabil­ity.

Star­ling Bank, a key ri­val to Monzo, which pre­vi­ously em­ployed many of Monzo’s top ex­ec­u­tives in­clud­ing Blom­field, says it re­mains on track to break even this year de­spite the pan­demic.

The busi­ness re­ported losses of £52m in 2019, up from £25m for the pre­vi­ous year. De­spite this, chief ex­ec­u­tive Anne Bo­den re­mains op­ti­mistic about the com­pany’s prospects based on its per­for­mance dur­ing lock­down.

“Our costs are very much in con­trol. If we con­tinue on that tra­jec­tory, we will break even in De­cem­ber. In De­cem­ber, our rev­enue will ex­ceed our costs. That’s a re­ally good story for us,” Bo­den says. Star­ling has reached an av­er­age of £999 in de­posits per cus­tomer, higher than Monzo’s av­er­age de­posit of £357 per cus­tomer and Revo­lut’s £236 av­er­age.

“Yes we have less ac­counts than some of the other new banks, but our ac­counts are very, very well-used. They’re real ac­counts,” Bo­den adds.

De­spite this op­ti­mism from Bo­den, reach­ing break even and even­tu­ally prof­itabil­ity is go­ing to be a dif­fi­cult task for dig­i­tal banks, espe­cially dur­ing the re­cov­ery from the pan­demic.

“I think it’s a big chal­lenge,” says Merry. “Get­ting to prof­itabil­ity even on a point in time ba­sis, let alone a sus­tained ba­sis, re­mains a pretty up­hill task.”

Dig­i­tal banks that al­ready face squeezed rev­enues dur­ing the pan­demic are also now fac­ing higher reg­u­la­tory scru­tiny than ever be­fore. The Pru­den­tial Reg­u­la­tion Au­thor­ity (PRA), part of the Bank of Eng­land, warned in a con­sul­ta­tion pub­lished last month that “many of these new banks have un­der­es­ti­mated the de­vel­op­ment re­quired to be­come a suc­cess­ful and es­tab­lished bank”. This con­cern has led to higher cap­i­tal re­quire­ments for bank­ing start-ups, which is likely to force them to turn to ven­ture cap­i­tal­ists for fresh fund­ing to meet these re­quire­ments.

Monzo’s lat­est re­port shows that it was re­quired to raise its cap­i­tal to 13.65pc of its risk-weighted as­sets, up from 8.5pc. This caused the busi­ness to bring in £21m to meet the higher re­quire­ments.

The in­tro­duc­tion of higher reg­u­la­tory re­quire­ments while start-ups are strug­gling dur­ing the pan­demic has frus­trated some in­dus­try in­sid­ers who favour a light-touch ap­proach by the Bank of Eng­land, but oth­ers wel­come the re­newed in­ter­est.

“It would be un­re­al­is­tic to ex­pect the PRA to not be closely mon­i­tor­ing these banks through a re­ally high stress sit­u­a­tion,” Merry says.

The chal­leng­ing en­vi­ron­ment of the pan­demic has pre­sented a par­tic­u­lar prob­lem for bank­ing start-ups, which rely on in­ter­na­tional trans­ac­tions for a large share of their rev­enue. Overseas trans­fers al­low start-ups to take a higher cut of trans­ac­tion amounts, mean­ing many busi­nesses had po­si­tioned them­selves as travel cards be­fore lock­down.

Revo­lut has signed up more than 10 mil­lion cus­tomers around the world, and their in­ter­na­tional trans­ac­tions have been an im­por­tant source of rev­enue for the com­pany.

But it warned in its lat­est ac­counts that the level of these trans­ac­tions had fallen dur­ing the pan­demic, although the com­pany did see a rise in cryp­tocur­rency trans­ac­tions dur­ing lock­down.

Revo­lut’s losses rose to £106.5m last year, although rev­enues in­creased sharply from £58m to £163m in 2019.

Any start-ups that are par­tic­u­larly re­liant on in­ter­na­tional trans­ac­tions for rev­enue face a dif­fi­cult few months ahead.

“Chal­lenger banks have not ma­tured enough to be able to spread their bets, re­ally. If you have all your eggs in one bas­ket then ac­tu­ally if that bas­ket has a prob­lem then your busi­ness has a prob­lem,” Brear says.

Bo­den says Star­ling doesn’t risk los­ing out on sig­nif­i­cant rev­enue from a drop in in­ter­na­tional trans­ac­tions as her cus­tomers largely use Star­ling for do­mes­tic and busi­ness trans­ac­tions.

“We are not de­pen­dent on in­ter­na­tional busi­ness,” she says.

The prob­lem could be more pro­nounced for start-ups like Soldo, which of­fer pre­paid cards pop­u­lar amongst busi­ness trav­ellers.

“Travel cards are go­ing to strug­gle mas­sively,” Brear says.

And cross-border ex­changes such as Trans­fer­Wise and Az­imo also face sig­nif­i­cant changes to con­sumer be­hav­iour, which could up­set their finely tuned models that are re­liant on reg­u­lar flows of cap­i­tal around the world.

But so far, ex­ec­u­tives from both com­pa­nies in­sist that lock­down hasn’t caused se­ri­ous prob­lems for them.

Chang­ing con­sumer be­hav­iour, a po­ten­tial drop in rev­enues and more reg­u­la­tory scru­tiny than ever be­fore has cre­ated an un­prece­dented chal­lenge for the UK’s fi­nan­cial tech­nol­ogy start-ups.

Dig­i­tal banks are fac­ing a strug­gle dur­ing the pan­demic, but the com­pa­nies that man­age to con­trol their costs and emerge at the other side of lock­down could see them­selves tak­ing ad­van­tage of a resur­gence in con­sumer spend­ing.

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