The great challenger experiment has failed
The unsexy world of mid-tier high street banking is in the grip of deal fever. Cheerleaders of the challengers will argue that the latest burst of activity is evidence that they’ve succeeded in their shake-up attempts.
Yet, with its share price having slumped more than 90pc since it went public at £20 a share five years ago the opposite is true of Metro Bank. The only thing it has ever truly challenged is the prosperity and sanity of those naive enough to buy the stock at such wildly inflated prices on claims that it might eventually unseat the industry’s big beasts.
Unsurprisingly, it didn’t take long for eccentric American founder Vernon Hill to discover that opening a handful of shiny branches with the help of a few clowns on stilts, while handing out free dog biscuits to customers, hardly counted as a revolutionary new business model. With the share price stuck around the 100p a share mark since the start of the pandemic, shareholders will surely jump at the chance to get out at a decent premium.
Yes, it was a nice idea initially, and for a while it injected a certain amount of pizazz and fun into the painfully grey world of current accounts and mortgages, but as Metro and its many mid-ranking rivals have found out, getting people to switch bank accounts requires more than a few gimmicks and brightly-coloured premises.
The same goes for Co-op bank and TSB. Despite aborting talks about a shotgun marriage the pair seem destined to either end up in each other’s arms, or in the embrace of other lower league upstarts that have struggled to break the stranglehold of HSBC, Natwest, Lloyds and Barclays.
Indeed, with switching still woefully low, and in some cases going backwards, it is fair to ask if anything will convince the majority of customers to take the leap. Even one-off cash payments, food delivery vouchers and other incentives have had little effect.
Other than Banco Santander it is genuinely hard to think of a serious threat to the major banks. The big banks aren’t troubled by the opposition. Their market share is largely undiminished.
Metro has managed to amass a respectable two million accountholders and although boss Dan Frumkin dragged it back from the brink, it has never really recovered from a catastrophic accounting crisis in 2019. Without the deposit base to take on the giants in mortgages and current accounts, it has been forced to move further into riskier forms of unsecured lending.
Takeover interest from private equity giant Carlyle would seem to contradict the image of a struggling outfit, but it is more likely that it sees Metro as little more than a vehicle for consolidating a bombed-out sector rather than an attractive business in its own right.
Similarly, Co-op bank and TSB can hardly claim to be considering a merger from a position of strength. The Co-op is only just beginning to see the green shoots of recovery after its humiliating rescue at the hands of a club of hedge funds in 2017, and TSB has been beset by the IT issues passed down from former parent Lloyds.
After such damaging mishaps, is it any wonder backers of both are eyeing the exit?
It may be that someone is brave enough to mop up the stragglers and create something of real heft, but that risks creating a sort-of Frankenstein bank stuffed with hidden dangers. Talk Talk attempted something similar in telecoms, but ended up delisting after repeatedly being held back by the issues that it had inherited.
Purists may contend that it is wrong to see the smaller high street banks as challengers at all, but ultimately it is a game of scale. Low margins mean that the smaller players can’t compete. You can open it up to others but in the end simple economics takes over. It is the same issue that has blighted the energy market and ended in a catalogue of collapses.
Some consider the real contenders to be the new generation of fintech hopefuls such as Revolut, but the same obstacles exist and they can’t be magicked away by a whizzy app. With profit frustratingly elusive, Revolut finds itself having to play in ever racier areas of finance such as crypto-trading and the buy now pay later market, or coming up with increasingly unconvincing initiatives such as “Stays” that aims to emulate Airbnb.
If anything can be said for the fresh competition, it’s that the established names have responded by upping their game, meaning tens of millions of account holders are benefiting from new technology and improved service. But otherwise, if the measure of success is whether the grip of the incumbents has been weakened, then the great challenger experiment has so far largely failed.
‘Low margins mean that the smaller players can’t compete’